George Bush's friend "Brownie" (former Federal Emergency Management Agency chief Michael Brown) must have been in charge of the Federal Reserve. Under chairman Alan Greenspan, our nation's "non-political" guardian of the financial system stood by while banks and other lenders jettisoned any sense of prudence and "irrational exuberance" overtook the housing market. The Federal Reserve acted as though it believed that deregulation meant no regulation. Its officials watched in awe while Wall Street bankers developed ever-exotic financial instruments - ABSs, CDOs, CLOs, CDSs and who knows what else - allowing financiers to trade risks back and forth for more fees. These investments built a sub-prime pyramid on a foundation of ever-rising housing prices.
Other "innovative" forms of money-changing proliferated as long as the pyramid went on pyramiding and banks were willing to lend to super-leveraged hedge fund speculators. Whatever we might have expected of "regulators" like the Bush administration's Securities and Exchange Commission, we had thought that the Federal Reserve itself would do financial fire prevention and not just financial fire fighting.
New Yorkers used to cheer every year that holiday bonuses on Wall Street broke the old record. The conventional wisdom had it that more spending by bankers would slosh around the local economy, and city and state treasuries would be flush with tax receipts to pay for schools, the subway and public hospitals. Now, though, we have learned that big bonus payouts can mean the economy is about to go off a cliff because bankers and brokers do not get those bonuses for helping the American economy create good jobs, new companies or new products. Instead, they rake in those bonuses for finding new ways to generate fees and feed unsustainable speculation.
Consumer spending drives the U.S. economy, accounting for over two thirds of Gross Domestic Product (the national economic yardstick). Used to be, the economy grew...