The economic meltdown could be good news for the area of clean energy investing, according to Steven Fraser, a senior lecturer at the University of Pennsylvania and author of the recently published “Wall Street: America’s Dream Palace.” Fraser believes that backlash to the recent economic crisis will result in a new era of enlightened regulation and investment akin to Roosevelt’s New Deal, which helped America climb out of the Great Depression. Fraser offered these opinions in a recent interview on WHYY’s Fresh Air program.
In the interview, Fraser said he felt “very confident” that “real anger at Wall Street” will result in better regulation and more oversight of commercial and investment banking. The steady deregulation of these sectors over the past 25 years has created an “orgy of speculation” and brought us to the current crisis. The future of our economy will depend on rebuilding our infrastructure and a shift to new forms of clean energy, according to Fraser. Any overhaul of our banking and investment sectors should move capital into these areas and away from highly leveraged speculation.
America Doesn’t Make Anything Anymore
The growth of the financial sector as the engine of the economy over the past 25 years has corresponded with a “de-industrialization” of our economy. The result: we don’t make anything anymore. Instead, we’ve become infatuated with highly speculative forms of investment that don’t produce anything except bubbles and burst bubbles. America must re-industrialize its economy based on high technology, environmentally responsible industries.
What can a government do to encourage this? Any new or revised regulations should provide incentives to move capital resources in to productive means. An example Fraser cited would be to change the asset reserve requirement that a bank must meet to receive a license to operate and insurance coverage by the federal government. A new regulation could require investment banks to invest at least 5% of their assets in clean energy projects. Or an example of a dis-incentive would be to tax gains from speculative paper transactions.
The Free Market?
Many of the rules put in place during the New Deal of the 1930s prevented banks from engaging in risky activities and encouraged investment in to productive enterprises. The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation, and an attempt to bring Wall Street under some level of supervision. Starting in the Reagan era, many of these reforms were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980, and further in 1999, by the Gramm-Leach-Bliley Act, which was signed by President Clinton. This steady march of deregulation eliminated much of the oversight or gutted enforcement agencies like the SEC. Many trace this version of the free market mindset back to the ideas of Milton Friedman, who launched a counterrevolution against the New Deal from his perch at the University of Chicago economics department.
The freewheeling “free market” movement launched by Friedman, introduced by Ronald Reagan and entrenched under Clinton has produced massive wealth for some, but also gave us the savings and loan default (and bailout), the junk bond scandal, Enron, the housing bubble, the sub-prime bust and now the credit crisis. This version of the free market is a fallacy, according to Fraser, because the great speculators never pay for their mistakes. Instead this free market “created privatization of reward, but socialization of risk” where the government freely uses taxpayer money for bailouts. Is there any mystery why the income gap has accelerated during this period? According to the Congressional Budget Office, from 1979 to 2005, the after-tax income of the top 1 percent of U.S. households soared 139 percent, while the income of the middle fifth rose only 17 percent and the income of the poorest fifth climbed just 9 percent. Last year American CEOs earned 262 times the average wage of their workers – up tenfold from 1970!
We are certainly ready for an energy-based New Deal, but who will be the next Roosevelt to lead us out of this mess? McCain’s economic advisor is the former Texas Senator Phil Gramm – the ultimate free market maven. During his time in the Senate, Gramm authored several of the bills that further deregulated the financial industry. Barack Obama’s chief economic advisor is Austan Goolsbee, a University of Chicago economist. He is known as a centrist, not necessarily a disciple of Milton Friedman, so perhaps he has some ideas about how government can creatively fiddle incentives and regulations controlling the market.
Obama called the government’s proposed $700 billion Wall Street bailout “sobering” and blamed the deregulation generally favored by Republicans. Is this a firm stance or campaign rhetoric? Clinton also favored reform until he did a U-turn on the economy just before his inauguration. He met with then-Goldman Sachs chief Robert Rubin, who convinced him to embrace more liberalization. Rubin is now an adviser to the Obama campaign.
If you are angry about the current crisis, stay that way! Use this anger to motivate our next government to begin this period of enlightened investing in America’s infrastructure and industry described by Steven Fraser. There will be a lot of losers as a result of this meltdown, will the clean energy sector be one of the winners?
Jim Witkin is a marketing and content consultant focusing on ICT4D and social enterprise. He is also pursuing an MBA in Sustainable Management. You can reach him at jameswitkin at yahoo dot com