The Second Gilded Age: What’s Next

The Guilded Age of America refers to the period of American history in second half of 19^th century and early 20^th century when so much wealth were accumulated and concentrated in so few people’s hands with Industrial Revolution.  The excess and extravagance were best displayed by the mansions of Newport as discussed in my last March's blog.   Super rich industrialists such as Carnegie, Rockefeller and Vanderbilt are familiar names and success examples to many till this day. 

The first Gilded Age was met with the backlash of the Progressivism that attempted to redress some of the problems that had arisen.  Progressives did pass legislation such as the Sherman Antitrust Act of 1890 to rein in big business, combat corruption, and protect the consumers.  The pendulum did not swing back however until Oct 29, 1929 when the stock market collapsed and Great Depression set in officially.  There are many schools of thoughts by the economists for the causes of the Great Depression.  One suggests that inequality of distribution of wealth and income is a main factor as the economy produced more than it could consume (due to insufficient income).

A century later, history repeated itself in a new and much more sophisticated form that revolving around the concentration of power and wealth in and through Wall Street.  Some have called this development as the New or Second Gilded Age of America.  Many have noted the disappearance of the middle class.  Now we all know that the first sign of trouble was the burst of the housing bubble of 2007, after two decades of unprecedented growth, dominance, and prosperity. The meltdown of the financial system began when Bear Stearns, one of the oldest and largest investment banks went down on March 17, 2008 and was helped by the Federal Reserve Bank of New York through an emergency loan.  For the subsequent 6 months, many tried to avert the disaster behind the scene only to see the beginning of the free-fall and “run on the bank”, starting with Lehman Brothers filing for Chapter 11 bankruptcy protection on Sept 15^th, 2008.

The recent book – Too Big to Fail - by Andrew Ross Sorkin of New York Times gave a detailed and vivid account of the meltdown and rescues of the whole financial system by Federal Government. The book is a Who’s Who of the financial world from Government officials including Ben Bernanke (Federal Reserve Chairman), Hank Paulson (former Treasury Secretary), Tim Geithner (former President of NY Federal Reserve Bank and current Treasury Secretary) to Wall Street powers then including Dick Fuld Jr. (Lehman Brothers), John Thain (Meril Lynch), John Mack (Morgan Stanley), Lloyd Blankfein (Goldman Sachs), Jamie Dimon (JP Morgan Chase), Vikram Pandit (Citigroup), Ken Lewis (Bank of America), et.al.   The high drama couldn’t have been crafted by any reality show as so many strong characters collided in such a small space and time as co-competitors and frenemies.  For the corporate CEOs, they did share one thing in common that is to save themselves and their egos; it is clear they can’t separate it easily from their companies and stake holders. For the government officials, they were convinced that the American financial system, thus the whole economic system, is on the brink of a colossal failure and they were determined to do whatever they could to prevent the second Great Depression from happening.

The saga is far from being over.  For one, the economy is still very weak and we are certainly not out of the woods yet.  Perhaps more importantly, the structural issues remain including badly needed regulatory reforms.  A key consideration for the massive bailouts of financial institutions of over 1.4 trillion dollars since Sept 2008 was the concern of “too big to fail” that few big banks’ failure will take the Main Street down.  Now there are even fewer large banks compared to pre-Sept 2008.  Will the big banks be broken up and how?  Will the congress repeal the Gramm–Leach–Bliley Act of 1999 that repealed the Glass–Steagall Act which was created in the wake of the Stock Market Crash of 1929 to prohibit banks from both accepting deposits and underwriting securities?  What else are needed?  In the midst of all these, Supreme Court recently delivered a sharply divided and controversial ruling on campaign finance that allows unlimited political contribution by corporations and organizations (such as labor unions and lobbyist) which would further diminish the influence of independent individual. 

Wall Street serves an extremely important function in our capitalistic society.  By the very nature of capitalism, there needs to be an effective mechanism by which capitals are raised and concentrated, and efficiently moved and utilized.  There is nothing wrong to have investment banks address corporate financial needs.  There is nothing wrong to have banks issuing home mortgage loans, leveraging its depositors’ savings.  What is off putting is the “financial products” and security papers/derivatives that were “engineered” and traded out of thin air and human greed and ignorance.  One has to be impressed with the creativities of those financial magicians; risk is no longer a bad thing and liability.  It can actually be divided, bundled, insured, and traded at a dollar value, when all it does is to build a bigger domino as these spread risk is still the same one coherent risk and act in unison (that ultimately brought down the house). 

To complete the equation, we got short selling that allows one bet and profit from others’ misfortune.  The problem is we can no longer separate Main Street from Wall Street easily although some politicians including President Obama from time to time appeal to the populist rhetoric of “us vs. them”.   With popular vehicles like mutual funds, retirement funds, pension funds, etc., most American’s financial security and future relies more and more on healthy or extraordinary performance of Wall Street.   Then what is a reasonable expectation and what are or should be the balancing mechanisms to keep our own sanity and reality in check?

President Obama’s first State of the Union Address of last night reaffirmed his intent and push for reform of the financial system without details.  Judging from what he has been saying and doing, we will not be seeing the return of Keynesianism that shaped and guided the country into a social liberalism after the Great Depression till 70’s.   He talked more like a centrist to left with a Neoliberalism substance.  I am sure there are quite a few smart guys wrestling with this issue.  We will see how it plays out this year.

Talk to you soon!