Volume 12, Number 3 November 16, 2008
It’s just a "Confidence Game"
By Dr. Ridgely Abdul Mu’min
The current financial crisis has focused attention on our financial institutions and how they operate. Over the last few months I have paid a lot of attention to Congressional hearings on C-Span, financial experts on the National Public Radio, 60 Minutes, CNBC, financial writers in the Final Call Newspaper and various internet websites. I have even bought and read such books as America Theocracy and the Tyranny of Oil.
In many cases the language and terms used in these discussions seem to purposely obfuscate the underlying truth. Economic issues affect our ability to survive in this modern age of interconnected financial markets. Yet we know so little about this system and lack a basic economic understanding to be able to even ask the right questions.
It seems that our congressional people had not done their homework or were not paying attention. Their solution is throwing taxpayer money at the problem. The general public, according to CNN polls taken during the debate on the bailout plan, voted against the bailout by 94 to 96 percent. But congress passed the bailout bill anyway. As of November 16th, although $350 billion has been given to the banks, the credit markets are still frozen while the big banks are buying smaller banks with the bailout money.
Will money alone restore "confidence"? When Treasury Secretary Paulson addressed the committees in congress concerning the administrations proposed $700 billion bailout plan for Wall Street and more specifically the banking and financial institutions, he kept saying that there was a lack of confidence in the markets which must be restored. However, further analysis shows that this lack of confidence is due to mistrust between the individuals involved in the financial industry. It seems that people in the industry were misled by others of their peers into making risky investments while the regulators who were supposed to insure fair dealings and proper accounting methods were either asleep on their watch or looking the other way. We have found that there were at one time laws on the books which would have prevented this financial crash, but they were taken off the books by congress over the last eight to nine years while the people slept and their watchdogs were paid off.
The Honorable Elijah Muhammad has taught us something of the nature of the people that call themselves "white". We must remember that the financial "system" as we have it today was set up, is owned by and managed by these same people. Now the Honorable Elijah Muhammad said that white people can do right as long as there is a gun to their head. However, if the gun is removed then they will revert back to lying and stealing.
Now, these words may seem harsh and cold and labeled as racists. However, let us look at an analysis of our current problems as described in an October 10, 2008 New York Times article entitled "The Reckoning-Agency’s ’04 Rule Let Banks Pile Up New Debt". In this article Arthur Levitt Jr, who was S.E.C. chairman in the Clinton administration said, "It seems to me the enforcement effort in recent years has fallen short of what one Supreme Court justice once called the fear of the shotgun behind the door. With this commission, the shotgun too rarely came out from behind the door." The public role of the Security and Exchange Commission (S.E.C.) was to police Wall Street by enforcing the players to operate under rules set by congress.
On October 26th 60 Minutes aired an interview with Eric Dinallo, the insurance superintendent for New York. In that interview he said that credit default swaps — essentially private insurance contracts that paid off if the underlying investment went bad — were totally unregulated, meaning that the banks and investment houses that sold them didn’t have to set aside any money to cover potential losses. "As the market began to seize up and as the market for the underlying obligations began to perform poorly, everybody wanted to get paid, had a right to get paid on those credit default swaps," he said. "And there was no ‘there’ there. There was no money behind the commitments."
100 years ago these gambling activities were made illegal, explained Dinallo. And then Congress made it legal gambling with the Commodity Futures Modernization Act of 2000, which removed derivatives and credit default swaps from federal oversight and preempted the states from enforcing existing gambling and bucket shop laws against Wall Street.
To make it simple, a derivative is a financial instrument whose value is based on something else. In other words individuals and companies were making bets that the people who owed mortgages on their homes would go into default leaving the lenders holding the bag. When the banks and investment companies did not have enough money to pay out to the winners, they arm twisted the government to pay off their bad bets for them. However, even if the bets are paid off the distrust for each other is so great that they can’t trade with each other or issue new loans. This freeze in the credit markets is choking the very life blood of our credit dependent economy.
Now it seems that Wall Street is looking a lot like the streets in the Black community. As a whole, Black people spend over $700 billion per year mostly with people from other ethnic groups. The mistrust and lawlessness which keep Black people from investing in themselves, also makes outsiders too afraid to help. I have personally sat and watched police observe drug trafficking in once viable Black neighborhoods and do nothing. Once the drug trafficking and the violence associated with it has destroyed the value of the houses in those communities and a new set of people move in, all of a sudden there is no more drug trafficking.
I have personally had the experience of my former business being robbed and the best thing that the detectives could do was ask me who do I thing did it. Then when I actually found the people that did it, they would not investigate because I did not have proof that they had my goods. I had to actually catch them red handed trying to sell my goods at a flea market before the police would move in and even then they were reluctant. So what type of signal does that give a prospective Black business person operating in America? It tells him that he is not protected by the law, but is responsible for all legal obligations even if he is put out of business.
In working with the Black farmers I found out that they had to put up more collateral than their white counterparts to receive government loans. Then when disasters struck, they did not get the same disaster relief that saved white farmers during a drought, tornado or flood. Instead, Black farmers were still required to pay all financial obligations to the government including compounded interest on the debt. When these Black farmers went under and their land sold at auction, it was the relatives of the very government agents that were supposed to help them who bought their land for dimes on the dollar.
Leaders, like the Honorable Minister Louis Farrakhan, for years have accused the government of conspiring against the economic and moral development of Black people in America. He has been ridiculed and laughed at for his, what they call, "conspiracy theories". We will not go into detail over the history of what has been done to Black people. However, the result has been a people who lack confidence and trust in each other to invest money with each other to establish businesses and institutions like every other community in America.
Black people should take heart at the financial crisis in America because the chickens have finally come home to roost in the high perches of Wall Street. Like Wall Street, we must find ways to trust one another. Like Wall Street, we must develop a new view of the world that gives us faith in a productive and secure future. Like Wall Street, money by itself can not restore confidence, only the truth and a set of restrictive laws or codes of behavior with unbiased enforcement can guarantee our success.