Monday, May 3, 2010

Big Banks and the Rest of Us

By Danny Hyon

Desperate times call for desperate measures; this aphorism conveys a strong belief that chaos can be subdued by an equivocal responsive measure. Oddly enough, Congress, big banks, and Wall Street seem to believe otherwise. The seeds of greed have sprouted a decaying tree filled with branches of corruption and leaves of eroding public faith. Special interest groups and political lobbyists have tediously nurtured this insidious plant to laugh at the face of justice.

In the midst of a global demolition, crafted by the large corporate institutions and Wall Street executives, the world was struck by a devastating monetary force comprised of toxic assets and over-the-counter derivatives manufactured and packaged through a clandestine transaction between two parties: the federal government and large financial institutions (Wall Street), while neglecting the concerns of the public sector (Main Street). What has been going on in the global economies, the financial sectors, and the underlying way of life is strongly attributed to the avarice visions of Wall Street and Congress’s lack of will power to help or create a sound economic-regulatory policy.

Congress and Wall Street have created an elaborate theatrical play, where the directors of this economic tragedy (Wall Street), have acquired powerful media friendly actors (Congressional lobbyists), to perform and entertain on stage using financial properties--company stocks, personal equity, municipal bonds, treasury notes, 401 K/ retirement plans, and other financing instruments--as devices to create an illusion of prosperity. Like all terribly scripted plays, the ending is not only confusing, but the big players have orchestrated a series of acts that withhold any degree of sensibility and coherency.

The reality behind this play sinks in when we the audience (Main Street) are not only perplexed by the synopsis of this monstrosity, but infuriated by our overpriced, highly inflated ticket without receiving a viable return. To fully comprehend the economic disaster the explanation lies within the resolution where reformation is imperative and categorized by five facets: the federal government, the over-the-counter derivatives market, the “too big to fail” notion, the trendy executive payroll, and finally the consumer protection agency. These elements are currently circumventing the court of public opinion and Congress in strong hopes of precluding a fiscal disaster from reoccurring, but in some twisted sense of humor, it is an attempt to justify the malignant practices of Wall Street.

The Fed

The recent financial crisis has been in production for decades. Some may contend that after the fall of President Woodrow Wilson’s Administration, the regulatory system of the Federal Government gradually withheld its active participation in the economy. The focal point of this discussion begins with the birth of the Reagan era and the continuing deregulatory polices enacted by the Clinton Administration. In retrospect, the Reagan administration could be considered the beginning of the collapse of the American Monetary Empire or economically speaking, Reaganomics is the transfer from public capital to the hyper-concentrated interests of the plutocratic elite. Make no mistake, the global community is currently facing the adverse effects of deregulation, political corruption, and the influences of the ever-emerging corporatocracy.

In 1978, congressional leaders designed and ratified a legislative agreement; that supplanted the Full Employment Act of 1946 by enacting the Humphrey-Hawkins Act of 1978. This decision negatively impacted our economy. It was the very first step to financially constrain the influences of a once active government from monitoring the conditions of the economy. The Hawkins Act explicitly stipulates that the federal government will rely primarily on private enterprise to achieve the four goals (employment, growth in production, price stability, and balance of trade and budget); moreover, the Hawkins Act ridicules the inefficiency of its predecessor, the Full Employment Act of 1946, in assertion that zero unemployment is unattainable and unrealistic. Most importantly, the Hawkins Act empowered the influences of the private sector and the central banking system, while undermining the U.S. government regulations.

As Ronald Reagan transitioned from Hollywood actor to U.S. President, his award winning performance on bad government left the American people in awe and investment bankers begging for more. Reagan’s stage presence was superb; like all great actors, his performance reflects the genius behind his directors. President Reagan made the people of the world believe that “Big Government” is not the answer; as the stock market continued to climb, citizens began to believe the myth. The economy began to bloom, trade deficits appeared to gradually shrink, people were happy and bankers were happier; in the Regan era, the nationalistic slogan was quite clear; “show me the money.”

The Clinton administration continued to cement and amplify the deregulatory practices of Wall Street by glorifying and promoting the actions of private institutions as a catalyst to the American economy. In the early 1990’s, President Bill Clinton inherited a healthy economy, the fall of the Soviet Union, and the birth of the internet/technological boom ensuing the success, innovations, and supremacy of the United States of America. Each facet played a significant role in shaping the zeitgeist of the U.S. instilling the belief that corporations did more good than bad. The mixture of these elements and the ill advice of Alan Greenspan, Chairman of the Federal Reserve, help foster the concept of free-market capitalism. Greenspan’s advocacy of the free market system is a false axiom that would defend and justify the authorization of the Gramm-Leach-Bliley law, commonly referred to as the “Financial Modernization Act .“

On June 16, 1933 President Franklin D. Roosevelt signed into law the “Glass-Steagall Act”, a legislative action that pursued financial regulation in hopes of decimating the wanton criminal activities of the oligarchy and its egregious influences of the U.S. economy. The Glass-Stegall Act targeted the banking system by separating the confluent aspects of commercial banking and investment banking. The Glass-Stegall Act stipulates that no commercial bank was allowed to own an investment bank and vice versa. Each institution consisted of different policies and functions of capital; investment banking handles the exchanges of securities and commodities, while commercial banking involves transactions of small customer deposits. When the two aspects of banking are fused as a single entity, the unified institution yields a great source of financial power, thus a super-institution is created and equipped with a great amount of control over America’s financial life.

On November 12, 1999 the Financial Modernization Act was enacted, diluting the Glass-Steagall Act of 1933, thus opening the flood gates of the financial reserves and eventually contaminating the economic system with toxic assets and over-the-counter derivatives.

President Roosevelt understood the ulterior motives of the large banking institutions and the detrimental consequences of their monetary actions; the Glass-Steagall act was a preemptive strike against future corruption and financial enslavement held by the large banking firms. Under Roosevelt’s clairvoyant leadership, the Glass Steagall Act was a significant humanitarian charter issued and designed to preserve the financial and constitutional liberties of Americans.

Unfortunately, the current economic situation is the fruition of Wall Street aspirations, the abolishment of stern financial regulation, and the incessant greed that consumes, pervades, and trickles down from the top of our modern oligarchy. In retrospect, the manifestations of the recent financial crisis and the ongoing lives of America draw strong parallels to the destitute life of America in the 1920’s, where the banking industry contributed to a stock market crash and extreme levels of unemployment resulting in the Great Depression. The American agenda should revolve around the reformation of the Federal Government’s regulatory oversight, where stabilizing the health of our economy and reintroducing the financial notion of balance of power is the priority of government in order to maximize the value of life and liberty, not the assets of corporations.


The over-the-counter derivatives market has been an unregulated market that has been practiced by large corporations for over a decade. Derivatives are extremely confusing and considered a novelty in the financial markets. A derivative is defined as a transaction negotiated between two parties without the confinements of an exchange. It is an agreement that transfers risk of one company to another. The derivatives fall into two categories where customized risk of a company is transferred and negotiated privately to another firm, commonly referred to as an over-the-counter derivative or financial swap.

Another form of a derivative is known as a futures asset, a standardized form of exchange-traded derivatives. The main distinction between a swap and a futures asset is the over-the-counter derivative or swap is highly volatile because it does not involve the standard strictures of an exchange; it is essentially, a private agreement that is structured on a bilateral basis, it does not comply with matters of jurisdiction, and its credit-risk mitigation varies between a company’s policy in relation to the negotiated parties. In an attempt to simply and explain the hazardous products of over-the-counter- derivatives, it is a sophisticated, highly unregulated monetary gambling instrument that is purely backed by leverage.

On October 9th, 2008 Lyndon LaRouche ridiculed the federal government for its inactive participation in regulating the over-the-counter derivatives market stating that the derivatives bubble is “the hyperinflationary bomb, crushing the international financial system.” He then censures the discretions of the Federal Reserve and its former Chairmen with a closing statement, “It is time to break the silence on derivatives. The true, hyperinflationary factor in the situation is the unregulated, insanely leveraged derivatives trade. This is what is killing us. This is the great crime of Alan Greenspan.”

Based on the analytical data released on June 30th 2008 by the Office of the Comptroller of the Currency, the three largest American banking institutions, J.P. Morgan Chase, Bank of America, and Citicorp, aggregated a current outstanding derivatives contracts of $179.4 trillion. The three banks combined have total assets just under $5.6 trillion. As of December 31, 2007, according to the Bank for International Settlements the total over-the-counter and exchange-traded derivatives summed to more than $675 trillion.

A startling analysis of the derivatives market by John Hoefle, an analyst for the Executive Intelligence Review, estimated the true figures of the derivates market to be well above the quadrillions of dollars. These numbers and contentions are dated two years ago and reformation of this deleterious market is yet to be conceived. President Barrack Obama created a frail proposal on regulatory reform authored by U.S. Secretary of Treasury Tim Geithner; however, serious doubts have circulated throughout the public and a substantial regulatory policy has yet to be enacted. Yet the over-the-counter derivates market is an extremely volatile sector that has negatively impacted the U.S. economy; it is an ineffective monetary instrument accountable for our recent financial instability.

Too big to fail

Many economists have dissected the deeply interwoven connection Wall Street has in our global economy. The too big to fail notion revolves around the idea that corporations are too large and interconnected with all facets of the economy, declaring government authority to proclaim bankruptcy to such institutions will be deplorable and cause a severe meltdown in the overall scale of the global economies. To the public sector, too big to fail arrogantly validates the wrong doings of Wall Street firms impressing the perception that large corporations are immune to failure despite the truth behind corporate influences.

In 2007-2008 Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Bear Sterns, Countrywide Financial, and AIG were all infected with the hazardous toxic assets that were distributed in the interconnected economies. These mega corporations all failed and almost pushed the world to the brink of demolition. Subsequently an emergency bailout was allocated by Congress to rescue other large financial institutions from defaulting, thus solidifying the despicable and unforgivable Wall Street Slogan; Too big to fail. Paul Krugman a noble economist, has argued that too big to fail is beyond a catchy phrase, it is the justification of predatory lending, fictitious monetary transactions, and money hungry measures that Wall Street will take to make an extra dollar while conscientiously jeopardizing the financial well being of mankind.

In 1863, President Abraham Lincoln conveyed an uncanny foresight about big banks' impact on American lives in the future. “The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. Corporations have been enthroned, an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in a few hands and the Republic is destroyed.”

As we stare at our deflated tickets, as the curtain falls, and we are left to fill in the pieces behind the Wall Street tragedy, I ask my fellow Americans, where is our poetic justice?

Danny Hyon is a senior at St. Thomas Aquinas College. He enjoys writing and studying economics.

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