Senator Elizabeth Warren of Massachusetts slammed insurance giant AIG for considering joining a lawsuit that claims the terms of the company's federal bailout were unfair.

Why we need the old order back—before another financial bubble bursts

The best argument for the American rule of law, however imperfect it has been, is that we Americans eventually get it right. President Obama paraphrases Martin Luther King, Jr., when he says that the arc of history bends toward justice. But with a new credit bubble looming, and the same old Wall Street bankers defying new rules enacted to rein them in, and other pin-striped thieves enjoying not just regulatory leniency but also the political support of ranting yahoo Tea Party Republicans, justice seems far less than inevitable.

Sometimes law isn’t much of a remedy. M&T Bank, whose boss swore up and down that neither he nor his outfit would ever do such a thing, stalked off with more than $250 million in a deal that they cooked up with the all-powerful Goldman Sachs a couple of years ago at the height of the craze for creating mortgage-backed securities. $250 million sounds like chump change at a time when just one of the big Wall Street banks is on track to profit $6 billion just this quarter alone. But back in the day, just five years ago, the Buffalo guys bundled up 6,000 or so very shaky mortgages (many of them written here in Buffalo) and then sold them to a big insurance company in New York. This meant that our local bank had to look past the inconvenient truth that it knew it was peddling garbage as if it were gold. Here’s what our legal system said when the insurance company found out that what it had bought was garbage: A New York judge said, in effect, you should have known better than to trust those guys.

Now it seems that Goldman Sachs all by itself is up to its old tricks again. The law, as enacted by our elected representatives in Congress, got changed in 2010, when Congress worked with President Obama to stop the once-banned practice of banks gambling their clients’ money. Bloomberg News reported this week that the CEO of Goldman Sachs did not tell the truth when he swore up and down that neither he nor his outfit would ever engage in “proprietary trading,” which is allegedly banned by the new Volker Rule of the much-heralded Dodd-Frank Act. The journalists at Bloomberg named some of the names of the 20 or so Ivy League grads whose daily bread comes from doing what the boss says they don’t and what the law says they shouldn’t.

Bubble ahead, bubble behind

The Dodd-Frank bill is more than 800 pages long. Back in 1934, in the aftermath of the last huge credit-bubble crash, Congress enacted the 35-page Glass-Steagall Act, where the lines were laid down brightly. From 1934 until 1999, until a former Goldman Sachs CEO, Robert Rubin, became secretary of the treasury and convinced everybody in town to repeal Glass-Steagall, it was illegal, plain and simple, for banks to gamble on Wall Street. It was so simple. Now it’s not so simple. And the new law means “yes” when it says “no” because there’s a brand-new nuance to “no.”

But locally, and nationally, bubbles are forming again. The local news is that housing prices are up an enormous amount—a 13 percent increase in median sale price just in the past year, here in a market that has four or five times as many new houses being built as there are new households to buy them. Wages are not rising 13 percent a year, that’s for damned sure: Wages are stagnant in nominal dollars, and actually declining in real purchasing power. What’s happening is that some assets are swelling in value—the assets that banks like to lend against. The old problem of 10 years ago is back, and back in a major way.

Everybody in the world of high financial capital is seeking high yields because interest rates are being kept so incredibly low. There is no point to saving: Your savings account at your local bank or credit union is yielding you less than one half of one percent interest on your deposits, and that’s true of everybody, large and small. That leaves some people—specifically, old people—reliant on their monthly pension payments, and not on their interest on savings, to keep them in the realm of consumers. The people who manage the pension funds that have to pay out money to those old folks have to come up with the money somehow, so those fund managers have to hope that stocks go up in value—or, in the alternative, that other things go up in value, things that can be leveraged, i.e., borrowed against.

Therein lies the problem: There is a new round of debt-leveraging underway. Debt is exploding again. And now, one of the people who warned about the first debt bubble is warning that we are looking at another one.

Hudson’s alarms

Michael Hudson, the senior voice of a group of economists that is far outside the Goldman Sachs-led world of compromised academia and revolving-door Washington officialdom, is warning that the same guys who pumped up the housing bubble in the first decade of the 21st century are pumping up a bond bubble that will pop in the second decade.

Here’s why people should sit up and listen when Michael Hudson talks: He called it right the first time. Hudson writes voluminously. His website (michael-hudson.com) is full of extraordinarily long essays. Mixed in amongst them are a few easy-to-understand expositions, such as the very nicely illustrated article for Harper’s Magazine in May 2006 that explained, with pictures and brief paragraphs, exactly how the housing bubble would pop, and what its popping would do to everybody. Hudson was prescient, correct, understandable—and his warning was completely ignored by Washington.

Now Hudson is at it again. He is warning that the major banks, unconstrained by effective regulation as they were in the olden days of just a dozen years ago, are leading the way to turning working people all over the world into debt slaves. We didn’t experience it in Buffalo because of the peculiar dynamics of this region, but in many other places in the US, the run-up in the cost of houses turned millions of people into slaves to their mortgages—which suddenly, in 2008 and 2009, became loans on houses that were worth less than people had borrowed to buy them.

But this time around, there are a couple of pieces of good news. You may believe that when President Obama succeeded in raising tax rates on high-income households, including capital gains tax rates, that it was all about politics. Wrong. It is actually good news for the overall economy that the people who have captured well over 93 percent (UC Berkeley economist Emmanuel Saez’s estimate) of all the income gains since 2008 are going to be paying slightly more in taxes because their consumption won’t change, but more of the burden of all the government debt that was racked up during the Bush era will be their burden to bear.

The other piece of good news is that corporate executives—not the bankers or the speculators or the hedge-fund managers—are gaining something that sounds awfully like class consciousness, in that they are beginning to understand that their interests as salarymen are different from the interest of the aforementioned. People whose jobs are tied to stock-price performance actually are unlike the rentier class. And the rumor is, from at least one Republican consultant, that these business people have figured out that the Congressional Tea Party is a threat to economic recovery.

That still leaves us with a political establishment that has not yet been capable of restoring the rule of law. Banks that defrauded hundreds of thousands of customers get wrist-slapped. Banks that launder money pay fines and chug along. Banks that knowingly peddle bad paper skate. And their CEOs remain unbelievable. At least the US Senate now has a law-maker, in the person of Elizabeth Warren, who understands the potential majesty of the law, especially in matters of money.

Bruce Fisher is director of the the Center for Economic and Policy Studies at Buffalo State College. His recent book, Borderland: Essays from the US-Canada Divide, is available at bookstores or at www.sunypress.edu.