Financial History 25th Anniversary Special Edition (104, Fall 2012) | Page 39
While it may be true that history does
not exactly repeat itself, the events occurring during the recent credit crisis would
have been familiar to anyone who lived
through the 1929 crash and the depression. The well-worn cliché certainly gives
validity to the more accurate idea that
events seem to re-occur because of the
limited universe of possibilities and events
that combine to produce a financial crisis.
In just two short years, Wall Street had
experienced more tumultuous events than
at any other time since 1929. The collapse
of the credit markets in 2008 and the
sharp drop in the stock market indices
helped Barack Obama win the presidency,
as it appeared that desire for economic
and social change was in the air after eight
years of a Republican presidency. The
events of 2008, in particular, were eerily
reminiscent of 1932 in the markets. The
following two years also displayed significant parallels to 1933 and 1934.
The parallels were striking because it
became apparent that, as in 1929, Wall
Street had created the crisis through its
disregard for investors and the manufacturing of securities, to use Charles Mitchell’s original phrase. Lack of due diligence
by investment bankers helped create the
conditions for the market crash in 1929
and would prove a decisive element in
financial reform after 2009. Poor collateral pledged against mortgage securities
was the culprit, again demonstrating that
banking oversight was sorely lacking. The
1920s and 1930s had no effective regulator to monitor the process, and the same
proved true in the contemporary period
after 1999.
The early 1930s and the early 2000s
also shared another trait that would surface again. Bankers in the 1930s, as their
counterparts in the 2000s, had no effective critics to check their activities. Wall
Street figures again were in the limelight,
as they had been 80 years before, treated
as celebrities who reigned over an industry
that had lost most of its meaningful regulation. Goldman Sachs partners replaced
those from J.P. Morgan & Co. as advisers
to government, while the media doted on
mutual fund managers, bankers and corporate chief executives as the latest prophets of wealth and the architects of a new
economy that would only rise from year
to year. But the events of 2009 quickly
caused an about-face that challenged Wall
Street rather than praised it.
Joseph Schumpeter’s notion of capitalism’s tendency toward creative destruction was not a concept that critics of Wall
Street embraced as the aftermath of the
credit market and mortgage crises became
clear any more than social Darwinism
was widely embraced in the 19th century.
Ironically, however, the great historical
discrepancies between wealth and income
in the United States began to be mentioned again, as they had in the 1930s.
During the Great Depression, Marxist
criticism gained some popularity because
it highlighted the inequalities in society. In
the 2000s, similar criticisms were heard,
and the question of whether financial
capitalism could survive the economic
turmoil began to be raised again. Such
an idea would have been ruled absurd 10
years before, despite the dot com bubble
bursting and the follies of Enron and
WorldCom.
The vast discrepancies in annual
income, in particular, began to draw attention as the popular tide turned against
Wall Street. For several years, critics had
inveighed against tax breaks given to
hedge fund managers and those in private
equity whose annual income effectively
was taxed at the long-term capital gains
rate of 15%. As the institutions receiving TARP capital infusions became more
widely disseminated, the idea of tax favoritism was viewed as highly repugnant at a
time when home mortgage foreclosures
were at historically high levels.
At the same time, some hedge fund
managers made substantial profits effectively shorting the market for residential
mortgages while mortgage holders were in
poor economic straits, recalling the bear
raids of the early 1930s. This was in stark
contrast to the appearance of tent cities,
the contemporary version of Hoovervilles,
in areas most ravaged by the foreclosure
crisis. It was difficult to draw realistic or
meaningful parallels between the profitability of John Paulson’s hedge fund and
the aggregate value of average workers’
paychecks. Attempts of that sort had been
made before in the 1930s, but the comparisons were considered too inaccurate
and polemical to be of any real value. Yet
it was clear that vast discrepancies existed.
In the early 20th century, discussions
about the discrepancies of wealth in the
United States usually emphasized the
wealth of a small portion of the population
compared with the rest of the country.
Usually, the top 5–10% of the highest paid
held around 90% of the country’s assets.
It sometimes was difficult to determine
who fell into that top group, individuals
or corporations. Gustavus Meyers raised
the issue, citing interlocking directorships
as evidence of highly-paid elites. The Pujo
Committee extended the comparisons
using corporations as its starting point
before World War I, and Adolph Berle
and Gardiner Means extended the analysis
again in 1932.
But it was the socialists who made the
analysis on a personal income or household income basis. In 1936, in Rulers of
America, American socialist writer Anna
Rochester noted that a small fraction of
American families (1/10 of one percent)
at the top of the income scale received as
much as 42% of families at the bottom of
the scale. At the time, that meant those
earning $75,000 per year or more at the
top versus less than $1,500 at the bottom.
In the 1920s, that sort of discrepancy was
described as being offset by the percolator theory, or “trickle down” economics. A similar case was made after 2009,
although not very successfully.
A similar discrepancy in income was
shown by the Congressional Budget Office
(CBO) 75 years later. In a report comparing trends in household income between
1979 and 2007, the CBO came to a similar
conclusion: “For the one percent of the
population with the highest income, average real after-tax household income grew
by 275% between 1979 and 2007 . . . for the
20% of the population with the lowest
income, average real after-tax household
income was about 18% higher in 2007 tha