The Derivative Economy: Can High Finance Get Any Lower?

Here's how it works. You give your nest egg to a band of Wall Street crooks with a name that starts with initials like "J.P." or perhaps one with the word "Gold" in it. They play Russian Roulette with your life. Got it? That's all you need to know about the sleazy side of corporate capitalism in the New Derivative Economy. The other side of capitalism, the side that isn't sleazy, is receding faster than you can say "Jamie Dimon".

Can high finance get any lower? Stay tuned; if it can, it will. That's because there's nothing to prevent the same bunch of rogue "risk managers" from pulling the same shenanigans and hijacking the hopes along with the savings and pensions of millions of people all over again. People who entrust hard-earned money to bankers who pay them less than one percent on cash savings, assess a proliferating variety of fees for dubious services, and foreclose on unemployed homeowners who can't meet the monthly installments on undocumented loans the banks should never have made in the first place. The very same bandit bankers who have proven beyond a shadow of a doubt that they cannot, in fact, be trusted with anybody else's money.

The mythological "free market" is not free. It is a slave to the stock market which is manipulated and, indeed, exploited by investment bankers, fund managers, and a new breed of free-booting financial con artists. Remember Enron? The late Kenneth Lay? His partner in crime, the convicted co-swindler, Jeffrey Skilling, now serving a very long prison sentence? How about Bernie Madoff, the Ponzi scheme pirate? Big time financial fraudsters who were finally brought down. Now try to name a single profiteering peddler of toxic assets who has been indicted for similar crimes since the massive 2008 financial mudslide? You can't, but don't feel bad: there aren't any.

The high and mighty megabanks have a stranglehold on the American economy and a foot on the neck of the Washington political establishment. Approximately twenty banks too big to fail and the plutocrats who run them, serve as directors, belong to the same exclusive golf clubs, move in the same rarefied social circles, and profit beyond measure from a system where money flows in torrents to those with privileged information – these are the main features of a system now wholly in thrall to the derivative economy.

A market economy arises naturally where there is scarcity and real competition for resources. The derivative economy is artificial, an invention of pseudo-capitalists driven by pure greed, a contempt for everything public (think: anything that begins with "social"), and a killer instinct for the "enemy" (think: corporate raiders, hostile takeovers, mergers and acquisitions). Monopolies and cartels, of course, are the very antithesis of competition and the reason why the very idea of a free market – one devoid of any and all state interference or regulation – is a myth in the modern world. It's Economics 101. Or at least it was once upon a time before "market analysts" on FOX News became soothsayers for the republic.

What is to be done? First, what is not to be done. Or undone. Here's William Black, author of The Best Way to Rob a Bank is to Own One on President Obama's 2012 JOBS Act:

"The JOBS Act is insane on many levels. It creates an extraordinarily criminogenic environment in which securities fraud will become even more out of control. One of the forms of insanity is the belief that one can “win” a regulatory “race to the bottom.” The only winning move is not to play in a regulatory race to the bottom. The primary rationale for the JOBS Act is the claim that we must win a regulatory race to the bottom with the City of London by adopting even weaker protections for investors from securities fraud than does the United Kingdom (UK)." (Interview, New Economic Perspectives, 3/20/2012)

Black is not alone in focusing blame on the collusion between Washington and Wall Street, a cozy arrangement that has involved chief executives in business and government – including five presidents beginning with Ronald Reagan. Robert Kuttner, Joseph Stiglitz, Elizabeth Warren, Robert Weissman, Robert Reich, and others have tied the virtual repeal of the Glass-Steagall Act near the end of the Clinton administration to the 2008 financial crisis.

Kuttner says gutting Glass-Steagall permitted “super-banks” to “re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s.” These included “lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way.” Sound familiar? Stiglitz, Warren, and Weissman all argue that with Glass-Steagall cancelled the culture of commercial banking changed dramatically. The more Wall Street crowed about "risk management", the more risk eclipsed management. The bottom line, according to Warren: Glass-Steagall kept banks from doing “crazy things.”

The Glass-Steagall Act of 1933, recall, limited the kinds of financial activities that commercial banks could engage in. As a result, from the 1930s to the end of the 20th century, commercial banks and investment banks operated under different sets of rules. As things stand, four years after the Big Meltdown, the financial services industry – a euphemism for a handful of major banks – stands astride the system, makes the rules, and sets the agenda.

Until the financial and securities industry is regulated in the public interest, until financial fraud is punished, and until the corrupt system that allows multimillion dollar rewards for malfeasance and incompetence is reformed, nothing will change except to get worse. Sadly, if the past is prelude things will have to get much worse before "we, the people" join hands across the lines that divide us and demand clean government and a fair shake. And then it may be too late to avoid the worst.

The 1% sow the wind and the 99% reap the whirlwind. That's what happened in 2008. And, as things stand, it's only a matter of time before it happens again. That's the true meaning of the New Derivative Economy.