Ten years after the financial crisis, the contagion spread to democracy itself

By the time Lehman Brothers filed for the largest bankruptcy in American history on September 15, 2008, the country had been sailing in the global financial waters for over a year. Bear Stearns had been rescued by JPMorgan Chase during a merger facilitated by the bailout, and the government had nationalized housing giants Fannie Mae and Freddie Mac. For anyone who pays attention to the financial system, the situation has been very difficult for a long time.

And yet, throughout the turmoil, the Federal Reserve and the US Treasury allowed the country's largest banks to transfer as much cash as they wanted to their shareholders – even if it became clear that these same banks could not not pay their debts. Lehman himself had increased his dividend and announced a $ 100 million share buyback in early 2008. On September 19, 2008, the insurance giant AIG paid a dividend of $ 4.40 per share, the highest in the world. his history. after the Federal Reserve gave the insurance giant $ 85 billion in emergency funding. According to Professor Anat Admati of Stanford University Business School, the 19 largest US banks distributed $ 80 billion in dividends between the summer of 2007 and the end of 2008. They drew $ 160 billion from the US Treasury and Billions of dollars from the Fed. $ 7.7 trillion in emergency loans.

When poor people engage in such activities, we call it looting. But for the princes of American capital and their lieutenants at the Fed and the Treasury, it was pure crisis management.

Today, Ben Bernanke, Hank Paulson and Timothy Geithner insist that they did what they had to do under extreme stress conditions. Mistakes have been made, the former senior financial controllers of the government have acknowledged a recent article for the New York Timesbut they finally "prevented the collapse of the financial system and avoided another Great Depression."

Except they did not really save the banking system. They turned it into an unjust criminal syndicate. In the years following the crash, the biggest Wall Street banks were arrested money laundering of drugs, violate WE. punishments against Iran and Cuba, Corruption foreign government officials, doing Illegal contributions to the campaign to a state regulator and manipulate the US public debt market. Citibank, JPMorgan, Royal Bank of Scotland, Barclays and UBS same pleaded guilty to crimes to manipulate the currency markets.

Not a single human being served a day's imprisonment for all of it.

The financial crisis that reached its peak on Monday morning ten years ago was not fundamentally a problem of capital, liquidity or regulation. It was a crisis of democracy that taught middle-class families a dark lesson about who really imported into American society – and that did not count.

For most of American history, financial policy was a central political battleground. There was the quarrel between Thomas Jefferson and Alexander Hamilton over the debt of the war of independence; the whiskey rebellion; The assault of Andrew Jackson against the second bank of the United States; the bank notes that Abraham Lincoln issued to help finance the civil war; William Jennings Bryan and the gold cross; the creation of the Federal Reserve; New Deal of FDR. These were among the most passionate political issues of their time. And they were all understood as issues of power and democratic accountability, not just issues of growth or efficiency.

But from the 1950s, the United States came to understand that finance was apolitical – something better managed by technocratic experts isolated from the passions of a democratic electorate. This idea was marked by various slogans – "liberal consensus", "great moderation", "independence of the central bank" – but they all ended in the same thing: the economy was non-ideological. The decisions made by the experts tending to the financial machine were strictly tactical. Any mistake was to pull the wrong lever or set a dial too high.

The financial crisis blew up this myth. "The failures of the crash and the bailout are not technocratic failures," says Mehrsa Baradaran, a law professor at the University of Georgia. "They talked about power."

Lehman would be the only major US financial institution to fail in the crisis. All others were bailed out under generous conditions that not only protected their creditors, but their shareholders and, with the exception of AIG, the jobs of their leaders. Criminals who have broken the law have been protected from prosecution.

Here is what happened to all those who did not work for a bank: As a percentage of the overall wealth of each family, the poorer you were, the more you lost in the accident. The first percent of US households ultimately capture more than half of the economic gains over the Obama years, while the more modest 99% have never recovered their crash losses.

These were political choices and not economic inevitability. Under Presidents George W. Bush and Barack Obama, the government saved the financial sector by filling it with cash and then taking unprecedented steps to increase the value of financial assets. For anyone who owned stocks and bonds (ie rich), it was great news.

But there was no similar commitment to housing – where middle-class people held their wealth. Instead, more than 7.7 million households have been lost to foreclosure between 2007 and 2016, while millions of others have found the source of their savings – the equity in housing – eliminated.

It could have been different. When Obama took office, he pledged to spend up to $ 100 billion of the bailout bank to prevent foreclosures. He finally just passed $ 21 billion. But the dollar amount was only a fraction of the failure. The bailout gave the government unprecedented authority over the foreclosure process – it could have forced banks to adjust monthly payments or reduce the debt burden for homeowners in distress. Instead, as Geithner said, the seizure plan was aimed atlather the track"For banks coming for a hard landing. This allowed banks to slow down the pace of foreclosures, but did not really help families keep their homes.

Geithner had not badly adjusted the dials. He had chosen who deserved the full attention of the government and how the aid would be distributed. And he had done so without any significant contribution from Congress, nor even from a public debate.

"This has resulted in a breakdown and a lack of trust in the institutions," says Admati. "What we saw here … is rather disturbing. This has raised many questions about who controls the company – the companies or the elected government.

Financial crises foment authoritarianism. In 2015, a trio of German economists They studied financial panic in 20 advanced economies dating back to 1870 and concluded that they almost always result in significant gains for "far right" political parties after a delay of a few years. The most pressing question for decision-makers facing a banking crisis is not: "How do we restore our banks to profitability?

And on this front, the technocrats at the top of the US government have just as failed as their European counterparts. By developing rescue and protection plans that protect the German and French banks while imposing direct difficulties on all, the International Monetary Fund, the European Central Bank and German Chancellor Angela Merkel have sent a very clear message about the European Union. European.

The result was a predictable and terrifying resurgence of the authoritarian politics unpublished since the Second World War. In Greece, it takes the form of the Golden Dawn neo-Nazi. In Italy he took power as Five-star movement. In Austria, it is the party of freedom; in Hungary, the government of Viktor Orban. And in the United States, it's manifested under the presidency of Donald Trump.

There is an obvious paradox in the American plot. Trump is part of a growing international authoritarian tide, but the financial crisis has disproportionately hit black and brown families. How did he empower a white nationalist presidency?

On average, black and Hispanic families have completely lost half their net worth in the crash. The racial wealth gap was dug during the recovery, as black real estate wealth was destroyed. At the height of the housing bubble, almost half of all mortgages to black families were subprime mortgages, and foreclosures were heavily concentrated in black neighborhoods. In 2013, the wealth of the middle black family had fallen to only $ 13,487, according to the Urban Institute. Even in 2016, he had recovered only $ 17,409, about one-tenth of the average family wealth of $ 171,000.

Paradox has a simple answer. In the American bipartite system, the frustration of blacks with the Democratic Party is low voter turnout, while Whites angry at the Democratic Party become The Republicans. An increasingly racist GOP does not offer much to black families, stay at home election day, while many white Democrats were willing to to hold your nose and vote for Trump, or found his demagoguery more attractive once the Democrats had prioritized the concerns of banking elites over the middle class.

For incorrigible optimists, there are signs of improvement in the banking sector a decade after its near-death experience. Banks have more capital than they did, a new regulatory agency now exists to help protect families from abusive financial products, and complex derivatives at the heart of the 2008 crisis must now be traded through clearing houses.

There is less here than in the eye. The loopholes in offshoring allow banks to hide their derivative transactions. The Office of Consumer Financial Protection is systematically emptied by the Trump administration. And banks do not really carry so much capital. When Lehman failed, he bore a debt equal to 31 times its total capital. This leverage boosted Lehman's profits in good years, but he also magnified his losses in a bad year. The new rules of the 2010 Dodd-Frank Act are an improvement, but they still allow for a leverage of 20 to 1. The Volcker rule prohibiting banks from performing risky securities transactions for their own accounts has never fully taken effect and, under a new proposal from Trump regulators, never is really going.

But even debates about these rules miss the point. The crisis was not just a breakdown of regulatory oversight. It was a failure of the democratic process, of economic management as an apolitical and technocratic domain. When people do not feel included in the most important decisions affecting their livelihoods, they lose confidence in democracy itself.

"You can not take something out of the democratic realm and expect people to be happy with the inequality," says Baradaran.