Serious Implications

Listen to Michael Greenberger on NPR’s Fresh Air

Michael Greenberger was recently interviewed by Terri Gross on NPR’s Fresh Air. The topic was “The Shadow Financial System.” The audio feed for the interview is linked above. Everyone at all curious about the world of money, investment, and finance should listen to what Greenberger has to say – it’s that good. Educators might want to use it in their classes.

According to Greenberger, who used to serve on the Commodity Futures Trading Commission but is now a professor at the University of Maryland, an irresponsible piece of legislation called the Commodity Futures Modernization Act of 2000(CFMA) was presented to Congress by its sponsor Senator Phil Gramm (R-TX) in December 2000. It was not written by members of Congress. It was written by lawyers and lobbyists. With no rigorous hearings or debate on the bill, it was passed by Congress and signed by President Bill Clinton just before Christmas recess.

According to Greenberger, the CFMA was a particularly damaging piece of legislation that made possible a type of murky, unregulated investment known as structured investment vehicles. These are the “mystery meats” on the global financial “menu.”

Furthermore, according to the Wiki article on Gramm, the bill created the “Enron exemption” that deregulated energy markets. Gramm’s wife, Wendy, wrote that part of the bill and Gramm pushed it through the legislative “grinder” to final passage. Wendy was later appointed to a directorship at Enron. This legislation led, in part, to the Enron debacle and thousands of Enron employees losing their jobs and pensions. Phil Gramm is now advising John McCain and has been suggested as a potential running mate (ibid).

The explanation by Greenberger in the audio link is better than my crude summary, but in short, nobody knows the extent of problem because these SIV’s are so mysterious in composition and so poorly collateralized that they amount to nothing more than “making bets.”

Summing up, Greenberger says:

Should we have an economy that’s based on whether people make good or bad bets? Or should we have an economy where people build companies, create manufacturing, do inventions, advance the American society, make it more productive? This economy is based on people sitting at their computers and making bets all day long. They call it credit default swaps, OTC derivatives, asset backed securities, etc. etc, – makes it all very complicated, but we are rewarding people for sitting at their computers and punching in bets. That’s not the way our economy is going to be built, and India and China, with their focus on science and industry and building real businesses, are going to eat our lunch, unless the American public wakes up and puts an end to an economy that praises and makes heroes out of speculators.

Those “retrospective voters” who long for a return to the good old days of the “Clinton economy” of the 1990′s should realize that those were days of relatively cheap oil, the tech boom (followed by the Nasdaq bubble), and the Baby Boomer generation working in its peak earning years. The economy Clinton inherited from George H.W. Bush was in much better shape than the one our next president will see.

Update April 18, 2007:
The arcane terms structured investment vehicles, credit default swaps, OTC derivatives, and asset backed securities are examples of what NYU professor and author David Hapgood calls “wordnoise.” Hapgood defines wordnoise as “verbal fakery designed to mask reality.” Wordnoise is part of the “Vocabulary of Screwing,” which is described here.

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