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The Bankruptcy of Casino Capitalism

May 5, 2010

The Goldman Sachs scandal offers an opportunity to focus on our critique to the capitalist system itself.  April 28, 2010

EVEN THE guy who made a name for himself defending the British Empire can’t stomach Goldman Sachs’ style of capitalism.

“Whether or not there is any basis for the [Securities and Exchange Commission’s] claim that [Goldman] misled investors, the key point is that the synthetic collateralized debt obligation (CDO) at issue was nothing more than an elaborate wager on the future price of some mortgage-backed securities–a wager with as much economic utility as a gigantic bet on a roulette wheel or a horse race,” wrote investor Ted Forstmann and economic historian Niall Ferguson, the pro-colonial author of Empire: The Rise and Demise of the British World Order.

They concluded: “Facilitating such bets has become a huge part of the business of the world’s biggest banks.”

And the bets keep coming. Will the Greek government default on its debt? Speculators are wagering that it will–and stand to profit if a default comes.

Other investors are sizing up state and local governments in the U.S. with a similar aim. They’re buying credit default swaps (CDS), a form of insurance that will pay up if those government entities default on their bonds. “As U.S. cities and towns wrestle with financial problems, investors are finding a new way to profit on their misery: by buying derivatives that essentially bet municipalities will default,” the New York Timesreported.

It’s CDS trading that’s at the center of the scandal surrounding Goldman Sachs.

According to the SEC’s lawsuit, Goldman conspired with billionaire hedge fund boss John Paulson to cook up complex securities–those CDOs disdained by Ferguson and Forstmann–based on residential mortgages that were likely to go bad. Paulson then bought CDS insurance that paid him $1 billion when the mortgages failed. But Goldman kept Paulson’s negative bet quiet–and according to the SEC, that omission constitutes fraud.

Legal or not, this is standard practice on Wall Street. But the Goldman scandal has revived critical voices that were largely drowned out since the financial crisis of 2008 eased.

Among them was New York Times business columnist Roger Lowenstein:

Wall Street’s purpose, you will recall, is to raise money for industry: to finance steel mills and technology companies and, yes, even mortgages. But the collateralized debt obligations involved in the Goldman trades, like billions of dollars of similar trades sponsored by most every Wall Street firm, raised nothing for nobody.

In essence, they were simply a side bet–like those in a casino–that allowed speculators to increase society’s mortgage wager without financing a single house.

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POLITICIANS ARE getting into the act as well. As financial reform legislation moved into its endgame, the Democrats from President Barack Obama on down were racking up political points by bashing the banks.

In a speech April 22 at Cooper Union in New York, Obama told CEOs, labor leaders and others that financial reform was necessary. Jabbing a finger in the general direction of Goldman Sachs CEO Lloyd Blankfein, Obama said that “unless your business model depends on bilking people, there is little to fear from these new rules.”

Unfortunately, Obama is correct. The proposed reforms might sting the banks in one place and slap them in another. But the proposed limits on derivatives trading wouldn’t end the dangerous practices that nearly obliterated the world financial system in the fall of 2008.

And there’s nothing in the proposed legislation that would limit the size of the banks already too big to fail. Gretchen Morgansen, the New York Times reporter who has done much to uncover Goldman’s shady dealings, has it right: Too big to fail ought to mean too big to exist.

But because of bank collapses and forced mergers in the crash of 2008, the surviving banks are even bigger today–and remain in position to blackmail the government into either providing still greater bailouts in the future or taking the risk of financial Armageddon.

Certainly, it’s a pleasure to see the likes of Blankfein get put on the hot seat in Washington–especially following Goldman Sachs’ success in placing its former personnel in key positions in the Obama administration. Finally, it seems that some Wall Street executives will at least be publicly humiliated, sued and, one hopes, prosecuted as well.

Yet while it’s gratifying to see Goldman get grilled, the fact remains that working people will be on the hook for many years to bear the cost of the bailout.

Don’t be fooled when the U.S. Treasury trumpets early repayments of the $700 billion Troubled Asset Relief Program (TARP) used to take over AIG and General Motors and inject tens of billions of government money into the banks. The reality is that trillions of taxpayer dollars are still being funneled into the banks via near-zero interest rates and special loan programs.

While the U.S. government continues, as always, to proclaim the virtues of the free market, it has quietly resorted to state capitalism to prop up “private enterprise” and safeguard the basic functioning of the system.

In recent decades, the increasing size of the financial sector has led many to conclude that deregulation and out-of-control banks are the main problem. Fix that with tighter regulation, and the problem could be solved.

Of course, more financial regulation restricting derivatives would be a welcome first step toward reining in Wall Street. And the (highly unlikely) breakup of the big banks would be far better. But what’s most important is to seize the political opportunity created by the Goldman scandal to critique the capitalist system itself.

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THAT’S WHY it’s so important to look beyond the banks. With or without the help of Uncle Sam, capitalists are compelled to do one thing: maximize the rate of profit or risk being driven out of business by their competitors. To accomplish this, employers have for the last 35 years been on a systematic campaign to drive down wages, cut benefits and eliminate unions.

If financial capitalists seem excessive and especially greedy, it’s because they function as the nerve center of the entire capitalist class. The insatiable drive to accumulate capital at all costs led both to Goldman’s profiteering from home foreclosures and Massey Energy’s corner-cutting approach to workplace safety that led to the deaths of 29 miners last month.

If the economy were in decent shape, Goldman’s boss Blankfein and Massey CEO Don Blankenship might have an easier time riding out the storm. But in an economy where even a recovery has barely managed to bring the jobless rate below 10 percent, the fury that erupted in the crash of 2008 has found a new focus.

According to the mainstream media, the driving force of the popular anger is the Tea Party “movement”–something that’s in fact driven by discontented, middle-class white conservatives egged on by the likes of Fox News.

Certainly the right can make a comeback in a polarized political atmosphere. But the far-reaching effect of the economic crisis will have a radicalizing impact on the working class. Where, when and how this will lead to organized resistance by workers is unclear. But the Goldman scandal has already widened the political debate about capitalism to an extent unseen since the crash of 2008.

To question capitalism is to open the debate on socialism. In a world wracked not only by economic crisis, but also endless war and environmental disasters, it’s vital to take the discussion beyond tinkering with regulations on derivatives to question the future of capitalism itself–to put forward a socialist alternative.

For decades, in the U.S. and in much of the world, the discussion about socialism was distorted by the fact that a totalitarian state, the USSR, claimed to be socialist, as did a number of other countries with a similar economic model.

Today, by contrast, there’s a hunger to explore different possibilities–especially among young people–and the beginning of a recognition of the necessity of an alternative economic model based on workers’ control and human need rather than simply greed.

We should revel in the exposure of Wall Street’s greed and arrogance, and demand punishment for those who triggered a financial calamity that’s wrecked untold numbers of lives.

But we also need to take the opportunity to discredit the system that created this disaster–and make the case for socialism.


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