Fool’s Greed: The Wall Street Collapse of 2008 and the Impact of Global Market Bubbles.

Fool’s Greed: The Wall Street Collapse of 2008 and the Impact of Global Market Bubbles.

J.M. Rogers

. . . 

            In reading Fool’s Gold, Gillian Tett provides the reader with all the requisite information they would need to discern factors that drove the 2008 recession, as well as some insight into why the recession could have happened. During this recession, approximately eight million people lost employment. Another six million had their homes seized due to defaulting on their mortgages, a process known in modern economic times as “foreclosure.”  This economic collapse, according to Tett, was largely due to the secretive banking practices (most notably in the creation of credit derivative deals), which ultimately led to confusion in the financial sector over exactly how these banks were generating revenues. The lack of open communication was due to the private interests of large corporations such as AIG because “opacity, in the world of finance, breeds fat margins” (Tett 281). And while in the past, the market was significantly less conflicted, in modern times, the interests of billions are represented in daily market activities. However, rather than growing opacity being the catalyst for the 2008 recession, increasing cooperation among global markets led to the collapse. With multitudes of international investors seeking ways to create profits in any way they can, the resulting interdependence of national markets upon the global marketplace to generate wealth has created an atmosphere ripe for booms and busts.

It is important to remember that there have been plenty of market booms and busts in the past, so much so that the market activities that precede such events have been given symbolic names. The Bear Market represents periods of economic shrinkage, while the Bull Market represents periods of economic expansion. While both have pitfalls, the normal interplay of these two market behaviors creates the healthy fluctuation of market values for resources and manufactured goods. As such, prolonged Bull Markets often coincide with periods of economic deflation, while prolonged Bear Markets coincide with economic inflation. In the year before the 2008 recession, a prolonged bear market was in place in the United States and near-depression levels were being observed in European markets. This drag in European markets was due to various issues within the European Union that had impeded, rather than incited, a consolidated European market. As such, the rate of global economic growth, and most notably consumer spending in the United States, decreased considerably. Entirely separate from this issue, banks in the United States had begun bundling together mortgage loans, placing a few high-quality mortgages alongside a majority of high-risk mortgages (those considered most likely to default) in order to generate new revenue streams on low-value loans that investors had little fear over (Tett 281). Rather than drive down the value of these credit derivatives, the banks packaged the investment opportunity as balanced and fair, with a high likelihood that the loans would be repaid (Tett 283). However, as the market continued to shrink, and jobs began to evaporate, the high-risk loans came to bear rotten fruit. Rather than moving along a gradient, or market spectrum, the shift in jobless rates, and the resulting defaults on mortgage compounded one another, creating what many have come to refer to as a “credit bubble” which burst.

This bursting bubble ultimately cost the U.S. government 180 billion dollars because of the bloated balance sheet of AIG, which included over 400 billion dollars worth of credit derivatives (Tett 283). Unfortunately, due to the overwhelming size of AIG, and its sizeable collection of credit derivatives, to let AIG fail would have risked sending the U.S., and the already unstable European economy, into a full-fledged depression. The uncomfortable truth that this conveys is simple: global corporations with revenue streams that exceed the profit potential of their national contemporaries, as many corporations do, are more important to global profitability than the national markets in which they operate. Gillian Tett feels that the 2008 recession was directly related to “opacity” and a lack of financial transparency, but the fact that AIG is a publicly-traded company, with public records, shows that opacity is only a small part of the issue (Tett 284). While economic whizzes living in “silos” (tiny pools of individuals with specific financial intelligence that allows them to manipulate and dictate market activities), do represent a potential issue for egalitarianism in competitive markets, the truth is that major corporations have employed financial analysts to work in economic thinktanks since the dawn of Wedgwood and the mass market revolution (Tett 284). There is also the fact that egalitarianism is, by nature, counter-productive to capitalism.

Tett’s conjecture that the market situation leading up to the recession was much akin “to that of the European medieval church,” equating the use of Latin by clergy to the existence of silo-specific knowledge by unnamed members of the “banking system” should be interpreted cautiously (Tett 284). The analogy is misguided at best and intonates that patriarchal systems of management inherently utilize these types of intentional subversive behavior. However, there is no quantitative information that provides names for the so-called “banker-priests” who lead people to financial ruin due to the existence of “laziness-cum-trust” thinking among the consumer base (Tett 284). There is also little proof that all medieval priests were manipulative people who lied to their fellowship in order to reap benefits. The fact is, priests, just like bankers and barbers, are often devout to their own lines of perception, whether they be religious, economic, or cultural. As such, followers of Keynesian economics tend towards socialism and federalism, while advocates for free-market capitalism tend towards independence and self-government. To assert that individuals willingly participated in mass collusion in order to fane economic security so that they could generate profits off of low yield/high-risk credit derivatives; profits that were then lost to these individuals due to the financial setbacks caused by the collusion is convoluted conjecture.

Tett’s ultimate indictment of the financial market is qualitative, not quantitative. She does her best to explain the motives of the individuals involved rather than explaining how the complex interplay of global economic markets ultimately affects all nations involved. During this period, the declining markets in China and Europe were much better indicators of the oncoming economic issues than the cluster of bankers who sold credit derivatives. Until this financial crisis is viewed through the lens of global culpability, the preference for placing the onus of guilt upon U.S. corporations will continue to produce limited insights. Questionable economic practices should be, and typically are, investigated by the U.S. government, which suggests that the credit derivatives, while being a poor return on investment, did not create an inherently problematic situation. Tett’s claim that “opacity” breeds fat margins is antiquated and poorly reflects the modern economic climate, in which investors have access to the internet and more information about varying banking regulations than ever before. Again, this is a qualitative interpretation of the facts. The corresponding recessions in Europe, China, Mexico, and Canada after The 2008 recession all point to the global nature of this period of financial adjustment. In conclusion, the economic crisis of 2008 symbolized the first truly modern global bubble, in which the economic activities of countries divided by thousands of miles were revealed to be mortally interdependent.

 Bibliography

- Guest, Kenneth J. Cultural Anthropology: A Reader for a Global Age. New York, W. W. Norton & Company, 2018.

- Tett, Gillian. Fool’s Gold: The Inside Story of J.P. Morgan and How Wall Street Greed Corrupted Its Bold Dream and Created a Financial Catastrophe. New York, Free Press, 2009, pp. 281-285.