Rough Draft Stage Two
The year 2008 saw an unprecedented change in the economic status of our
country. This crisis was caused by the dismantling of governmental regulations that
were put in place to stabilize the economy and prevent the disastrous consequences
of speculation from recurring in the future. George Orwell’s dystopian novel, 1984,
illustrates a world in which the government has complete totalitarian power over its
inhabitants. Orwell’s novel serves as a social commentary on the expansion of
governmental power and corruption that occurred during the post World War II era.
Though Orwell’s novel was written well before the occurrence of the recent financial
crisis, the Party’s manipulative rise to power still shares many parallels with the
growth of governmental deregulation and corruption of the American financial
system. 1984 was meant to serve as a forecast of the future, and through
observation of actions of the government and the financial sector, it is easy to note
many modern-day similarities to Orwell’s novel. Deregulation of the economy has
created a destructive and immoral financial system that mimics major facets of the
corrupt inner workings of Orwell’s fictitious dystopian society.
After the Great Depression, the American economy remained relatively stable
due to the tight governmental regulations that were put in place to stabilize the
economy and prevent the disastrous consequences of speculation from recurring in
the future. The introduction of deregulation in the 1980’s marked the beginning of a
new economic plight. The traditional investment bank consisted of a small group of
wealthy partners who pooled their money collectively in order to invest in stocks or
bonds. Their collective investing minimized any losses that each individual member
might incur (Knight). Before becoming publically traded, these banks invested only
with the money of the partners. In the 1980’s, many investment banks began to
transition toward becoming publically traded corporations, giving them a massive
increase in funds, and vastly bolstering their investment power (Morrison and
Wilhem 4). In 1981, Ronald Reagan chose the CEO of the investment bank MerrillLynch, Donald Regan, as the Secretary of the Treasury. Regan began to initiate the
first steps of a thirty-year long period of deregulation, believing that it would
provide “a long-term solution for troubled thrift institutions” (Krugman). He passed
the Monetary Control Act of 1980, effectively eliminating caps on interest rates
(Atlas). Regan also passed the Garn-St Germain Act of 1982, allowing banks to utilize
adjustable-rate mortgages loans. This meant that lenders could increase and
decrease the interest rate of their loans at their own discretion. It also resulted in a
reduction in the size of down payments required for a loan, and increased monthly
repayment periods, leaving loaners in debt for a much longer period of time
(Campbell and Hercowitz). These steps of deregulation formulated the basis for the
eventual subprime mortgage crisis.
The initial phases of deregulation would allow for even larger changes to
occur, setting the stages for the economic meltdown. In 1998, Citicorp, a large
commercial bank, attempted a merge with Traveler’s, a large securities firm. At the
time, the move was illegal due to the Glass-Steagall Act of 1933, which prevented the
merge of commercial and investment banks (Gross). This act was put in place to
prevent commercial banks from being able to speculate with their depositor’s
money. On November 12th of 1999, the Gramm-Leach-Bliley Act was passed,
eliminating the Glass-Steagall act and allowing for the consolidation of commercial
banks, investment banks, and insurance agencies (Grant 374). This vastly increased
the power of the banks, allowing for merges that allowed them to grow large enough
that they became “too big to fail.” This meant that banks were so interconnected and
large that bankruptcy would destroy the economy, causing investors and depositors
to lose the entirety of their savings. This allowed banks to engage in high-risk
investments and speculation without fear of repercussions, as the governmentfunded Troubled Asset Relief Program was created to provide bailout money to
bankrupt companies (Grant 376). The strategic maneuverings of the banks provided
them with a system of uncontrollable expansion and a guaranteed safety net.
As deregulation continued, the power and profit of banks expanded, and the
impending consequences worsened. Banks use a ratio known as leverage to track
the ratio of their debt versus their actual fiscal assets. Initially, the Federal Reserve
Bank had tight reserve requirements in place. The reserve requirement indicates a
minimum reserve of deposits that a bank must not lend out. This requirement is
meant to keep the ratio of leverage ratio balanced and to keep the financial
obligations of banks in check (Sardi). On April 28th of 2004, financial lobbyists
worked with the Securities and Exchange Commission to relax laws restricting
leverage. This would allow the banks to lend out larger amounts of money, thus
generating more profit for themselves. Initially, leverage was maintained at a lower
ratio, near three to one. By 2007, leverage rates skyrocketed, growing to ratio of
30:1 and higher. Such a ratio, as Barth indicates, would leave only 40 billion dollars
of supporting capital for a loan worth 1.2 trillion dollars (Barth et al. 17). This meant
that should loans begin to default, the banks would not have near enough capital to
cover their exorbitant loans. The massive borrowing of the banks led to a large
increase in subprime lending, and fueled the creation of a housing bubble, an
increase in home prices due to speculation and high demand.
The ease of obtaining a mortgage from the increased volume of these loans
initiated the housing bubble, causing home prices to rise substantially. In 2007,
home prices increased to nearly double their prior price (Barth et al. 8). With their
newly increased capital, banks began making loans to low-income families and
families with large amounts of debt. These riskier loans were known as subprime
loans, and have a higher interest rate for the loan recipient in order to account for
the higher risk that the lender is supposedly assuming. This led to a sort of
predation on unknowledgeable families. Banks offered adjustable-rate mortgages,
which would start with low initial interest rates, and rise substantially in only a few
years (Atlas). An increase in loan volume allowed for a greater increase in profit for
the banks. From 2000 to 2003, the number of mortgage loans that were distributed
each year rose substantially, nearly quadrupling (Barth et al. 9). From 2001 to 2005,
the percentage of subprime loans in the country rose from 8% to 21% (Barth et al.
9). The sharp rise in subprime loans illustrates the effective push toward predatory
lending that was caused by deregulation. Lenders were often able to pass off the risk
of their predatory loans. They did this by selling the loans to investment banks,
which packaged them into securities that they sold to investors. This passed the risk
of the loans back into the hands of the public (Atlas). This process led to a highly
convoluted and interweaved lending chain that was a major cause in the decline of
the economy. As homebuyers began to struggle to keep up with the high-interest
payments on their homes, they began to default on their payments, and were often
eventually foreclosed upon. The process of deregulation allowed lenders the power
to give out loans that were far beyond the capacity of many families, ultimately
leaving them broke and homeless.
Despite many warnings, the conglomerates of the financial sector continued
their destructive endeavors. Raghuram Rajan, a Chief Economist of the International
Monetary Fund, predicted that moral conflict that would occur from such massive
sums of profit. He believed that banks would disregard the integrity of their job to
serve the customer in order to further line their own wallets. In a paper he wrote
concerning the repercussions of the housing bubble, he claimed that banks “have
greater incentive to take risk” and that their actions would “create a greater
probability of a catastrophic meltdown” (Rajan 4). Many banks realized the toll their
actions would have on the economy and on investors, and sought to take advantage
of the situation. In 2007, just before the housing bubble burst, the investment bank
Goldman Sachs sold over forty billion dollars in securities backed by subprime
mortgages. They then purchased insurance on the securities that essentially
functioned as a bet against housing prices, as well as the securities they had just
sold. This meant that they knowingly bet on the failure of the securities that they
had just passed off as safe investments, allowing them to transfer any losses that
they might endure to their investors (Gordon). Though the banks realized the strain
that their actions were taking on the economy, they chose to proceed regardless of
the consequences.
The propaganda that was fed to customers of the investment banks
resembles the propaganda utilized by the Ministry of Plenty in Orwell’s novel.
Amidst the peak of the financial crisis, Goldman Sachs began selling securities that
would become increasingly profitable as customers suffered more losses. This
meant that Goldman gained more money as the customer lost more money. Three
years later, in April of 2010, Goldman was brought before Congress and the
Securities and Exchange Commission for fraud concerning one of these securities,
known as Timberwolf (Story). During the trial, the Congress discussed emails
between a sales team, in which employees had been quoted as saying, “that
Timberwolf was one shitty deal.” Afterwards, Goldman continued to trade the
security, and another email between the sales team stated that “the top priority is
Timberwolf” (Dayen). Members of the Inner Party would use similar propaganda
tactics in Orwell’s novel. Winston noted decreases in rations, and yet the Ministry of
Plenty flooded the Party with reports that “the standard of living has risen by no less
than twenty per cent over the past year” (58). The methods of the Party allowed
them to deprive their citizens of amenities while simultaneously using falsified
statistics to exploit their ignorance, creating a façade of an ever-improving society.
The deceit used by both the Inner Party and the American financial sector is fueled
by both greed and exploitation, elevating the status of the wealthy at the expense of
the unknowing masses.
Orwell’s novel establishes a hierarchical system within the party that exploits
the proles and Outer Party members, leaving a concentration of wealth and power
amongst a small group of individuals. After sharing real coffee and bread with
Winston, Julia informs him that there is “nothing those swine don’t have” (141). The
excess privilege of the Inner Party is again noted when Winston and Julia visit the
home of O’Brien. O’Brien shares a glass of wine with the couple, stating that “not
much of it gets to the Outer Party” (171). He also is able to turn off the telescreen,
exhibiting the enormous “privilege” of freedom and party he was allowed as
opposed to the other members of society (169). Orwell’s depiction of the class
differentials between the Inner and Outer Party are representative of the current
distinctions prevalent in society today. For example, the CEO’s of the banks that
played major roles in the 2008 crisis earned massive sums of money, despite their
respective company’s plunge into ruin. Joseph Cassano, CEO of the insurance firm
AIG, received 34 million dollars in bonuses as his company suffered bankruptcy.
Lloyd Blankfein, CEO of Goldman Sachs, earned 42.9 million dollars in 2008, cashing
in on the bankruptcy of AIG (Jones). While the executives of the banks perpetuating
the crisis were getting richer, the customers of the investment banks suffered fiscal
devastation. The state of the American and global economies at this point in time
were the worst they had been since the Great Depression, and nearly 30 million
people were left unemployed globally. Orwell’s depiction of the Inner Party mirrors
the power and wealth that is attainable at the expense of the general public.
The process that the American government and Wall Street executives used
to initiate the reforms that allowed such disastrous results mimics the Party’s slow
integration of Newspeak. Both were implemented in a slow and deliberate manner
that allowed for a subtle reconfiguration that suited the goals of both parties. By
slowly introducing newer and more refined versions of the Newspeak dictionary,
the Party was progressively destroying “the range of consciousness…the concept of
freedom…[and] thought, as we understand it now” (53). This allowed the Party to
gradually strip its members of any chance of resistance and knowledge, ultimately
leaving them helpless, with no semblance of their original language. This is highly
similar to the process that was used to introduce deregulation. Beginning with
Regan, the government repealed more minor laws that prevented deregulation. As
the years passed, more and more laws were repealed and replaced, until they were
ultimately left with a 1.5 trillion dollar market that was completely unregulated
(Atlas). The underhanded methods utilized by the Party and the financial sector
allowed for the creation of systems that would benefit only the selfish members that
worked to ensure the initiation of their respective reforms.
The absence of strong leadership and the immoral proceedings that occurred
within the financial sector demonstrates its similarities to Orwell’s dystopian
society. Deregulation of the financial sector allowed for the development of a system
of exploitation in which the conglomerates of the industry were free to manipulate
the economy at the expense of unknowing investors. Their actions represent the
moral corruption that plagued the financial industry, mimicking the exploitation and
decadence that characterized the society of Orwell’s 1984.