Summary:
US economy went into a recession in 2008. The stock market crashed and job prospects looked bleak. With the majority of individual retirement savings tied to the the stock market in the form of 401(k)s and IRAs, this was a double whammy. Under then President Barack Obama, the economy recovered slowly in a few years. Even though the economy has attained sustainable growth, job market for the general public continued to lag. The prime driver behind the 2008 recession was the country's largest banks(commercial and investment). Their approach to handling other people's money drove the recession of 2008 in the US and across the globe. However, Obama's administration, rather than penalizing the banks, steadfastly supported the banks.
In this book, Nomi Prins provides in depth analysis of how US administrations(Democrats and Republicans) have bailed out the banks since 1900. As candidates, presidents have routinely portrayed banks as the villains only to solicit their support and provide scaffolding for the banks' disastrous bets after the election.
Synopsis:
Every chapter in this book examines a ten year period. It covers the US economy from 1900s to today. After the Spanish American War of 1898, US came to be treated on par with other developed countries of the world at that time.
1900 - 1910: In 1899, Morgan Bank's owner J P Morgan had used his influence to loan 50 million dollars to the US government when it needed the money. The end of 1890s was a time of companies buying loans to finance completion of US railroad infrastructure and by 1907, the banks had issued bonds and other financial instruments to aid these developments. Knickerbocker Trust Company happened to be one of them. Its managers and proprietors came up on the short end of a disastrous attempt to corner the copper wire market. Once the news got out, depositors rushed to withdraw their deposits and this panic spread to other banks as well. Theodore Roosevelt who was the US President in 1907, backed the effort of Morgan and other big bankers who sought to bring the Panic under control. At that time, Britain's Pound Sterling was the dominant currency in the world and London the pre-eminent financial center. Britain and other European countries had support from their respective governments who stepped in to stanch any bank runs before it became widespread. Roosevelt had run in 1902 as the candidate best positioned to rein in the banks' speculative excesses and had used Sherman Antitrust Act, passed in 1890, to ride roughshod over the banks. However, by 1907, the bankers had regained their lost influence.
1910 - 1920 : Democrat party candidate Woodrow Wilson became president in 1912. Like Roosevelt, he pledged to restrain the banks' abominable behavior in his election campaign. To avoid repeat of 1907 panic, US bankers provided their input to Congress in terms of forming Federal Reserve that would serve as a backstop in any financial crisis. Wilson was not in favor of providing more support to the bankers. However, he offered his consent to the bill after consulting the bank owners. He also went easy on the banks by not invoking the Sherman Anti Trust Act against them. When First World War erupted in 1914, the United States did not take part in it at the beginning. The american banks provided loans to all the parties in the war. The American banks also took advantage of the predicament European banks were in during the war, to expand their offerings to other countries. With the sinking of 5 US merchant ships in Atlantic in 1917 by German U-boats, Wilson decided to enter the First World War on the side of Britain, France and Russia (Allied or Entente Powers) and against Germany, Austria and the Ottoman Empire (Central Powers). In the meantime, Wilson was re-elected as US President in the 1918 election. Peace talks began in Paris in 1919 to end First World War. Wilson announced his framework for peace talks in terms of Fourteen Points. However, his effort was in vain as Britain and France were intent on humiliating Germany and Austria in the peace talks. Wilson's other idea of a League of Nations that would serve as an assembly of nations also met opposition from Britain and France. Before his ideas could become reality, Wilson suffered a stroke. In the 1920 election, Democrat candidates James Cox and Franklin D Roosevelt ran on following through on Wilson's ideas and lost to the Republican ticket of Warren Harding and Calvin Coolidge. Support for Wilson's Fourteen Points and League of Nations proposals withered after the loss. As a consequence, Britain and France levied draconian punitive measures on the the losing side of Germany and Austria at the Treaty of Versailles
1920 - 1930: After the end of First World War, the economy of the United States slowly began to recover. The debt instruments from banks that were allocated for war funding now flowed towards the American people. With a Republican administration, taxes was reduced on people and banks. The restrictions on lending were relaxed. As a result, the economy grew rapidly. In the 1928 election, Republican candidate Herbert Hoover became the President. He chose Andrew Mellon as his Treasury Secretary. The bulk of the growth of the US economy came through individuals taking on debt. In the 1920s, loans were primarily created by big banks such as Morgan, Chase and National City Bank (today's Citi). Morgan Bank had grown through lending to institutions including other banks and companies. National City Bank showed that there was a market in lending to individuals. Not to be left out, Morgan Bank focused on its growing its revenue through deposits and investments. The proprietors and managers of these big banks also borrowed on their own accounts and drive the stock valuations to dizzying heights. They bought shares of banks and other companies at a low price, drove the stock prices up and when members of the public got in, the proprietors and managers sold off their shares at a handsome profit. Once the public realized the con, they tried offloading their shares. However, with everyone trying to offload their shares at the same time, the demand for those shares plummeted and the stock market came crashing down. Owing to the Republican Administration's professed 'hands off' policy towards banks, the stock market crash led to a Depression in the US and across the globe. At the same time, US banks created Bank of International Settlements (BIS) in 1930 to help banks in Germany, Britain and France deal with the after effects of First World War on banking operations across borders.
1930 - 1940 : Economic Depression which began in the United States spread throughout the world. In early 1930s, German government wanted to reduce the debt burden that had grown as a result of the punitive measures imposed by Britain and France at the Treaty of Versailles. This time around, Britain and France were amenable to the demands. But before the reductions could go into effect, Germany's inflation shot up( Hyper Inflation). In the US, Treasury Secretary Andrew Mellon was removed from office for cheating on his taxes. 1932 election saw the defeat of President Hoover by Democrat Franklin Delano Roosevelt(FDR). FDR put in measures to slow down the effects of Depression and it had an impact. FDR Administration passed legislation setting up Federal Deposit Insurance, Agricultural Adjustment Act, Works Progress Administration and Social Security Administration. He further strengthened the Glass Steagall Act that was passed during the previous Republican Administration, to force the banks to separate their commercial and investment banking operations. FDR got re-elected in 1936 election. In Europe, Hitler became a dictator of Germany and successfully invaded neighboring countries. With the slow but steady growth of American economy, FDR was monitoring the events in Europe. In September 1939, Britain announced it was at war with Germany. Second World War had begun.
1940 - 1950: Notwithstanding the support for Germany and Italy in the United States, the support for Britain and France was stronger. Moreover, American banks worked with banks in Britain and France, and there was a comfortable relationship built on currency exchange on both sides. FDR was re-elected again as President in the 1940 election. As Second World War was going on, a meeting was convened in July 1944 ,at Bretton Woods in New Hampshire to analyze the economic situation in the world after the war. This conference led to the creation of the International Monetary Fund (IMF) and International Bank for Reconstruction and Development (World Bank) to ensure stability in economic affairs across the world. With the destruction (mental as well as physical) of much of Europe after Second World War, the US came to be the dominant country, economically, politically and militarily in the world. FDR died in April 1945. A Democrat, Harry Truman became the President. Second World War came to an end in 1945. American banks used their influence and health to play a major part in disbursing funds for the Marshall Plan to rebuild Europe and Japan. In 1948, Harry Truman got re-elected as President.
1950 - 1960: Soviet Union emerged as the enemy of the US during the Cold war. With differing economic and political systems, capitalism in the US and communism in the Soviet Union, banks in the US saw their growth tied to their nations' growth. So they developed relationships and opened bank branches in Asia, Africa, and the South American continents. They lent money on favorable terms to nations in these continents, which the Soviet Union did as well, in its sphere of influence. In 1952 and 1956, Republican Dwight Eisenhower won the election and became the president of the United States. Consistent with Republican economic philosophy, he brought down the level of taxation that had been imposed on people and banks for Second World War.
1960 - 1970 : Democrat John F. Kennedy won the 1960 election to become the president of the United States. With Cold War at its peak, Foreign affairs were the focus of his administration. After his death in 1963, Democrat Lyndon Johnson assumed the Presidency. In 1964 election, Johnson was elected president. His time in the office was consumed by Vietnam War. He focused on poverty elimination in US, setting up Medicare and Medicaid to help the poor. The Republican candidate Richard Nixon won the 1968 election with a promise to end the Vietnam War. He kept his promise and ended the war once he became the President.
1970 - 1980: Since 1900, bank managers and proprietors considered public welfare as the guiding principle in their decisions even though their primary purpose was to make money, for themselves and for their organizations. After the tumult of Vietnam years and a spectacular increase in revenue inflows from Middle East oil and gas resources, their principles diverged from public welfare for the country. Bretton Woods had made US Dollar the reserve currency for the world economy and tied it to value of gold (1 ounce - $35). In the 1920s and 1930s, the value of the currencies of all countries was pegged to gold. With finite available gold deposits, the prolonged misery of Depression was made even longer with this hard tie-in to gold. When US economy entered into a slowdown in the early 1970s, foreign holders of US dollar demanded gold equivalent to their dollar holdings. Nixon cut off the link between the dollar and the gold. The severing of the link between dollar and gold has made it easier to borrow at lower rates. In 1972, Nixon was re-elected President. He was forced to resign in August 1974 because of the Watergate scandal and the involvement of his re-election committee with the burglars who broke into the Democrat party headquarters. Republican Gerald Ford assumed Presidency of the United States. In the 1976 election, he lost to Democrat Jimmy Carter. As the US economy slowed down, the inflation picked up.
1980-1990 : Republican Party candidate Ronald Reagan became president in the 1980 election. His administration came in with a fixation on Free Market principles. According to it, market forces can best allocate funds according to their self interest thereby aligning the economy to operate in the most efficient manner and an intervention by government in the affairs of the market, however well-intentioned, will distort the economy for the worse. Even though this policy has not been shown to work in any real world economic context (other than in the heads of its fervent supporters), it spread and gained acceptance across the US economy because of it was the governing economic ideology of the Republican Party and it provided a simple (but wrong) explanation for a complex economy. Further, both parties relied on bankers and business owners to fund their party activities and as a result, subordinated themselves to the economic whims of their paymasters. This led to a reduction in tax levels for both individuals and businesses. The tax reductions were reversed a few years later when the incoming tax revenue targets were missed (contrary to the original claims by Free market advocates). Reagan appointed Donald Regan, head of Merrill Lynch as his Treasury Secretary. The constraints on lending and reporting on financial transactions were also relaxed. When the US banks lent loans to poor countries without evaluating their credit worthiness, the US banks requested american government to guarantee their debt which the Reagan Administration proceeded to do. In the future, when banks made terrible bets that blew up in their faces, they would go to american government as a lender of last resort and that practice gained wide acceptance during Reagan administration. When IMF and World Bank wanted to provide loans to struggling countries, Reagan administration once again came to the rescue of the big banks, appointing them in charge of servicing those loans (and bolstering bank revenues). With the loosened regulations and a benign Federal Reserve under Alan Greenspan looking on, the stock market crashed in October 1987. In the 1989 election, Republican candidate George H W Bush became the President of the United States. Following in the footsteps of Reagan, he loosened the bank regulations further.
1990 - 2000 : Democrat party candidate Bill Clinton became the President of the United States in 1992 election. During the election campaign, he used the banks as a foil but turned in favor of them once he came to power. When currency crises hit Mexico, East Asia and Russia during his administration, he firmly sided with american banks. It was under his administration that Glass Steagall Act(which was put in place during Depression) was finally dismantled. This resulted in banks offerring both commercial and investment services under the same roof.
2000 - 2010 : Republican candidate George W Bush won 2000 election to become the President of the United States. His administration came into office filled with supporters of free markets and as such, banks stock prices soared. Banks not only lent money through loans but also sold derivatives using mortgages as the underlying source. These bundles of derivatives and bonds spread throughout the world, valued at several billions of dollars. The decline in their values precipitated the 2008 recession. Democrat Party candidate Barack Obama was elected as President after the 2008 election. He implemented $700 billion asset relief program (TARP) to stabilize the declining stock market.
2010 - : Obama was re-elected President in the 2012 election at the time when the US economy was slowly recovering from the 2008 recession. Even though his administration portrayed the banks as the enemy in public pronouncements, they did not follow through in their actions and allowed the banks to get away with egregious offenses they committed in the previous decade.
Other books of interest:
The Robber Barons - Matthew Josephson
US economy went into a recession in 2008. The stock market crashed and job prospects looked bleak. With the majority of individual retirement savings tied to the the stock market in the form of 401(k)s and IRAs, this was a double whammy. Under then President Barack Obama, the economy recovered slowly in a few years. Even though the economy has attained sustainable growth, job market for the general public continued to lag. The prime driver behind the 2008 recession was the country's largest banks(commercial and investment). Their approach to handling other people's money drove the recession of 2008 in the US and across the globe. However, Obama's administration, rather than penalizing the banks, steadfastly supported the banks.
In this book, Nomi Prins provides in depth analysis of how US administrations(Democrats and Republicans) have bailed out the banks since 1900. As candidates, presidents have routinely portrayed banks as the villains only to solicit their support and provide scaffolding for the banks' disastrous bets after the election.
Synopsis:
Every chapter in this book examines a ten year period. It covers the US economy from 1900s to today. After the Spanish American War of 1898, US came to be treated on par with other developed countries of the world at that time.
1900 - 1910: In 1899, Morgan Bank's owner J P Morgan had used his influence to loan 50 million dollars to the US government when it needed the money. The end of 1890s was a time of companies buying loans to finance completion of US railroad infrastructure and by 1907, the banks had issued bonds and other financial instruments to aid these developments. Knickerbocker Trust Company happened to be one of them. Its managers and proprietors came up on the short end of a disastrous attempt to corner the copper wire market. Once the news got out, depositors rushed to withdraw their deposits and this panic spread to other banks as well. Theodore Roosevelt who was the US President in 1907, backed the effort of Morgan and other big bankers who sought to bring the Panic under control. At that time, Britain's Pound Sterling was the dominant currency in the world and London the pre-eminent financial center. Britain and other European countries had support from their respective governments who stepped in to stanch any bank runs before it became widespread. Roosevelt had run in 1902 as the candidate best positioned to rein in the banks' speculative excesses and had used Sherman Antitrust Act, passed in 1890, to ride roughshod over the banks. However, by 1907, the bankers had regained their lost influence.
1910 - 1920 : Democrat party candidate Woodrow Wilson became president in 1912. Like Roosevelt, he pledged to restrain the banks' abominable behavior in his election campaign. To avoid repeat of 1907 panic, US bankers provided their input to Congress in terms of forming Federal Reserve that would serve as a backstop in any financial crisis. Wilson was not in favor of providing more support to the bankers. However, he offered his consent to the bill after consulting the bank owners. He also went easy on the banks by not invoking the Sherman Anti Trust Act against them. When First World War erupted in 1914, the United States did not take part in it at the beginning. The american banks provided loans to all the parties in the war. The American banks also took advantage of the predicament European banks were in during the war, to expand their offerings to other countries. With the sinking of 5 US merchant ships in Atlantic in 1917 by German U-boats, Wilson decided to enter the First World War on the side of Britain, France and Russia (Allied or Entente Powers) and against Germany, Austria and the Ottoman Empire (Central Powers). In the meantime, Wilson was re-elected as US President in the 1918 election. Peace talks began in Paris in 1919 to end First World War. Wilson announced his framework for peace talks in terms of Fourteen Points. However, his effort was in vain as Britain and France were intent on humiliating Germany and Austria in the peace talks. Wilson's other idea of a League of Nations that would serve as an assembly of nations also met opposition from Britain and France. Before his ideas could become reality, Wilson suffered a stroke. In the 1920 election, Democrat candidates James Cox and Franklin D Roosevelt ran on following through on Wilson's ideas and lost to the Republican ticket of Warren Harding and Calvin Coolidge. Support for Wilson's Fourteen Points and League of Nations proposals withered after the loss. As a consequence, Britain and France levied draconian punitive measures on the the losing side of Germany and Austria at the Treaty of Versailles
1920 - 1930: After the end of First World War, the economy of the United States slowly began to recover. The debt instruments from banks that were allocated for war funding now flowed towards the American people. With a Republican administration, taxes was reduced on people and banks. The restrictions on lending were relaxed. As a result, the economy grew rapidly. In the 1928 election, Republican candidate Herbert Hoover became the President. He chose Andrew Mellon as his Treasury Secretary. The bulk of the growth of the US economy came through individuals taking on debt. In the 1920s, loans were primarily created by big banks such as Morgan, Chase and National City Bank (today's Citi). Morgan Bank had grown through lending to institutions including other banks and companies. National City Bank showed that there was a market in lending to individuals. Not to be left out, Morgan Bank focused on its growing its revenue through deposits and investments. The proprietors and managers of these big banks also borrowed on their own accounts and drive the stock valuations to dizzying heights. They bought shares of banks and other companies at a low price, drove the stock prices up and when members of the public got in, the proprietors and managers sold off their shares at a handsome profit. Once the public realized the con, they tried offloading their shares. However, with everyone trying to offload their shares at the same time, the demand for those shares plummeted and the stock market came crashing down. Owing to the Republican Administration's professed 'hands off' policy towards banks, the stock market crash led to a Depression in the US and across the globe. At the same time, US banks created Bank of International Settlements (BIS) in 1930 to help banks in Germany, Britain and France deal with the after effects of First World War on banking operations across borders.
1930 - 1940 : Economic Depression which began in the United States spread throughout the world. In early 1930s, German government wanted to reduce the debt burden that had grown as a result of the punitive measures imposed by Britain and France at the Treaty of Versailles. This time around, Britain and France were amenable to the demands. But before the reductions could go into effect, Germany's inflation shot up( Hyper Inflation). In the US, Treasury Secretary Andrew Mellon was removed from office for cheating on his taxes. 1932 election saw the defeat of President Hoover by Democrat Franklin Delano Roosevelt(FDR). FDR put in measures to slow down the effects of Depression and it had an impact. FDR Administration passed legislation setting up Federal Deposit Insurance, Agricultural Adjustment Act, Works Progress Administration and Social Security Administration. He further strengthened the Glass Steagall Act that was passed during the previous Republican Administration, to force the banks to separate their commercial and investment banking operations. FDR got re-elected in 1936 election. In Europe, Hitler became a dictator of Germany and successfully invaded neighboring countries. With the slow but steady growth of American economy, FDR was monitoring the events in Europe. In September 1939, Britain announced it was at war with Germany. Second World War had begun.
1940 - 1950: Notwithstanding the support for Germany and Italy in the United States, the support for Britain and France was stronger. Moreover, American banks worked with banks in Britain and France, and there was a comfortable relationship built on currency exchange on both sides. FDR was re-elected again as President in the 1940 election. As Second World War was going on, a meeting was convened in July 1944 ,at Bretton Woods in New Hampshire to analyze the economic situation in the world after the war. This conference led to the creation of the International Monetary Fund (IMF) and International Bank for Reconstruction and Development (World Bank) to ensure stability in economic affairs across the world. With the destruction (mental as well as physical) of much of Europe after Second World War, the US came to be the dominant country, economically, politically and militarily in the world. FDR died in April 1945. A Democrat, Harry Truman became the President. Second World War came to an end in 1945. American banks used their influence and health to play a major part in disbursing funds for the Marshall Plan to rebuild Europe and Japan. In 1948, Harry Truman got re-elected as President.
1950 - 1960: Soviet Union emerged as the enemy of the US during the Cold war. With differing economic and political systems, capitalism in the US and communism in the Soviet Union, banks in the US saw their growth tied to their nations' growth. So they developed relationships and opened bank branches in Asia, Africa, and the South American continents. They lent money on favorable terms to nations in these continents, which the Soviet Union did as well, in its sphere of influence. In 1952 and 1956, Republican Dwight Eisenhower won the election and became the president of the United States. Consistent with Republican economic philosophy, he brought down the level of taxation that had been imposed on people and banks for Second World War.
1960 - 1970 : Democrat John F. Kennedy won the 1960 election to become the president of the United States. With Cold War at its peak, Foreign affairs were the focus of his administration. After his death in 1963, Democrat Lyndon Johnson assumed the Presidency. In 1964 election, Johnson was elected president. His time in the office was consumed by Vietnam War. He focused on poverty elimination in US, setting up Medicare and Medicaid to help the poor. The Republican candidate Richard Nixon won the 1968 election with a promise to end the Vietnam War. He kept his promise and ended the war once he became the President.
1970 - 1980: Since 1900, bank managers and proprietors considered public welfare as the guiding principle in their decisions even though their primary purpose was to make money, for themselves and for their organizations. After the tumult of Vietnam years and a spectacular increase in revenue inflows from Middle East oil and gas resources, their principles diverged from public welfare for the country. Bretton Woods had made US Dollar the reserve currency for the world economy and tied it to value of gold (1 ounce - $35). In the 1920s and 1930s, the value of the currencies of all countries was pegged to gold. With finite available gold deposits, the prolonged misery of Depression was made even longer with this hard tie-in to gold. When US economy entered into a slowdown in the early 1970s, foreign holders of US dollar demanded gold equivalent to their dollar holdings. Nixon cut off the link between the dollar and the gold. The severing of the link between dollar and gold has made it easier to borrow at lower rates. In 1972, Nixon was re-elected President. He was forced to resign in August 1974 because of the Watergate scandal and the involvement of his re-election committee with the burglars who broke into the Democrat party headquarters. Republican Gerald Ford assumed Presidency of the United States. In the 1976 election, he lost to Democrat Jimmy Carter. As the US economy slowed down, the inflation picked up.
1980-1990 : Republican Party candidate Ronald Reagan became president in the 1980 election. His administration came in with a fixation on Free Market principles. According to it, market forces can best allocate funds according to their self interest thereby aligning the economy to operate in the most efficient manner and an intervention by government in the affairs of the market, however well-intentioned, will distort the economy for the worse. Even though this policy has not been shown to work in any real world economic context (other than in the heads of its fervent supporters), it spread and gained acceptance across the US economy because of it was the governing economic ideology of the Republican Party and it provided a simple (but wrong) explanation for a complex economy. Further, both parties relied on bankers and business owners to fund their party activities and as a result, subordinated themselves to the economic whims of their paymasters. This led to a reduction in tax levels for both individuals and businesses. The tax reductions were reversed a few years later when the incoming tax revenue targets were missed (contrary to the original claims by Free market advocates). Reagan appointed Donald Regan, head of Merrill Lynch as his Treasury Secretary. The constraints on lending and reporting on financial transactions were also relaxed. When the US banks lent loans to poor countries without evaluating their credit worthiness, the US banks requested american government to guarantee their debt which the Reagan Administration proceeded to do. In the future, when banks made terrible bets that blew up in their faces, they would go to american government as a lender of last resort and that practice gained wide acceptance during Reagan administration. When IMF and World Bank wanted to provide loans to struggling countries, Reagan administration once again came to the rescue of the big banks, appointing them in charge of servicing those loans (and bolstering bank revenues). With the loosened regulations and a benign Federal Reserve under Alan Greenspan looking on, the stock market crashed in October 1987. In the 1989 election, Republican candidate George H W Bush became the President of the United States. Following in the footsteps of Reagan, he loosened the bank regulations further.
1990 - 2000 : Democrat party candidate Bill Clinton became the President of the United States in 1992 election. During the election campaign, he used the banks as a foil but turned in favor of them once he came to power. When currency crises hit Mexico, East Asia and Russia during his administration, he firmly sided with american banks. It was under his administration that Glass Steagall Act(which was put in place during Depression) was finally dismantled. This resulted in banks offerring both commercial and investment services under the same roof.
2000 - 2010 : Republican candidate George W Bush won 2000 election to become the President of the United States. His administration came into office filled with supporters of free markets and as such, banks stock prices soared. Banks not only lent money through loans but also sold derivatives using mortgages as the underlying source. These bundles of derivatives and bonds spread throughout the world, valued at several billions of dollars. The decline in their values precipitated the 2008 recession. Democrat Party candidate Barack Obama was elected as President after the 2008 election. He implemented $700 billion asset relief program (TARP) to stabilize the declining stock market.
2010 - : Obama was re-elected President in the 2012 election at the time when the US economy was slowly recovering from the 2008 recession. Even though his administration portrayed the banks as the enemy in public pronouncements, they did not follow through in their actions and allowed the banks to get away with egregious offenses they committed in the previous decade.
Other books of interest:
The Robber Barons - Matthew Josephson
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