A Case for Economic Democracy

Posted on May 16, 2009. Filed under: Finance, Housing, Politics, Predatory Lending | Tags: , , , , , |

This lecture was delivered on March 25, 2009, at Union Theological Seminary in a public forum, “Christianity and the U.S. Crisis,” associated with a class co-taught by Cornel West, Serene Jones, and Gary Dorrien. It is an abridged version of a chapter in Dorrien’s forthcoming book, Social Justice in Question: Economy, Difference, Empire, and Progressive Christianity (Columbia University Press, 2010).

Today we are caught in a global economic crash and depression, a calamity affecting every nation connected to the global economy, especially poor nations lacking economic reserves. But this crisis also puts into play new possibilities for a democratic surge, perhaps toward economic democracy.

From the perspective of Economics 101, every bubble mania is basically alike, but from the beginning, this one has been harder to swallow, because it started with people who were just trying to buy a house of their own, who usually had no concept of predatory lending, and who had no say in the securitization boondoggle that spliced up various components of risk to trade them separately. It seemed a blessing to get a low-rate mortgage. It was a mystery how the banks did it, but this was their business; we trusted they knew what they were doing. Our banks resold the mortgages to aggregators who bunched them up with thousands of other subprime mortgages, chopped the package into pieces and sold them as corporate bonds to parties looking for extra yield. Our mortgage payments paid for the interest on the bonds.

For twenty years securitizations and derivatives were great at concocting extra yield and allowing the banks to hide their debt. Broadly speaking, a derivative is any contract that derives its value from another underlying asset. More narrowly and pertinently, it’s an instrument that allows investors to speculate on the future price of something without having to buy it. The words that are used for this business-securitization, insurance, diversifying risk-sound reassuring, but they mask that the business is pure high-leveraged speculation and gambling. Credit-default swaps are private contracts in a completely unregulated market that allow investors to bet on whether a borrower will default. Ten years ago that market was $150 billion; today it’s $62 trillion, and it’s at the heart of the meltdown. Credit default sellers are not required to set aside reserves to pay off claims, and in 2000 Congress exempted them from state gaming laws. AIG’s derivatives unit was a huge casino, selling phantom insurance with hardly any backing, for which we now have to pay. The tally for the past six months: four bailouts, $160 billion, some very hard-to-take bonus payments, and no bottom in sight for a sinkhole of toxic debt exceeding $1 trillion.

via OpEdNews » A Case for Economic Democracy.

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