It was not just Wall Street that became too big for its own good. The failure of the financial system to perform for the good of the nation was equally the failure of the political system. But that’s not all: the whole American population all too readily went along for the ride. Has America become too big to survive?
As institutions of financial gluttony madly ingest banking, investment, and outright gambling for the sole purpose of increasing profits (quite different from the respected small-town banker), these institutions must run faster and faster just to stand still. As their complexity rises, they teeter on the edge of chaos. Complexity permits great effectiveness, but when complexity fails, it fails disastrously because complexity leads to a density of internal links and dynamics that effectively redesigns itself until no one understands how it functions: it is, after all, self-adaptive. I will mention three examples: Easter Island (population implosion), AIG (corruption in a rogue subdivision), and the Soviet Union (too big to manage). Both Wall St. until 2008 and the Soviet Union bragged about their scientific management methods, but neither could actually manipulate the mass of detail well enough to survive over the long-term.
The out-of-control, self-adaptive evolution of the U.S. financial system in the lead-up to the 2008 crash lies at the core of this historic scandal. Certainly there were plans, plots, and guilty fraudsters; many very rich and powerful people did everything they could to “tilt the playing field” in their direction..and they rushed to the front of the line for their welfare checks when they fell flat on their gluttonous faces. But viewed from above, aside from a criminally widespread elite consensus that the Federal Government would either stand aside with its regulatory head in the sand or actively facilitate the transfer of national wealth into the deep pockets of the super-rich, the “U.S. financial system” during the party years (and for helpless Iraqis and Afghanis, the war years) was less “system” than chaos: unplanned, uncoordinated, heedless growth in every possible way for any manner of short-term gain. Specific examples are legion:
denial of “the fear that, in dispersing risk so widely, derivatives were transferring risk from a single institution to the entire financial system” [Bethany McLean and Joe Nocera, All the Devils Are Here (NY: Portfolio, 2011) 64]:;
in a stellar example of a Government financial regulator doing his job, a General Accounting Office study by James Bothwell of then-new derivatives found the dealers so deep in denial that one-third of them refused to admit that ‘abnormal market conditions’ might even have relevance for their new financial game, which would only 14 years later bring the U.S. financial system to its knees [Nocera, 66];
synthetic CDOs, “the financial equivalent of a nuclear bomb” [Nocera 263], were the culmination of the general denial of reality – a financial product not only based on no genuine collateral of their own (being instead based on some other party’s bonds but also massively leveraged and made even more risky because even the other party’s collateral was typically a basket of fraudulent mortgages);
going far beyond the casino antics of a Wall St. in love with playing with other people’s money, “[t]he willingness of government to abide teaser mortgages, ‘liar loans,’ and home mortgages with zero down payments, amounted to a staggering case of regulatory neglect” [Lowenstein, 286-7]. And Lowenstein did not even mention perhaps the most outrageous fraud of all – judges looking the other way at robo-signing [Economic Monitor];
and perhaps most damning of all, the fundamental error throughout the party years – the more the Government trusted Wall St. and mortgage lenders to behave like adults, the more both behaved like hungry two-year-olds finally left alone in the kitchen with the cookie jar.
Superficial thinking about the consequences of behavior facilitated a self-serving (at least over the short term) denial that worst case scenarios were even worth thinking about. If complex systems at their best remove the restraints of top-down control and thus stimulate bottom-up creativity, the behavior of the leaders of the U.S. financial system and of the Federal regulators led to a complex system at its worst – chaotic, short-sighted, unsustainable behavior biased toward dream-world denial that led straight over the edge of the cliff. Whether one defined the “system” as the Wall St. casino mini-system or as the overall U.S. financial system, the leaders were on balance undermining the system they managed. At the core of this out-of-control and increasingly incomprehensible complex system was a very simple reinforcing feedback loop: the more denial about the possibility of failure, the more fraud, and the more fraud, the more denial.
Already distorted and undermined by the series of super-costly Neo-Con wars of aggression [Larry Everest, Oil, Power and Empire (Monroe, Maine: Common Courage Press, 2004), 9-11, 247; Anonymous, Imperial Hubris (Washington: Brassey’s, 2004) 9, 15, 178; Andrew J. Bacevich, Washington Rules (New York: Metropolitan Books, 2010) 182-186] the wheels of the U.S. financial car began to come off…except for the one wheel of financial gambling, with its component parts: denial and fraud. Before its own fraudulent collapse, the infamous Enron corporation played a bit part in the dynamics of the wheel of denial and fraud. Wendy Gramm, wife of Senator Gramm–who did so much to set the stage for the crash of 2008 by gutting Glass-Steagall bank regulations, used her position as head of the CFTC to prevent regulation of derivatives, including handing Enron an exemption for some of its energy derivatives. Any questions about the legality or propriety of Wendy’s gift to Enron, the simultaneous Enron political contributions to her husband, or her quick jump through the revolving door when she “resigned and joined Enron’s lavishly compensated board” [Roger Lowenstein, The End of Wall Street, (New York: Penguin Books, 2011) 61] were brushed aside. [See Curing Moral Hazard for an appropriate way of handling such situations.] Another example of how the system ran on a flow of cash sodden with an evidently invisible layer of conflict-of-interest sludge gluing the billionaires to their Government lackeys was Fannie Mae’s incestuous relationship with Congress. The Government-created and Government-protected mortgage institution “spent roughly $100 million on lobbying and political contributions” in a still-denied conflict of interest scandal [Gretchen Morgenson and Joshua Rosner, Reckless Endangerment (New York: Times Books, 2011) 12].
The Gramms-Enron and Fannie Mae-Congress mutual enrichment schemes symbolize the reinforcing dynamics linking corrupt politicians with corrupt corporate leaders that infected the core of the system. As the financial car accelerated around the track, it came increasingly to be balancing on this one remaining wheel. The big wheel of denial and fraud increasingly powered the acceleration of the whole complex, adaptive financial system, and as the wheel of denial and fraud spun around faster and faster, it flung more and more mud into the faces of the American people.
The big financial institutions are not just a threat to democracy and to our economy and to all of us as individuals (think of the man who was mistakenly accused of not paying his mortgage and just died in court after his banker stole his house), they are also a threat to themselves: they are increasingly designed to fail and fail disastrously. A decade ago, the smug big shots in New York and Washington would have snickered at that claim; today, we have all seen how true it is. Big Banks are the capitalist equivalent of Soviet socialism: too big to survive.
One can rely on lurid analogies of drunken drivers steering the American financial car toward the abyss or technical descriptions of a warped complex, adaptive financial system with an immoral reinforcing denial-fraud feedback loop, but to put it bluntly, by the end of the good half century without world war, America had turned from producing to gambling. The rich gambled that they could launch a class war against the 99%. CEOs gambled that they could sell their companies to Japan and escape the collapse with pockets full of gold. The Neo-Cons gambled that they could rule the world. The ruling elite gambled that the U.S. could borrow from China to fund an endless party of mindless consumption. Homeowners gambled that they could spend their equity to attend that party since home prices would rise forever. Wall St. gambled that it could…well…gamble without ever losing because its lackeys in Washington would always bail it out when the roll of the dice went sour. Never in history had the preeminent global power held such a strong hand as the U.S. did with the collapse of the U.S.S.R., but–humans finding long-term thinking particularly challenging when everything is going their way–the U.S.A. decided to roll the dice for double or nothing. Has America become too big to survive?