8 Te Epic Crises of the Nineties

the association of deregulated markets with modernization as he does here, “As we move into a new century the market-stabilizing private regulatory forces should gradually displace many cumbersome, increasingly inefective government structures.”28

Greenspan also played the technological innovation card to gloss over overinfated asset prices or market bubbles. He established a trend for central bank policy called the “Greenspan Put.” Te basic strategy of the policy is to deny the existence of speculative bubbles, but when they inevitably burst, express a politically correct amount of surprise then calm the markets by tossing unlimited amounts of cheap cash into the banking system. Greenspan set the plan in motion by asserting on the day after the crash that, “Te Federal Reserve, consistent with its responsibilities as the Nation’s central bank, afrmed today its readiness to serve as a source of liquidity to support the economic and fnancial system.”29 Everyone on Wall Street understood the subtext of Greenspan’s message that the Fed would build into the system a market foor to stop the downward spiral that results from bursting price bubbles of risky assets. Te process of fnancialization was sent in hyperdrive because investment banks could build mountains of speculative assets that are inherently unstable without the fear of collapse. Te policy was called the Greenspan Put as a metaphor for “put” options which is a contract that allows a speculator to proft from a price decrease of their securities. With Greenspan frmly established as their dutiful servant, Wall Street could not be more pleased. For two decades, Greenspan led the Federal Reserve with a conviction that fnancial innovation and maintaining the bubbles when they become overinfated was more important stability.

Te Greenspan Put is a classic expression of neoliberalism and has been emulated by central banks everywhere. Outwardly the central bankers their belief in confdence in the efciency of markets and innovation. If bubbles occur, markets will automatically correct themselves. But inwardly always being ready to have the public sector push through policies directed at keeping the bubbles from collapsing at all costs. One of the reasons for they do this is to perpetuate bubbly illusions of paper prosperity to create a “wealth efect.” Te assumption is that as people in general feel wealthier after looking at the returns in their portfolios,

they will spend more on consumer goods, which stimulates growth for the rest of the economy. In other words, with the spread of fnancialization, the Greenspan Put became the primary device in monetary policy.

It all made sense. Te wealth efect would stimulate a spending binge, factory inventories would start disappearing, which would signal to businesses that they need to produce more stuf for people to buy. More production means more jobs and more income and away the process goes. Te only problem was that it did not work. Evidence of the wealth efect trickling down to households and working people is nonexistent.30 Instead, the Fed instigated an endless cycle of leveraged speculation in everything that could be traded, causing bubble markets, leading to bursting bubbles and crises and panic, followed by another round of leveraged speculation.

Te Greenspan Fed represents the essence of contemporary neoliberalism—minimum genuine accountability to the population it is supposed to serve while providing the institutional connective tissue between leviathan banks and the federal government structures of power. His stated mission was to “engage in eforts to advance free-market capitalism as an insider.”31

After 1987, the predictable patterns of neoliberal deregulation and fnancial market instability escalated. Speculative cash began moving more rapidly around the world as worldwide electronic trading infrastructure developed and institutional investors desperately searched the globe new opportunities for returns. Te electronic herd of speculators and institutional investors once again nestled into a “this-time-is-different” belief that somehow large-scale fnancial market crises would not happen again. Tat belief, of course, changed with the onset of the fnancial crises in East Asia and the stock market crash 2000–2001.

Notes

1. Margrit Kennedy, Occupy Money: Creating an Economy Where Everybody

Wins (Vancouver, Canada: New Society Publishers, 2012), p. 9. 2. John Bellamy Foster and Robert McChesney, Te Endless Crisis, p. 12.

3. Tomas Phillippon, “Te Future of the Financial Industry,” New York

University, Leonard N. Stern School of Business, http://w4.stern.nyu. edu/blogs/sternonfnance/2008/11/the-future-of-the-fnancial-in.html. 4. Household Debt to GDP for the United States, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/HDTGPDUSQ163N. 5. George Cooper, Te Origin of Financial Crises, p. 11. 6. Hyman P. Minsky, Can ‘It’ Happen Again? Essays on Instability and

Finance (Armonk, NY: M.E. Sharpe, 1982); Hyman P. Minsky, “Te

Financial Instability Hypothesis,” in M. Feldstein (ed.), Te Risk of

Economic Crisis (University of Chicago Press, Chicago, IL, 1991). 7. Charles Kindelberger, Mania, Panics and Crashes: A History of Financial

Crises (New York, NY: Wiley, 1978), pp. 11–19. 8. See John Bellamy Foster, “Te Financialization of Capital and the

Crisis,” Monthly Review, Vol. 59, No. 11, April 2008. 9. Kindleberger, Mania, Panics and Crashes, p. 12. 10. Frederich Nietzsche, Beyond Good and Evil: Prelude to a Philosophy of the Future [1886] (Cambridge University Press, 2002 [1886]), p. 156. 11. Johnson and Kwak, Tirteen Bankers, p. 71. 12. Edward Cowan, “How Reagan Sees the Budget,” Te New York Times,

October 18, 1981. 13. Gretchen Morgenson and Andrew Martin, “Citigroup Hires Mr. Inside,”

Te New York Times, October 10, 2009. 14. Nomi Prins, All the President’s Bankers: Te Hidden Alliances Tat Drive

American Power (New York, NY: Nation Book, 2014), p. 340. 15. Frederick Sheehan, Panderer to Power: Te Untold Story of How Alan

Greenspan Enriched Wall Street and Left a Legacy of Recession (New York,

NY: McGraw-Hill, 2010), p. 88. 16. Martin Mayer, Te Greatest-Ever Bank Robbery: Te Collapse of the

Savings and Loan Industry (New York, NY: Scribner’s and Sons, 1990). 17. Sheehan, Panderer to Power, p. 89. 18. T. Curry and L. Shibut, “Te Cost of the Saving and Loan Crisis,”

FDIC Banking Review, 2000, pp. 26–35. 19. Ibid. 20. Ibid., p. 341. 21. Sheehan, Panderer to Power, p. 92. 22. Ibid. 23. Stockman, Te Great Deformation, p. 317. 24. Portfolio insurance was a derivative that was structured around stock index futures and options. If stock prices started to seem unreasonably

high, the instrument would allow an option to cash out with without directly impacting the market. If prices fall, the instrument would allow the option of short selling that would ofset losses from the fall in price. In this way, large numbers of owners of derivatives could put downward pressure on stock prices even though the stocks themselves had not been traded. Tis is what happened in 1987. 25. “Stocks Plunge 508 Points, A Drop of 22.6%; 604 Million Volume

Nearly Doubles Record,” Te New York Times, October 20, 1987.

See also Danielle Booth, Fed Up: An Insider’s Take on Why the Federal

Reserve Is Bad for America (New York, NY: Penguin, 2017). 26. Justin Martin, Greenspan: Te Man Behind the Money (Cambridge, MA:

Perseus, 2000), pp. 173–174. 27. David Stockman, Te Great Deformation: Te Corruption of Capitalism in America (New York, NY: Public Afairs, 2013) p. 318. 28. Alan Greenspan lecture at the Annual Conference of the Association of

Private Enterprise Education, April 12, 1997. See https://www.federalreserve.gov/boarddocs/speeches/1997/19970412.htm. 29. Danielle Booth, Fed Up, p. 65. 30. Ibid., p. 217. 31. Alan Greenspan, Te Age of Turbulence: Adventures in a New World (New York, NY: Penguin, 2007), p. 52.

References

Cowan, Edward. “How Reagan Sees the Budget,” Te New York Times,

October 18, 1981. Foster, John Bellamy. “Te Financialization of Capital and the Crisis,” Monthly

Review, Vol. 59, No. 11, April, 2008. Johnson, Simon, and James Kwak. Tirteen Bankers: Te Wall Street Takeover and the Next Financial Meltdown (New York, NY: Pantheon, 2010). Kindelberger, Charles. Mania, Panics and Crashes: A History of Financial Crises (New York, NY: Wiley, 1978). Martin, Justin. Greenspan: Te Man Behind the Money (Cambridge, MA:

Perseus, 2000). Mayer, Martin. Te Greatest-Ever Bank Robbery: Te Collapse of the Savings and

Loan Industry (New York, NY: Scribner’s and Sons, 1990). Minsky, Hyman P. Can ‘It’ Happen Again? Essays on Instability and Finance (Armonk, NY: M.E. Sharpe, 1982).

Minsky, Hyman P. “Te Financial Instability Hypothesis,” in M. Feldstein (ed.), Te Risk of Economic Crisis (University of Chicago Press: Chicago, IL, 1991). Morgenson, Gretchen, and Andrew Martin. “Citigroup Hires Mr. Inside,”

Te New York Times, October 10, 2009. Nietzsche, Frederich. Beyond Good and Evil: Prelude to a Philosophy of the

Future (Cambridge University Press, 2002 [1886]). Prins, Nomi. All the President’s Bankers: Te Hidden Alliances Tat Drive

American Power (New York, NY: Nation Book, 2014). Sheehan, Frederick. Panderer to Power: Te Untold Story of How Alan Greenspan

Enriched Wall Street and Left a Legacy of Recession (New York, NY: McGraw-

Hill, 2010). Stockman, David. Te Great Deformation: Te Corruption of Capitalism in

America (New York, NY: Public Afairs, 2013).

8

The Epic Crises of the Nineties

By the nineties, large corporations and the Washington political establishment melded into a single frmament of power. Te revolving door between corporate boardrooms, the halls of Congress, the White House, and the Federal Reserve disappeared, leaving a wide open corridor teeming with expensive suits and briefcases. Dugger’s vision of corporate hegemony has become distinctly real. Te people who climbed to the top executive rungs of the corporate ladder are indistinguishable from the lobbyists who do their bidding, from the lawmakers who cut deals for them, from the members of the Fed’s open market committee, or from those serving in the president’s cabinet. But to characterize this establishment as corruption does not quite ft. Corruption implies a situation in which one institution is unduly infuenced by the money and power of another. Instead, the corporate-Washington establishment is a single, composite entity—an amalgamation of wealth and license into an institutional joint venture.

Tat the Fed and Treasury would pursue a political agenda that was crafted to extend corporate interests worldwide seems to no longer require explanation. It is a forgone conclusion that this is how things are done now. By 1999, the global economy was experiencing its own kind

© Te Author(s) 2018 J. Magnuson, Financing the Apocalypse, Palgrave Insights into Apocalypse Economics, https://doi.org/10.1007/978-3-030-04720-7_8

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post-traumatic stress disorder after a decade of fnancial market turbulence. In February that year, Alan Greenspan from the Federal Reserve, and Robert Rubin and Larry Summers from the Clinton administration’s Treasury Department posed together for a photo to be pasted on the cover of Time magazine. Time referred to them as “Te Committee to Save the World”1 as it canonized them as saviors for the global economy, which made little sense because the world was pressured by these people and institutions to restructure their economies to conform to a neoliberal set of policies that embroiled the economies into fnancial chaos.

Neoliberalism as policy was pushed into the political scene around the world by United States and international institutions based in Washington DC as we identifed earlier the Washington Consensus. Under this consensus, free-market capitalism was to be developed such that fnance capital and speculative cash could from one country to another without interference. Governments everywhere, including our own, were told they needed to slash public spending on social programs, reduce government regulations on banking and fnance, open their fnancial markets to the global investing community. Massive instability followed.

Te cyclone of instability in second half of the decade of the nineties was building from as a result of institutional developments. Wall Street banks and their international partners, the Federal Reserve, the U.S. Treasury and other powerful economic institutions that by then formed into the corporate hegemony that stands astride the global economy. Tis behemoth of economic and political power pushed neoliberalism on the rest of the world at the same time orchestrating global fnancialization. Ample supplies of cheap credit from the Federal Reserve, the largest central banking institution in the world, were washing saturating into fnancial institutions around the world while those institutions were being pushed into deregulation. Tis opened the food gates for fnancial market speculation on an unprecedented scale. Speed-of-light capital fows combined to create a massive cloud of speculative cash, or “hot money” as it came to be known, that orbited the planet at dazzling speeds. Hot money began moving more rapidly around the world as worldwide electronic trading infrastructure developed and speculators

feverishly scoured the globe looking for new opportunities and new markets. Financial markets everywhere were becoming increasingly unstable and subject to high-speed reckless endangerment. Te electronic herd of speculators and institutional investors once again nestled into a “this-time-is-diferent” belief that somehow large-scale fnancial market crises would not happen again. Corporate hegemony is like the hardware and neoliberalism is the software and together—institution and ideology—created a dangerously unstable system.

Pulled into this vortex of this massive structure of electronic fnancial market speculation were the so-called “emerging markets” in Asia, Eastern Europe, Mexico and other countries that were struggling to develop. In their efort to become members of the privileged club of developed nations, they sought to be integrated into the fnancial system that was dominated by the world’s largest fnancial institutions, though their own fnancial systems were fragile due failing currencies or weak securities markets. Tey turned to the United States and international institutions like the International Monetary Fund (IMF) for help and in return, as will see, they got pummeled.

Yet in this context Time referred to the top ofcials of these institutions as the committee to save the world. Looking at this from the institutional view, this is not surprising. A recurring theme within the structure of corporate hegemony is that what is drummed out as a solution is the same neoliberal game plan that created the problems in the frst place. Cognitive dissonance has become institutionalized.

Te principal neoliberal argument behind policies for emerging market liberalization was that fnance capital could be allocated around the world most efciently by following free market principles. Finance capital is scarce in many parts of the world. Te forces of supply and demand drive up returns to capital in places where it is most scarce and lower returns where there are not scarcities. Finance capital is typically scarce in developing countries and therefore the markets could command higher returns for investors. Hedge funds, shadow banks, institutional investors, etc., could borrow at very low rates in the US or Europe, rush money into emerging markets, and take advantage of those higher returns. Presumably a win-win scenario in which developing countries acquire capital they can use for development and investors

get premium returns if they are willing to take the risks. But the risk factor was largely nullifed by the Fed, Treasury and to some extent the IMF, because everyone knew these institutions would bail out the biggest players. Tese institutions created the phenomenon of “moral hazard,” meaning incentivizing fnancial recklessness. With the institutionalized moral hazard in place, the stage was set for epic speculation followed by epic instability.

Tis was heightened by the fact that the cloud of hot money was electronically transferred. In an open market environment that meant it could rush from one market to another on a whim. With each rush, prices would jump up and down and eventually turn into a crisis which created serious problems for the developing economies and the people in them. Among the frst to experience such a crisis was Mexico between 1994 and 1995.

Mexico’s December Mistake

After being pressured to deregulate its currency and bond markets in 1994, Mexico’s fnancial system was fooded with speculative cash mostly coming from the United States. Te North American Free Trade Agreement (NAFTA) created a severely imbalanced multilateral trade environment. Mexico’s trade defcits soared and along with that came soaring debt using short-term bonds. Te bonds were supported by the government and backed by dollars to give reassurances to foreign investors. In December 1994, a grassroots movement coalesced to rebel against the neoliberal programs adopted by the Mexican government and negative efect they were having in some of the poorest regions of the country. Despite the reassurances, American investors became skittish because of the political situation and began demanding higher returns as a risk premium.

Te investor public began to dump the Mexican peso as they considered it to have an artifcially high exchange rate with the US dollar. Mexico’s central bank began borrowing more and dollars to keep the currency from collapsing, but eventually ran out of credit. Investors rapidly pulled their money out Mexico by dumping bonds and dumping

the peso. A crisis of instability followed along with government ofcials in Washington claiming their surprise over these unfortunate circumstances as if they were caused by an earthquake. Te U.S. Treasury quickly orchestrated a $30 billion bailout package that was mainly to the beneft of Wall Street.2 Approximately $20 billion of the bailout funds came from the U.S. Treasury’s Exchange Stabilization Fund (ESF) supervised by newly appointed Secretary of Treasury, Robert Rubin and his sidekick Larry Summers. American politician, Newt Gingrich, soon to be Speaker of the House, also expressed “shock” and informed the public that the bailout was necessary to stop the crisis before it caused millions illegal immigrants to surge across the US/Mexico border.3 Te bailout did very little to improve the living conditions of the Mexican people who were protesting neoliberalism and damage it was doing to their livelihoods.

Te cloud of speculative hot money lifted up and away from Mexico and began trolling the planet for other emerging markets. It found them in Asia, quickly moved to the other side of the world to settle there and started another round of instability. In the meantime, there were warning signs of homegrown trouble brewing in California.

Orange County’s Derivative Debacle

In 1994, Orange County, California sufered major losses in investments in derivatives and plunged into bankruptcy. Te experience of Orange County tells a slightly diferent story of the fnancial troubles created by neoliberalism. Te county, located in the suburbs south of Los Angeles, is arguably one of the most prosperous counties in the country. But, like public service institutions everywhere, it has been starved of funds because of a deteriorating tax base. Increasingly, public agencies and pension funds are pushed toward speculation in fnancial markets as a method of paying for government services.

Te county scraped together about $8 billion of its reserves and borrowed about $12 billion and placed the bets on particular derivatives called “inverse foaters.” Inverse foaters are a kind of bond in which the yield foats in an inverse relationship to benchmark rates such as the rate

paid on Treasury bonds. When the benchmark rates rise, the foater rate goes down and vice versa. Placing bets is based on the assumption that the benchmark rate is high and should be going down in the future. If the assumption is true and the benchmark rate falls, the foater rate will rise. Typically, the rates on bonds and bond prices move in opposite directions. But with inverse foaters falling benchmark rates will cause both the rates on the bonds and the bond price to rise. In such a case, they can be sold for a proft.

Orange county tried this, and their turned sour. Local agencies that invested in Orange County’s investment pool suddenly saw their taxpayers money vanish as it lost over $1.5 billion.4 Te news sent major shock waves through bond markets, particularly in municipal bonds. As investors began dumping bonds, bond prices fell and the yield on those bonds jumped by 2% in a single day of trading. Te decline represented contagious fears that what happened in Orange County would happen elsewhere. It also represented panic from the creditors that lent the county funds to make such risky investments.

A fnancial advisor for local governments in California commented that, “You can pin this almost 100 percent on Proposition 13.” Te anti-tax neoliberals in California had pushed through a referendum that reduced property taxes—the main source of funding for local governments—by a staggering 57%.5 Te advisor continues, “Te only reason people are out there trying to turn two dimes into a quarter is they can’t fnance basic needs anyway else. Te Music Man comes in and says, ‘I can get you 10 percent when everyone else gets 5 percent and he is a hero.’”

Foundations, pension funds, scholarships, face the same problems as local governments. By mid-2016, returns to pension funds have dropped to their lowest levels on record, which has created a $1.25 trillion funding gap.6 Unable to raise funds or generate decent returns on bonds, they are forced into riskier territory just to pay their bills. Meanwhile, Merrill Lynch, being the music man in this case, made $100 million in fees for the deals it arranged with Orange County.7 Te zero-bound rate policy of the Fed has created a situation in which Wall Street companies can borrow billions at dirt cheap rates from the Fed, while these funds that serve legitimate social functions are stripped bare.

At the time, former investment banker and diplomat for the Clinton administration Felix Rohatyn commented, “Te more complicated and the fancier these so-called investments are, the more the question of appropriateness comes to the fore.” Rohatyn was an outspoken critic of derivatives and characterized them as “fnancial hydrogen bombs, built on personal computers by 26-year-olds with MBAs.”8 He and others were advocating at Congressional hearings that public funds should not be gambled with in this manner and pressed for legislation that would restrict local investment policies. Teir voices were drowned out by stalwart neoliberals, including Greenspan who complained in a meandering testimony that “Te trouble with legislation is that it is very likely in this type of market to become obsolete, and could very readily become counterproductive to the required fexibility that we need to address the types of problems that we are addressing.”9 In typical Greenspan fashion, he argues that fnancial innovation, no matter what problems it causes should always take precedent over regulation.

Thailand and the Crises in East Asia

Shortly after the crisis in Mexico and a heavy dose of neoliberal medicine, similar instabilities were building in the fnancial markets in East Asia. Te governments in Tailand, Malaysia, Singapore, Hong Kong, and South Korea were convinced by Washington to deregulate their controls on international capital fows in fnancial markets. Wall Street frms once again were given the green light to move speculative cash in and out of these countries as they saw ft. Te cloud of money drifted to Tailand for speculation on its currency, the Tai baht.

In April of 1995, the United States began negotiating a process whereby the dollar would rise in value against the Japanese yen in order to assist Japan out of its recession. By weakening the yen relative to the dollar, Japanese exports would become more competitive in US markets. With a boost in its export sector, it was believed that Japan would pull out of its recession. As the US dollar became stronger relative to the yen and other currencies, including the Tai baht (THB), also strengthened as they were fxed to the dollar. Just as weakening the

yen boosted Japan’s ability to export to foreign markets, strengthening the baht compromised Tailand’s ability to export. Tis was a signifcant problem for a country like Tailand, whose economic growth was almost entirely driven by its export sector. In their earlier years of development, Tailand and other Asian countries patterned their exportled growth after the Japanese model which was based on a pluralist system of careful government planning and management and private enterprise—a model which is antithetical to America’s push for a global system of pure capitalism.

After adopting a more free-market approach, and after tying its currency to the dollar, Tailand’s export sales plummeted and trade defcits began to soar. To make matters worse, China burst into the world trading system as the premier producer of low-cost exports and Tailand lost much of its share of the world export market.

Losing its export earnings, Tailand began borrowing large sums of money by selling bonds to Wall Street banks and investment frms at relatively high-interest rates. With the borrowed money, Tai banks, in turn, made loans to local businesses for economic development projects (a policy that was also recommended by the Washington Consensus) including commercial real estate development in hotels and resorts to augment tourism, and in export-oriented manufacturing infrastructure. Much of this development was directed toward restoring Tailand’s earnings of foreign currency needed to pay their high-interest debt obligations to Wall Street.

As Tailand agreed to follow open-market policies set by the Washington Consensus, its fnancial sector became vulnerable to instabilities that come with currency speculation. As with the Dutch tulip bulbs centuries before, the Tai baht became an object of speculator interest and was quickly destabilized. Speculators observed Tailand’s mounting defcit and debt problems and began to place bets that Tailand would not be able to sustain its fxed exchange rate with the dollar. But the speculators were not anticipating that the baht would rise in value, rather that it would fall. In other words, they were “short-selling” Tailand’s currency, and they were doing so in huge volume.

Te process of short-selling the Tai currency goes something as follows. Tailand had for some time been maintaining a fxed exchange rate of about 25 THB to the dollar. Speculators who believed that the currency would fall in value began borrowing baht and then used the baht to buy dollars. Tey would then wait for the currency to devalue, buy the baht at a cheaper price, pay back the loan and walk away with a proft. Say for example, a speculator borrows 25 million bahts and with that money immediately buys $1 million US dollars at the $1 = 25 THB exchange rate. Te speculator sits on the million dollars and waits for the baht to devalue, to say $1 = 30 THB. At that point, the speculator can buy the 25 million bahts it needs to pay back the loan, and at a $1 = 30 THB, the speculator only needs about $833,000 to buy the 25 million bahts and pocket the remaining $167,000.

Like other forms of speculation, short-selling has a way of becoming a self-fulflling prophecy. Large hedge funds and other US investors were positioning to short-sell the Tai baht. By doing so, they were siphoning dollars out of Tailand’s banks. As more speculators decided to short-sell, more were demanding US dollars and therefore placed more stress on Tailand’s reserve of foreign currency. Eventually Tailand ran out of dollars. Tose who were not short-selling began a panicked sell-of of the baht, and the currency went into a free fall. In a vain attempt to stabilize its currency at its agreed fxed rate, Tailand’s government borrowed huge amounts of dollars in order to buy enough baht to raise its value. But those dollars immediately fed back out of its banks as speculators sold of their holdings of baht. Te self-fulflling prophecy for the speculators was realized, and Tailand’s currency collapsed. Within a matter of months, Tailand’s currency lost half of its value, and at its lowest point it was trading at 56 THB to the dollar.

As the currency collapsed, the panic spread to other sectors of Tailand’s fnancial markets. US banks and investment frms that purchased Tai stocks and bonds stood to lose as these securities, priced in baht, collapsed in value along with the currency. Te collapsing currency dragged the stock and bond markets down with it. Free and open markets in Tailand came to mean that Wall Street frms were free to openly move their money into Tailand’s markets for speculation, and were freely to openly pull it back out, en masse, leaving a tsunami of

fnancial wreckage behind. In a wave of panic selling, these Wall Street frms sold out their holdings of Tai securities, which contributed heavily to the destabilization of Tailand’s stock and bond markets. In 1997, Tailand’s stock market dropped by a staggering 75%.10

Observing what was happening in Tailand, speculators became skittish in other markets and the speculative panic began to spread to other countries, specifcally among those that followed the Washington Consensus’s prescription of liberalized capital markets.

A brand of gambling casinos opened and speculators rushed into place their bets. As in Mexico, most of these bets were on an anticipation that the currency would lose its value relative to the US dollar. Speculative bets like this can be a self-fulflling prophecy if enough money is drawn to it. Te Tai baht tumbled into the target of speculators from the US and Europe who, in a self-fulflling prophecy, anticipated that the baht would collapse from the weight of this speculation. Tey started pulling their money out of Tailand and in 1997 a massive panic sellof occurred in which investors began selling their holdings of Tai securities along with the currency. Te Tai currency collapsed and Tailand’s stock market dropped by a staggering 75%. Following a similar pattern, the panic spread to Malaysia, Indonesia, Hong Kong, and South Korea, leaving a wide swath of economic ruin everywhere.11

In October 1997, Hong Kong’s Hang Seng stock market index showed a fall of 23% and its central bank had spent over $1 billion in US dollars—an amount equal to about half of Hong Kong’s broadest measure of its money supply—to prevent a collapse in its currency. Unemployment soared in South Korea along with poverty rates. Interest rates everywhere in East Asia spun wildly out of control, and at one point had risen overnight to as high as 500%. Malaysia’s and Indonesia’s currencies collapsed and both countries plunged into deep recessions. In Malaysia, the national currency, the ringgit, also collapsed, the stock market crashed and the country plunged into a deep recession that was felt in every sector of the economy. Malaysia’s real gross domestic product declined by 6.2% in one year. In Indonesia, the experience was similar: collapsing currency, crashing stock markets followed by a

deep recession. Accompanying Indonesia’s currency crash was skyrocketing price infation. Steep increases in food prices precipitated riots and political instability.12

For all the Asian countries involved, this was among the worst economic crises in their histories and people sufered in large numbers.13 Meanwhile the cloud of hot money lifted away from the Asian markets to seek fortunes elsewhere. Commenting on this series of crises, Nobel laureate and former World Bank economist, Joseph Stiglitz notes,

I believe that the capital account liberalization was the single most important factor leading to the crisis…Indeed, in retrospect, it became clear that the IMF policies not only exacerbated the downturns but were partially responsible for the onset: excessively rapid fnancial and capital market liberalization was probably the single most important cause of the crisis, though mistaken policies on the part of the countries themselves played a role as well.14

Te East Asian countries had no choice but to turn to the very same IMF for bailouts. Te bailout deals were brokered by the former Chancellor of the Exchequer, Gordon Brown, who had nonetheless stood by his Prime Minister, Tony Blair, as they pursued the neoliberal game plan. In the US, Robert Rubin, a former Wall Street investment banker, was Treasury Department Secretary at the time and brought representation for the banking and fnance industry directly to the White House cabinet. Rubin led the charge to crack open the fnancial markets in East Asia. Returning to the question of moral hazard, the element of risk in speculation was largely nullifed as companies knew that the IMF, the US Treasury, and Her Majesty’s Treasury would have their back if things went badly. Te IMF distributed tens of billions of dollars in loans to the governments of the East Asian so that they could pay back their obligations to New York and London frms. In retrospect, Robert Rubin commented that he was “shocked” and had never seen anything like this before, which is remarkable considering that he had just fnished administering the bailout deal in Mexico for precisely the same reasons.15

Ten Prime Minister of Malaysia, Mahathir Mohamad, as a new form of capitalist imperialism, “In the old days you needed to conquer a country with military force, and then you could control that country. Today it’s not necessary at all. You can destabilize a country, make it poor, and then make it request help.” Te help, in this case, would come from the IMF, which subsequently takes control over the policies of the country. “[And] when you gain control over the policies of a country,” Mahathir asserted, “efectively you have colonized that country…” He called specifcally on the international community to take note that the international fnancial institutions are acting in accordance with their own greed, not the wellbeing of people. Te institutions, he argued, “are not in the business of attending to the social needs of people. Tey are only thinking about their proft, and if you allow the market to go free, unregulated, then the world will face monopolies of giants who will not care at all about what happens to people…”16

Te warning signs that neoliberalism was making fnancial systems unstable and crisis prone was largely ignored in Washington and Wall Street, and most Americans could not feel what was happening as they were still caught up in market populism. Nonetheless, the United States was not entirely unscathed by the emerging market crises and fnancial market troubles swung back and came to roost at hedge fund LongTerm Capital Management (LTCM) and another homegrown crisis.

Long-Term Capital Management

Recall the merger waves in the banking sector in the 1990s. One of the waves occurred when investment banks were allowed to merge with commercial banks. Tis meant that frms that that engaged in making risking deals, underwriting derivatives, and doing massive proprietary trades on their own account now had access to commercial banks’ deposit money. Te waves also cemented the Too Big to Fail status of Wall Street leviathans.

Evidence of the TBTF status became clear when the Federal Reserve Bank of New York brokered a major rescue deal for one of the most prestigious hedge funds on Wall Street—LTCM. Part of its prestige

came from having employed the two Nobel laureate economists Robert Merton and Myron Scholes who were mainly responsible for crafting the Efcient Market Hypothesis, headed by John Meriwether former head of legendary Salomon Brothers, and from having a former Federal Reserve vice chair David Mullins on board. With this superstar team, LTCM was fagship company that set the standards for the mathematic wizardry that came to characterize fnance.

Deregulation allowed LTCM to craft massive arbitrage trades using $4 billion of its own capital and over $130 billion in money borrowed from a consortium of commercial banks. Te arbitrage trades were based on bets that the prices of certain stocks or yields on certain bonds could be diferent in diferent markets, but only temporarily.17 Te basic idea was that securities are traded in markets scattered around the world and occasionally there will be diferences in prices from one market to the next for the same security. Te same assumption held for the yields on specifc bonds. LTCM was trading “fxed income arbitrage” deals that were linked various government bonds, including bonds issued by the Russian Government. Te Efcient Market Hypothesis was built around an assumption that these diferences could not last for long and LTCM made bets accordingly. Huge bets. Te math models that drove the bets did not take into consideration the crises unfolding in emerging markets and the capital fight that ensued. Te crisis in East Asia triggered another crisis in Russian bonds and currency. When the Russian government was reeling from its fnancial and currency crises, it began to default on its bond obligations and the arbitrage deals began to unravel. LTCM was operating in near complete secrecy as hedge funds were not regulated. Investors from around the world panicked and a large cloud of hot money drifted to the safety of U.S. Treasury bonds. As a result, the yields on those bonds actually widened as they were traded in multiple markets. Tis was the opposite of what LTCM genius-inspired models predicted. and had quietly borrowed huge sums of money to underwrite these derivatives.

In 1998, LTCM lost massive amounts of money and its capital dropped total capital dropped to $1 billion.18 What was even more alarming was that the company was on the verge of defaulting on the debt is piled up to make the deals. Because of its size, LTCM’s troubles sent markets around the world roiling. Banks were panicking. Te

Fed was shocked and began to worry that such a default could precipitate a wider crisis, including instigating depositors to make a run on the banks.

Te Fed’s New York bank brought together representatives from every major bank in New York that had a stake in the hedge fund’s future, including J.P. Morgan Chase, Merrill Lynch, and Goldman Sachs. Te Fed pushed the banks to collectively pony up $3.6 billion in a bailout deal. Te Fed and Wall Street banks patted themselves on the back for containing a crisis that could have easily triggered a much wider meltdown. Greenspan, Rubin, and Summers were canonized on the cover of Time magazine’s February 1999 issue as “Te Committee to Save the World.” But the implications of the rescue deal were much more far-reaching. It proved to the world that the electronic trading infrastructure was lightning fast and so interconnected that a crisis in one part of the world could easily trigger a crisis on the other side of the planet. It also demonstrated that the Fed was in bailout mode for hedge funds that took massive risks based on abstract mathematical models that turned out to be worthless. It was a green light to Wall Street to indulge in more debt-driven risky business and to do so dramatically.

For over a hundred years, the Federal Reserve’s responsibility has been to maintain price and employment stability and to supervise banks. It was never intended to allow high fying hedge funds to achieve TBTF status, then orchestrate bailout after bailout. Not only does all of that amount to encouraging practices that lead to more instability, it represents a mission drift that swayed so far of center that it constitutes a violation of its charter.

Tese experiences should have made policymakers and people in general stand up and pay attention as they were clear warnings of dangers ahead. Instead, the bailouts made it easier to fall into apathy and amnesia. Other signs of cracks in the system were beginning to show in the nineties.

In the aftermath of the LTCM meltdown in the late 1990s, Brooksley Born, then head of the Commodities Futures Trading Commission, began to stitch together a proposal to regulate the derivatives industry. Born, unlike so many others around this time in the Clinton and Bush administrations, took her job as regulator seriously.

Her commission began investigating fraud in derivatives trades, including mortgage-backed securities. She was concerned mortgage-backed securities represent tens of trillions of dollars worth of risk, which could be dangerously unstable. She proposed to submit to Congress a plan for regulation and immediately came under attack by Wall Street companies and their partners in the Treasury, the Federal Reserve and the Securities Exchange Commission (SEC). Robert Rubin and Larry Summers at the Treasury, Alan Greenspan at the Federal Reserve, Arthur Leavitt at the SEC, and, of course, Phil Gramm in the Senate attacked Born openly in Senate hearings in a raw display of power and shut her down. Born’s plan to regulate derivative trades never got of the ground in Congress.

The Dot.Com Crash of 2000–2001

Not long after the bailout and mop up of LTCM was complete, another major crisis was already on the horizon. Tis time it was in the very fashionable and volatile tech stocks. the cloud of hot money drifted back to the stock markets where a major stock market crash began to boil out of the tech sector. From the peak of the stock market boom to the trough of the bust, the dot.com crash between 2000–2001 was among the most startling stock market crashes in the history of the world.

By the mid-1990s, desktop computing power had become more afordable and user friendly. No longer were they merely a hobby for techies, personal computers became a regular tool for businesses as well as a common household appliance. Consumers began spending huge amounts of their disposable income on newer and faster machines, and on multiple generations of new software packages. Technology was a red-hot growth sector and this found expression in the stock market.

When the stock market bubbles started to take of, the baby boomer generation was making its way through the American population. Te boomers are those born between the years 1945 and 1965, which meant that by 1995 they were between thirty and ffty years old. Tis is a time when most are in of their prime income earning years and had collectively amassed a substantial sum in their retirement and mutual fund

nest eggs. Tey were also more inclined to be involved in fnancial market speculation than previous generations. Analyst Deborah Gregory notes that, “since 1987, individuals have become responsible for their retirement savings through defned contribution plans, the funds of which are tied up in the markets.”19 William Fleckenstein, journalist and author of Greenspan’s Bubbles: Te Age of Ignorance at the Federal Reserve (2008), elaborates, “Te year 1995 marks the start of the biggest stock market bubble this country has ever experienced. Baby boomers, captivated by the Internet and the new fnancial networks like CNBC, believe they possess the know-how to invest for themselves and had earned the right to be rich.”20

Alan Greenspan, testifying in a routine report to Congress in May 1994, also noted that, “[Lured] by consistently high returns in capital markets, people exhibited increasing willingness to take on market risk by extending the maturity of their investments.” Interpreting his typical opaque language, Greenspan is saying that people were inclined to take long-term positions in the stock market and were shifting substantial amounts of money away from short-term money market accounts and savings deposits. He continued, “it is evident that all sorts of investors made their change in strategy—from the very sophisticated to the much less experienced.”21 According to Fed estimates, Americans moved approximately $282 billion from their piggy banks to the stock market in 1993 to get in on the bullish money-making phenomenon.22 As Frederic J. Sheehan notes, “Money chases an infating asset.”23

If people at this time felt that they were entitled to become rich, it was not through wage growth. Former Federal Reserve Governor, Lawrence Lindsey, repeatedly reported to the Fed’s policy making wing, the Federal Open Market Committee (FOMC), that wages and salaries of the working population in the 1990s were stagnating, while the wealthiest one percent were taking the majority of income growth from their investments. People on the rat wheel were falling into debt because, as Lindsey notes, “the non-rich, non-old live paycheck to paycheck, quite literally. Tat’s where all their income comes from. Remember, virtually none of the capital income or business income goes to them. Tey have to live on their wages and that wage share is

also declining… Te middle-class, middle-ages people who are borrowing are really getting their income squeezed.”24

Nonetheless undaunted, people in signifcant numbers were drawn into market speculation as a way to get what they considered their fair share. Equity growth, not wage growth, was fueling personal consumption expenditures. Increasingly, Americans were seeing their net worth, at least on paper, rise proportionally with expanding retirement portfolios and home equity. Tese were used as collateral to support consumer debt, and consumer debt was driving real economic growth measured in terms of GDP. Te US economy was resting on a squishy foundation of equity bubbles. Lindsay warned again in 1996, that, “there is a long-term social cost we are going to pay from all this…. Consumption has expanded more quickly than the income of the great majority of American households.” Lindsey was referring to the dangers awaiting as a majority were using bubbles to keep the economy alive and reiterated, “the long-term costs of a bubble to the economy and society are potentially great. Tey include a reduction in the long-term saving rate, a seemingly random redistribution of wealth, and the diversion of scarce fnancial human capital into the acquisition of wealth. As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst that bubble becomes overwhelming.” In other words, Lindsey was suggesting that the Fed take the air out of the bubble before it gets any bigger and thereby lessen the magnitude of the crisis that would follow. Chairman Greenspan responded, “On that note, we all can go for cofee” and after the cofee break, moved on to another topic. Lindsey’s warnings were ignored and the public thereafter was subject to a seemingly endless feat of fnancial log-rolling.25

Greenspan not only ignored Lindsey’s warnings, but believed that equity extraction, particularly from real estate, was a viable economic model. Sheehan tells how “Greenspan was living for the moment: ‘I believe that equity extraction from homes will continue to be a source for positive growth in personal consumption expenditure.’ Greenspan then extolled some Fed model… that calculated 20 percent of personal consumption came from consumers cashing out their ‘wealth.’ Rising house prices were essential to America’s continuous shopping spree.”26

Technology was not only the vehicle that moved capital around the world, but the stocks of technology companies themselves became the objects of fnancial speculation. Te technology industry was both an area of growth and a source of increased productivity rates for other industries and for the economy overall. As hardware and software technology developed and became more afordable, such as with the introduction of the Pentium processor and Microsoft’s Windows operating system, businesses and households spent heavily on computers and software throughout mid-to-late 1990s. Computing power became much more afordable and user friendly. No longer merely a hobby for techies, personal computers became a regular tool for business use and a household appliance. Households began spending huge amounts of their disposable income on newer and faster machines, and on a succession of new versions of software packages. By the mid 1990s, technology was a red-hot growth sector and this found expression in the stock market.

For businesses, investments in computer technology paid of in higher productivity levels. Rising productivity levels allowed for signifcant economic expansion without concerns of price infation. Technology enthusiasts began making bold claims that digital technology has changed the US economy in such a way that price infation would never again be an impediment to growth. With little worry about infation, the Federal Reserve began expanding the availability of credit, lowering interest rates, and this cheap money was eventually channeled into stock market speculation.

With the development of the internet, entirely new industries were created seemingly overnight. Entrepreneurs came out every corner of the economy to create an explosion of “dot.com” service-sector companies. Internet-based companies that sold travel and dating services, pornography, music and books, movie rentals, banking services and practically every other service that does not require a physical human presence. Most of these companies were not proftable, but their stocks were publicly traded and they skyrocketed with speculation.

Speculators, blinded by the usual cognitive dissonance seemed not to notice, nor did they seem to want to notice. Just as journalists were on the pool operator payroll in the 1920s, research analysts of investment banking frms were issuing favorable reports on client’s stocks,

particularly new issues by corporations for whom their own investment banks were assisting in capitalizing for lucrative fees.

Another factor contributing to the rise of stock prices during the decade of the 1990s was the heightened role played by institutional investors and the so-called “day traders.” A demographic wave coincided with the opening of fnancial markets in Asia and with digital technology. Baby-boomers were entering their prime income earning years and by the 1990s had collectively amassed a substantial nest egg in retirement funds and mutual funds. Moreover, the institutional investors had considerable infuence and were pressuring corporate managers to squeeze maximum returns out of their stocks. As they did so, the stock prices rose. With the Internet and the power contained in desktop computing, online amateur speculators, or “day traders,” were drawn to the bull market. Just as in the 1920s, just about anyone with a modest amount of money could potentially become obsessed with playing the stock market.

As with every other bubble in fnancial market history, when masses are caught up in the euphoria of easy money to be made in speculation, trouble inevitably follows. John K. Galbraith observed, “For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster.”27 Te disaster would be felt not by the rich, but by the millions of average Americans who watched the rapid defation of their 401(k) accounts. Te wealthy inside players that spearheaded bullish momentum on the up side, got out quickly, and triggered a reversal to bearish momentum on the down side.

Te Dow Jones Industrial Average was at 2588 in January 1991. By January 2000 it had risen to 11,302, an increase of 337% in 10 years. Te NASDAQ, which is heavily weighted with stocks of businesses in the computer and Internet sectors, rose from 414 in January 1991 to a peak of 5250 in March of 2000—an overall increase of 1168% in the same ten-year period and an average annual increase of 32%.28 Considering that many of the new, high-tech companies listed in the NASDAQ were not earning profts, the NASDAQ stock market boom could not have been on rising fundamental values; rather it was a speculative bubble. Measured by the DOW and NASDAQ, the 1990s