Jacapo: It’s difficult for us in 2072 to imagine what it must have been like to live in a country where accountability didn’t exist.
Esteban: Oh yes. The United States was a country which invaded Iraq in 2003 simply because it thought it could remake the Middle East in its own image.
Jacopo: But that was a mere eighteen months after the world watched the tallest buildings in its largest city destroyed.
Esteban: Precisely. When the idea to invade Iraq occurred, 70% of the country supported it. For fifty years, Americans were told that they were the world’s dominant nation on a daily basis. After the plane attacks of 2001, or 9/11 as we used to call it, Americans desperately needed to hold onto the notion that we were invincible. That kind of hubris takes a lifetime to build up, and the ramifications of being showed that they weren’t took another lifetime to recover from.
Jacopo: But didn’t the United States already have the experience of Vietnam to show them that they were not invincible?
Esteban: Vietnam is one of the most contested episodes in American history, now as then. Some Americans, mostly conservatives, thought America lost because it was not committed enough and should have sent millions of troops into the country. Others, mostly liberals, thought America lost because it had no business there at all. It was ultimately the dividing issue that caused the fissure that led to the USA’s dissolution a half-century after the war ended.
Jacopo: How did my greycer Zaydie and Bubbie feel about it.
Esteban: Vietnam was a routinely debated issue in my family. My mother was very much what the turn of the century used to call a neo-conservative, so she always advocated the hardest possible line against Communism, Islamism, and crime. But my father got a PhD to avoid the draft. He was a moderate-to-liberal Democrat who marched with Civil Rights and against Vietnam.
Jacopo: Wasn’t he a Republican?
Esteban: He registered purely as a joke. We lived in an area where the Republican party hardly existed, so I suppose he did it purely to shock people. My mother, on the other hand, registered as a Democrat because no Republicans were ever elected to anything in our area. So she registered as a Democrat purely so she could vote for the most Conservative candidate.
Jacopo: Sounds like an interesting family to grow up in.
Esteban: You don’t know the half of it....In any event, let’s get back to the topic.
Esteban: Everyone accepted that boom and bust were inevitable, but over a period of 30 years, bank lobbyists persuaded government to lift regulations.
Jacopo: What kind of regulations?
Esteban: The kind that separated investment banks from commercial banks.
Jacopo: For those who don’t know, what does that mean?
Esteban: Many things. But there are two that are especially worth noting. The first is that the ultimate difference between a commercial bank and investment bank is that a commercial bank must have a certain level of money in reserve so that people’s deposits can be a safe investment.
Jacopo: But didn’t America of your youth not require commercial banks to have that reserve?
Esteban: Yes. In 1999, the Glass Steagall act was repealed.
Jacopo: What is the Glass Steagall act?
Esteban: The act that separated commercial banks from investment banks. And that brings us to the second point. When the Glass Steagall act passed in 1932, the major investment firms were banks in which deposits could be made, and the banks could invest the entirety of your money in any way they saw fit. So when the stock market tanked, the banks lost most of their money.
Jacopo: Which caused a run on banks.
Esteban: Exactly. If people wanted to ever see their money again, they had to withdraw their savings from banks immediately. So the Glass Steagal Act ensured an unprecedented level of economic stability in world history. By keeping a certain amount of money of reserve, commercial banks would be a safe investment: low reward but low risk. And with the high rewards of investment banking came high risk, a fact that banks now had to make people realize.
Jacopo: What made them repeal it?
Esteban: The usual: hubris, utopian thinking, libertarian economics...People had forgotten the simple rule that high reward leads to high risk.
Jacopo: What were the arguments against keeping Glass Steagal?
Esteban: The exact same arguments that Republicans from Reagan onward used for lowering taxes. The regulations were too confusing.
Jacopo: Were they confusing?
Esteban: Of course. Interpreting laws always is.
Jacopo: So what was the real reason?
Esteban: Well,...I hate to reduce it so terribly, but.....greed.
Jacopo: That was predictable.
Esteban: But they didn’t view it as greed. Again, the whole point of the libertarian philosophy was to provide a religion for businessmen which assures them that greed is a virtuous sentiment. And their high priest was a man named Alan Greenspan.
Jacopo: Who’s Alan Greenspan?
Esteban: The late-20th century just cried.
Jacopo: Seriously, who is he?
Esteban: He was the Chairman of the Federal Reserve for 20 years.
Jacopo: What’s the Federal Reserve?
Esteban: It was America’s national banking system, in charge of printing money to decide how many dollars will be in circulation at any given time.
Jacopo: How was he the high priest of libertarians?
Esteban: Well, firstly, he learned his personal brand of economics at the feet of Ayn Rand, the founder of libertarianism herself. But more importantly, his policy was generally that there was no such thing as accountability when it came to prosperity. As a libertarian, he technically did not even believe in the necessity of the Federal Reserve. But once he became the Federal Reserve Chair, his solution to every problem was to flood the United States with dollars.
Jacopo: Isn’t that a direct contradiction from his beliefs?
Esteban: Yes. But no moreso than neoconservatives of the time who believed that democracy should be put into practice everywhere, except in places where people would vote against America’s interests.
Jacopo: Libertarianism and Neoconservatism sound very much alike.
Esteban: They were very much alike. And at the turn of the century, they were virtually interchangeable philosophies on different playing fields. Libertarians believed in the absolute goodness of the free market against all evidence, neo-conservatives believed in the absolute goodness of democracy against all evidence.The result of Libertarianism was the second great depression that nearly became a superdepression. The end result of Neoconservatism was the backslide of Russia and Iraq into authoritarianism.
Jacopo: That reminds me, I wanted to ask you what would have happened if the Arab Spring occurred while George W. Bush was president rather than Obama?
Esteban: I have no idea except that World War III would have turned into the destruction of the world.
Jacopo: (laughs uncomfortably) If you’d allow me, I’d like to take things in a slightly different direction. My next question is, how close did the US come to a run on the banks like in the great depression?
Esteban: Countless times they were on the precipice. They were on the ledge after the 2008 housing crisis with Lehman Brothers. They were on the ledge again after the debt ceiling collapse in 2011. They were on the ledge in 2018 when President Bachman threatened military action against China because the Central Committee would not allow for the import of American products. In response, China and Russia placed economic sanctions on the United States and placed trade blockades around their coasts and said that the sanctions would not be lifted if America did not start paying its debts.
Jacopo: Didn’t Obama and Romney pay off the debt?
Esteban: Hardly. After five years, the end result of Obama’s emergency austerity measures was to resurrect the American economy, balance the budget, and pay off a couple trillion from the debt. But there still was well more than 10 trillion dollars outstanding and US citizens held more than 35 trillion dollars of private debt.
Jacopo: So during that period, America had to make its own products again?
Esteban: For about a month, yes it did. There were all sorts of pundits, particularly a journalist named Thomas Friedman, who said that the sanctions were a blessing in disguise that would reignite American industry. But what Friedman never factored in was that no company had the money to pay even a minimum wage to the amount of workers that required. It’s not like our era when we have Second Geneva Convention to mandate a minimum wage throughout the globe that’s generally well-upheld. It’s a shame those sanctions didn’t happen ten years earlier when Americans still had unlimited access to capital. It might have saved the country.
Jacopo: Also, let’s go back to Greenspan for a moment. When he flooded the market with dollars for twenty years, how did that not lead to stagflation?
Esteban: You have to view the Greenspan approach a bit like an arms-race. Every time there was a new liquidity crisis, Greenspan would raise the interest rate, thereby creating more money. When the crisis was over, people would stand to make that much more money because the rate would stay at its new level. Until there was another crisis, at which point Greenspan would raise the rate again to stimulate the economy. The stimulation worked, and there seemed to be no need to put it back to the old level because we were out of the economic crisis and the growth of money was simply the new reality.
Jacopo: So paradoxically, we’d put so much money into the economy as to be stagflation-proof. But since there was now too much money in the economy, everything becomes too easily bought even when the prices are ludicrously high. So it was only a matter of time...
Esteban: ….Before deflation sets in. Yes, deflation can be still more terrible than inflation. In inflation, the value of money goes down, so people want to spend because their money while it’s worth something. And by spending it, eventually the money is turned into foreign currency and the supply of dollars corrects itself. In deflation, the value of money goes up, so nobody wants to spend money because the price of goods will be less at a later date. Once that spiral starts, there is no known way of getting out of it.
Jacopo: Y’know...this discussion is becoming very dry.
Esteban: Indeed it is. The Ravens are playing the Steelers so I think I’m going to watch a bit of that.