Wall Street’s 2008 Financial Crisis Costs U.S. Economy Close to $13 Trillion

Wall Street brought our financial markets to the brink of collapse and very nearly triggered a another Great Depression. Investment practices, greed and corruption rocked the U.S. economy and the American people with a catastrophic $13 trillion fallout from the 2008 financial crisis, based on the study performed by Better Markets.  As it turns out, the $1.2 billion taxpayer bailout of the investment industry was only the tip of the iceberg. 

The once fearful Securities Exchange Commission (SEC) impotently stood by while lobbyists and politicians paved the way for “creative” investment banking practices by removing regulations, restrictions and safety measures under the Glass Steagall Act of 1933. That gave Wall Street complete autonomy to repeat the mistakes that led to the 1929 stock market crash. Deregulation actually began in the early 1980s with the Reagan administration and Alan Greenspan as a part of implementing “Reaganomics”, a plan for economic reform.

After almost thirty years of deregulation that generated hundreds of billions of dollars in executive bonuses, the final blow came in 1999 with the enactment of the Gramm Leach Bliley Act (often referred to as the Financial Services Modernization Act), signed into law by President Bill Clinton.  This piece of legislation overturns key parts of the Glass Steagall Act of 1933 as well as the Bank Holding Company Act of 1956, both of which were enacted to prohibit any one entity from acting as any combination of investment bank, commercial bank and an insurance company.

These legal restrictions were already violated in 1998 with Citibank’s affiliation with Smith Barney, a large securities investment firm, and the subsequent merger with Travelers Insurance, forming the Citigroup conglomerate holding company.  Citigroup received a “special dispensation” from the Federal Reserve over a year before it actually became legal, eliminating all doubts of Wall Street’s influence over politicians at the highest levels.
2008 Meltdown

America’s financial collapse and economic crisis began in 2007, culminating in the 2008 taxpayer bailout. Five years later, it continues to impose enormous costs on the entire country.  Better Market’s report provides a detailed review of all the underlying costs.  Many of the costs and casualties cannot be quantified in terms of monetary loss. 

Over the last two years, Wall Street and its allies have refocused attention from the financial crisis and their role in bringing it about, to repealing the Dodd Frank Act of financial reform (a reinstatement of many aspects of the Glass Steagall Act of 1933). 

President Barack Obama approved and signed the Dodd Frank Act into law in 2009. To his credit, President Obama “closed the barn door left open by President Bush, that allowed all of the horses to escape”.  Governor Mitt Romney vows to overturn Dodd Frank if he is elected President in November of this year.

Since Dodd Frank was approved and put on the books, Wall Street lobbyists have relentlessly attempted to make claims about the enormity of expense associated with the implementation and enforcement of such legislation. At the same time, lobbyists avoided any discussion on how much the crisis has already cost the country’s taxpayers, while our economy is still running up debt.

The investment banking industry, with the full power of its financial influence, has waged war to kill or weaken Dodd Frank, coercing new legislation to repeal all or part of the respective financial restrictions.  Lobbyists are pressuring the regulatory agencies to pass weaker or loophole-ridden rules; challenging the validity of the reform in court.  Wall Street resources are also conducting a misleading campaign that minimizes the role they played and the responsibility they accept for the “bubble bursting” financial crisis. Their arguments and actions are without substance or merit.  Implementing and enforcing financial reform is essential to the protection of taxpaying investors as well as the entire financial system and the American economy.

The report published by Better Markets detailed financial-crisis-related costs to illustrate the urgency for regulatory reform.  America’s financial collapse and the subsequent economic crisis caused our Gross Domestic Product (GDP) to decline significantly, beginning in 2007. GDP would have dropped even more without massive spending and other actions by the federal government.  The sum of “actual GDP loss” and “GDP loss that was avoided because of emergency spending and actions by the Federal Reserve Board” is conservatively estimated to total more than $12.8 trillion for the period starting in 2008 and projected through 2018.

In October 2009, the broadest measure of unemployment (U-6 rate) across the country peaked at 17.5%, representing 26.9 million Americans. As of July 2012, the U-6 rate remained very high at 15%, representing 23.1 million Americans.

Understanding the causative factors and costs of the crisis are essential in order to implement meaningful economic reform that will prevent another financial crisis.  The SEC must strictly enforce the regulatory laws of the Dodd Frank Act to avoid future financial disasters.  Enforcement of the reform laws from Glass Steagall, written in the wake of the 1929 Stock Market Crash in the midst of the “Great Depression”, could have prevented the 2008 crisis if not repealed.  Apparently, our government forgot the teachings from its own economic history.

America enjoyed over 40 years of prosperity between the mid 1930s (after the enactment of Glass Steagall) through the 1970s.  In the early 1980s, the Reagan administration began 20 years of deregulation, leading to the financial crisis coming to a head in 2008.  It would seem that Wall Street suffers from a double dose of amnesia, sending their lobbyists to pressure politicians to repeal the regulations implemented under the Dodd Frank Act of 2009.  “Repeating the same mistakes and each time expecting a different result is the definition of insanity.”  Accepting that philosophy, what is the definition of an industry responsible for the loss of nearly $13 trillion and then wanting permission to recreate that same unregulated environment and expecting profitable results without the collateral damage?  Rhetoric aside, the definition beyond insanity is called “Wall Street”.

It becomes revolting understandable as to why the SEC does not have a stellar track record for enforcing regulations and investigating possibilities of fraud.  Non-enforcement is easy and can be compellingly lucrative to look the other way.  The SEC and other regulatory agencies are certainly not above corruption as brought to light by the Bernie Madoff Ponzi scheme that defrauded hundreds of billions of dollars from countless investors, many of which lost their life savings while the SEC looked the other way. 

The “scapegoat resignations” within the SEC in the aftermath of the Bernie Madoff Ponzi scandal wasn’t very convincing in wiping the Commission’s slate clean.  Many more government agency representatives, higher up on the food chain, need to fall on their swords before all my concerns are put to rest.  Various reputable sources were known to have brought the Madoff fraud charges to the SEC on multiple occasions beginning as far back as 2001.  No investigations were ever initiated by any governmental agency.  In fact, it was the effects of the financial crisis that deterred Bernie from raising additional funds to cover the payout of fictitious profits.  This type of corruption and indifference to the truth in our governing agencies cannot be tolerated if our economic system is to survive.

“We have the best government money can buy.”  Quoted by Mark Twain

 

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