[Marxism] 1929 redux?

[Louis Proyect]

1929 Redux: Heading for a Crash?
By Robert Kuttner, AlterNet
Posted on October 8, 2007, Printed on October 11, 2007

The following is Robert Kuttner's testimony before the House Financial 
Services Committee on October 2.

Mr. Chairman and members of the Committee:

Thank you for this opportunity. My name is Robert Kuttner. I am an 
economics and financial journalist, author of several books about the 
economy, co-editor of The American Prospect, and former investigator for 
the Senate Banking Committee. I have a book appearing in a few weeks 
that addresses the systemic risks of financial innovation coupled with 
deregulation and the moral hazard of periodic bailouts.

In researching the book, I devoted a lot of effort to reviewing the 
abuses of the 1920s, the effort in the 1930s to create a financial 
system that would prevent repetition of those abuses, and the steady 
dismantling of the safeguards over the last three decades in the name of 
free markets and financial innovation.

Your predecessors on the Senate Banking Committee, in the celebrated 
Pecora Hearings of 1933 and 1934, laid the groundwork for the modern 
edifice of financial regulation. I suspect that they would be appalled 
at the parallels between the systemic risks of the 1920s and many of the 
modern practices that have been permitted to seep back in to our 
financial markets.

Although the particulars are different, my reading of financial history 
suggests that the abuses and risks are all too similar and enduring. 
When you strip them down to their essence, they are variations on a few 
hardy perennials - excessive leveraging, misrepresentation, insider 
conflicts of interest, non-transparency, and the triumph of engineered 
euphoria over evidence.

The most basic and alarming parallel is the creation of asset bubbles, 
in which the purveyors of securities use very high leverage; the 
securities are sold to the public or to specialized funds with 
underlying collateral of uncertain value; and financial middlemen 
extract exorbitant returns at the expense of the real economy. This was 
the essence of the abuse of public utilities stock pyramids in the 
1920s, where multi-layered holding companies allowed securities to be 
watered down, to the point where the real collateral was worth just a 
few cents on the dollar, and returns were diverted from operating 
companies and ratepayers. This only became exposed when the bubble 
burst. As Warren Buffett famously put it, you never know who is swimming 
naked until the tide goes out.

full: http://www.alternet.org/story/64684/