Tuesday, October 13, 2009

Jeffrey Sachs: Political Perspective from an Economist

Jeffrey Sachs, Economics professor at Columbia University has made a name for himself as a prognosticator and translator of the very thing that has captured America’s attention for over a year: the economy. But it wasn’t his economic perspective that surprised us last Tuesday at the World Business Forum – it was his clear and direct indictment of money in politics that did.

Sachs went so far as to describe the US as fascist. Without actually using the “F” word, he declared that until the US government stops making law (or lack thereof) at the behest and on behalf of corporations in the financial services and healthcare industries, we won’t be living in the democracy we think we do.

For a well-respected, widely accepted, and quite influential economist to go into the lion’s den and poke it in the eye, things must have gotten – and must still be – pretty bad.

Specific highlights include:
The market for mortgage-backed securities on Wall Street went from $0 to $62 trillion in less than a decade. That’s roughly the size of the entire world economy – and no part of that market was regulated.

Both the Clinton and Bush administrations, as well as the Fed, kept regulators out of that market. Insurance giants like AIG made matters worse when they started insuring these investments against default, with no capital backing. They didn’t need to because regulators weren’t telling them to. Jeffrey called it “pure irresponsibility.”

Here's what the “pure irresponsibility” looked like (in everyday terms): A company like AIG told investors, “Give me $2, and in exchange, if you’re $100 mortgage-backed security defaults or is deemed worthless, we’ll give you that $100.” AIG did this with effectively no money in their bank account (i.e., no capital backing) to actually pay the $100. When mortgage-back securities were deemed worthless because nobody knew which ones contained toxic sub-prime mortgages, investors who purchased them started defaulting on their $100 and went to AIG for their lost money. But AIG didn’t have the money. So Joe Blow taxpayer had to pay. While illegal in other contexts, this activity wasn’t illegal here because there was no regulation.

Sachs rhetorically asked the audience “Why do you think regulators were kept out (of it)?” then turned his speech into surprising territory by answering, “This is about money and power.”

Making a broader point about money in politics now, he brought healthcare into the conversation. “Why do you think we’re no longer talking about The Public Option in the Healthcare debate…. Let me tell you: it wasn’t the townhalls over the summer…. Debates in public are sadly a side show. The real issues are being decided in the back rooms where campaign contributions and vesting interests and lobbying will set parameters on healthcare and the financial system.”

“We do not have a basic change of money in politics yet.” Sachs was clearly calling for one.

1 comment:

  1. How refreshing of Jeff Sachs to speak about what is on everyone's minds. Thanks for alerting us to this great speech!