Jon Taplin's Blog

Entering Financial Hell?

In his letter to Berkshire Hathaway shareholders in 2003, Warren Buffet warned that the growth of financial derivatives posed a “mega-catastrophic risk” to the economy. Derivatives like those that have caused the Sub Prime credit crisis are like ”hell… easy to enter and almost impossible to exit”. Four years later, his sage advice has come true with a vengeance. A chart in this morning’s New York Times look at the financial year ahead, said it all:

We are now caught in an ugly cycle which we haven’t seen since the mid 70′s defined by the term “Stagflation”. This occurs when growth is stalling (see above) and prices are still rising. Market fundamentalists (like Mitt Romney and John McCain) say this cannot happen, because as demand falls, so must prices. Tell that to the average American filling up their SUV with $3.20/gallon gas or filling up the grocery cart each week. When the economists strip out the price of gas and food from their “core inflation rate”, it just shows their disconnection from the lives of real people.

We have entered into Buffet’s financial hell because neoconservative economic fundamentalists believed that government regulation of any market was harmful. To prevent crooked mortgage brokers from peddling sub prime product to people who they knew could never repay, would have been to distort the magical invisible hand of the market.  Since the election of Ronald Reagan in 1980 the American political ruling ideology has been based on the twin poles of the Neoconservative philosophy first elucidated by Irving Kristol in The Public Interest in 1965: in domestic affairs the national government should shrink (by cutting taxes and business regulations) and in foreign affairs the government should grow (by becoming the world’s sole military superpower). The Clinton’s want to portray the 1992-2000 period as a radical break from the Conservative Revolution of deregulated businesses and military industrial dominance, but its a big lie. Through at least the last six years of the Clinton administration it could be argued that the main tenets of neoconservatism maintained their hold on the Washington agenda partially due to Republican control of the Congress after the 1994 election and partly due to the business friendly tenets of the DLC influence on the Clinton White House. Clinton did not radically restructure our military commitments or re-regulate large corporations. In fact it could be argued that their telecom bill of 1996 was one of the biggest pro-business giveaways in the last 30 years.

The fact that we must have a clean break from the economic & social policies of the last 27 years is obvious to most Americans (69% say the country is on the wrong track). By April, we will know who the candidates are and if Obama is the Democratic nominee we can fight a clear election between the party of the past (The Republicans) and the Party of the future (The Democrats).