Day 2 at the Financial Crisis Hearings: Sheila Bair Has Something to Say, Does the Commission Hear Her?

Shelia Bair, the head of the FDIC, is the first witness get near to addressing the major underlying causes of the crisis: the distended, distorted nature of our finance-heavy economy. She discussed “economic distortions” and the “disproportional” size of financial profits in our economy. She said that during the 1950s and 1960s financial profits accounted for 15 percent of all corporate profits. By 2008 they had metastasized to 34 percent.

If someone had bothered to ask, she may have also addressed the underlying distribution of wealth and income that has created the demand for more and more speculative financial products. It once was the case that that productivity increases inevitably led to real wage increases. That's no longer true. Those two trends have split apart starting in the mid-1970s, and now the lion’s share of the productivity increases go to the super rich.

In general there is a high correlation between the mal-distribution of income and economic crashes. The last time our wealth and income distribution was as skewed as it is today was 1929, and that's not an accident. When too much money is in the hands of the few it runs out of real world investment and gravitates towards speculative investments. This inevitably creates asset bubbles and crashes. Record pay and bonuses on Wall Street and high unemployment are connected.
(See The Looting of America [1] Chapter 2 and 11).

Ms. Bair opened the door to a line of questioning about how those imbalances were caused by decades of “tax reforms” that moved money to the very top of the income brackets. This was deliberate economic policy from Reagan on. This was the heart of trickle down. Combine the mal-distribution of wealth with financial deregulation and your get a crash, guaranteed.

Instead the commissioners are going after fraud, the rating agencies, the lack of regulation of subprime products, and derivatives. But, that won’t get us there.

The commission would do well to review how we controlled finance and the distribution of wealth from the 1930s to the 1970s. Then, policy makers understood that a vibrant and stable capitalist system required a growing middle class, a tightly regulated financial sector, and a constrained distribution of income.

Instead we got this: In 1970 the ration of pay between the top 100 CEOs and the average worker was 45 to 1. By 2008 it was 1,081 to one.

Please Mr. Angelides, go there!

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It [2] Chelsea Green Publishing, June 2009.