Predator Nation

1. The 2008 financial crisis: A culmination of deregulation and fraud

"It was, literally, the crime of the century, one whose effects will continue to plague the world for many years via America's economic stagnation and Europe's debt crisis."

Deregulation's dangerous legacy. The financial crisis of 2008 was the result of decades of financial deregulation, starting in the 1980s. This process removed crucial safeguards, allowing banks to engage in increasingly risky and fraudulent practices. Key milestones included:

• Repeal of the Glass-Steagall Act in 1999, allowing commercial banks to engage in investment banking
• Commodity Futures Modernization Act of 2000, which banned regulation of over-the-counter derivatives
• SEC's 2004 decision to allow major investment banks to calculate their own leverage limits

Fraud and predatory practices. As regulation decreased, fraudulent and predatory practices increased. Banks and mortgage lenders:

• Created and sold toxic mortgage-backed securities
• Engaged in predatory lending, targeting vulnerable populations
• Manipulated financial products to hide risks from investors and regulators
• Used complex derivatives to bet against their own clients

The result was a massive housing bubble and subsequent financial collapse that devastated the global economy, leading to widespread unemployment, foreclosures, and economic stagnation.

2. Wall Street's predatory practices and the housing bubble

"By the fall of 2005, Merrill Lynch estimated that half of all U.S. economic growth was related to housing—including new construction, home sales, furniture, and appliances."

The subprime mortgage machine. Wall Street banks fueled the housing bubble by creating a massive demand for subprime mortgages, which they could package into seemingly low-risk securities. This led to:

• Predatory lending practices targeting vulnerable borrowers
• "Liar loans" with no income verification
• Adjustable-rate mortgages with teaser rates that later skyrocketed
• Pressure on appraisers to inflate home values

Securitization and risk concealment. Banks then packaged these risky loans into complex financial products:

• Mortgage-backed securities (MBS)
• Collateralized debt obligations (CDOs)
• Synthetic CDOs, allowing bets on the performance of other securities

These products received high ratings from credit rating agencies, despite their underlying risks. Banks like Goldman Sachs even created products designed to fail, betting against them while selling them to unsuspecting clients.

3. The rise of a financial oligarchy and its influence on politics

"America is in decline—economically, politically, and also, in some ways, ethically and culturally."

Concentration of wealth and power. The financial sector's unchecked growth has led to the emergence of a powerful oligarchy:

• Top 1% of Americans now control over 40% of the nation's wealth
• Financial sector profits soared to nearly 40% of all U.S. corporate profits during the bubble

Political influence. This concentration of wealth has translated into enormous political power:

• Massive increase in lobbying expenditures and campaign contributions
• Revolving door between Wall Street and government positions
• Weakening of financial regulations and enforcement

The result is a system where both political parties cater to the interests of the financial elite, often at the expense of the broader public. This has led to policies that exacerbate income inequality, weaken financial oversight, and protect the banking industry from meaningful reform or prosecution.

4. Academic corruption and conflicts of interest in economics

"These days, if you see a famous economics professor testify in Congress, appear on television news, testify in an antitrust case or regulatory proceeding, give a speech, or write an opinion article in the New York Times (or the Financial Times, the Wall Street Journal, or anywhere else), there is a high probability that he or she is being paid by someone with a big stake in what's being debated."

Compromised expertise. Many prominent economists and academics have deep financial ties to the industries they study and comment on:

• Consulting contracts with financial firms
• Paid speaking engagements for industry groups
• Board positions at major banks and corporations

Impact on policy and public opinion. This creates a conflict of interest that can:

• Skew academic research towards industry-friendly conclusions
• Influence policy recommendations in favor of deregulation
• Provide intellectual cover for risky or fraudulent practices

Examples include economists praising financial innovations that later proved disastrous, defending the practices of banks that later collapsed, and opposing regulations that could have mitigated the financial crisis.

5. America's widening income inequality and declining opportunity

"Ranked by income equality, the United States is now ninety-fifth in the world, just behind Nigeria, Iran, Cameroon, and the Ivory Coast."

Growing wealth gap. Since the 1980s, income inequality in the U.S. has skyrocketed:

• Top 1% of earners have seen their incomes more than double
• Bottom 90% have experienced stagnant or declining real wages
• CEO-to-worker pay ratio has increased from 30:1 in 1978 to 271:1 in 2016

Declining social mobility. This inequality is accompanied by decreasing economic opportunity:

• U.S. ranks lower in social mobility than many European countries
• Education system increasingly segregated by income
• Rising costs of healthcare and higher education create barriers to advancement

The result is an America where one's economic prospects are increasingly determined by the circumstances of their birth, undermining the ideal of the American Dream.

6. The political duopoly: How both parties serve the financial elite

"We have, in short, a political duopoly—a cartel formed by the two parties that, between them, control all of American politics."

Convergence on economic policy. While the two parties maintain fierce divisions on social issues, they have largely converged on economic policies favorable to the financial sector:

• Both parties supported financial deregulation
• Neither party has pursued meaningful prosecution of financial fraud
• Both receive massive campaign contributions from Wall Street

Distraction through social issues. The parties maintain the appearance of stark differences through:

• Heated debates on issues like abortion, gun control, and immigration
• Cultural and regional divisions (e.g., "red states" vs. "blue states")

This strategy allows both parties to maintain voter loyalty while serving the interests of their wealthy donors. The result is a political system that is increasingly unresponsive to the economic needs of the majority of Americans.

7. The urgent need for systemic reform and financial sector regulation

"For America to reverse its decline, it will be important to do several difficult things."

Necessary reforms. To address the root causes of America's economic and political dysfunction, several key changes are needed:

1. Financial sector reform:

   • Break up "too big to fail" banks
   • Reinstate Glass-Steagall-type separation of commercial and investment banking
   • Strengthen regulation of derivatives and other complex financial products

2. Political reform:

   • Campaign finance reform to reduce the influence of money in politics
   • Stricter rules on revolving door between government and industry
   • Greater transparency in lobbying and political contributions

3. Economic reforms:

   • Policies to address income inequality (e.g., more progressive taxation)
   • Investment in education and infrastructure to improve economic opportunity
   • Stronger antitrust enforcement to reduce industry concentration

Challenges to reform. Implementing these changes will be difficult due to:

• Entrenched interests of the financial sector and wealthy elites
• The current political duopoly's resistance to fundamental change
• Public cynicism and disengagement from the political process

However, the author argues that without such reforms, America risks continued economic stagnation, political dysfunction, and social unrest. The future of American democracy and prosperity depends on the ability to confront and overcome these challenges.

Last updated: July 25, 2024