We’re seeing a lot of stories about big bonuses to the recipients of taxpayer bailouts. What’s odd is that the outrage we read doesn’t seem to penetrate into the financial industry. The moral voice doesn’t seem to carry through the insulations of layers of money.
Economist Dean Baker described to Nieman Watchdog how those layers of money are being created.
Baker observed that there have been a number of news articles recently about big banks returning to profitability, but most of those stories fail to make the point as to how those banks are becoming profitable — namely, by borrowing money short-term from the Federal Reserve at near zero cost and then loaning that money back to the Treasury by buying U.S. government bonds that pay around 3.5 percent interest.
- Story ideas, from an expert
Kevin Drum expressed the outrage well.
There’s an insanity here that’s almost beyond analysis. Wall Street can spark an economic slowdown that misses destroying the planet and causing a second Great Depression only by a hair’s breadth — said hair being an 11th hour emergency infusion of trillions of taxpayer dollars — and then turn around and use those trillions to return to bubble levels of profitability within a year. And they can do it even though the rest of the economy is still suffering through the worst recession since World War II. It’s mind boggling.
Is there any silver lining here? Probably not, but I’ll try: If Wall Street can shrug off the worst recession of our lifetimes as if it’s a minor fender bender and get the party rolling all over again in less than 12 months, it means the next bubble is already in the works and its collapse will be every bit as bad as this one. That in turn means it will almost certainly happen while today’s politicians are still in office. So maybe news like this will finally spur lawmakers to realize once and for all that the financial industry needs to be cut down to size. Half measures won’t do it. Self-regulation won’t do it. Compensation limits won’t do it. Byzantine, watered-down rules won’t do it. Something like a Morgenthau Plan for Wall Street is the only thing that has even half a chance of working.
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The aspect of all this that cause the most surprise is the willingness of Wall Street to do this in the open. Again, that lack of any resonant moral voice carrying to the Street. Goldman Sachs especially is shaping up to become an icon as legendary and popularly hated as Rockefeller in his day.
Elizabeth Warren, chair of the Congressional Oversight Panel, and charged with overseeing the U.S. banking bailout, is shocked at the brazenness of the industry culture, its ingenuous oblivion.
“I do not understand how financial institutions could think they could take taxpayer money and turn around and act like it’s business as usual,” Warren says. “I don’t understand how they can’t see that the world has changed in a fundamental way – it’s not business as usual. All I can say right now is they seem to be winning this argument.”
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“This is a moment when all around the country people are saying we’ve had it about up to here with these large financial institutions that want to write the rule then take our money. I find it astonishing that they have the nerve to show up and say, ‘I’m a big financial institution. I took your money. And now I’m going to lobby against anything that might offer some protection to ordinary families in this marketplace,’ ” Warren says.
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As to why we coddle these giants of finance, this recent NYT story offers a window into how our culture contains much forebearance for financiers, perhaps from the assumption – now proved obsolete – that what they do is both difficult and incomprehensible to most of us.
Goldman Sachs and its perennial rival Morgan Stanley were allowed to transform themselves into old-fashioned bank holding companies. That switch gave them access to cheap funding from the Federal Reserve, which had been unavailable to them.
Those two banks and others like JPMorgan were also allowed to issue tens of billions of dollars of bonds that are guaranteed by the Federal Deposit Insurance Corporation, which insures bank deposits. With the F.D.I.C. standing behind them, the banks could borrow the money on highly advantageous terms. While some have since issued bonds on their own, they nonetheless enjoy the benefits of their cheap financing.
A big reason for Goldman Sachs’s blowout profits this year has been the willingness of its traders to take big risks — they have put more money on the line while other banks that suffered last year have reined in such moves. Executives say there are big strategic gaps opening up between banks on Wall Street that are taking on more risks, and those that are treading a safer path.
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Right. But it’s hard for taxpayers to see that risk the story mentions.
The systemic view of what’s happening here is best explained to my mind by a couple of comments on Ezra Klein’s blog a few weeks back:
Since the early 1970’s real wages have been flat to falling. Workers’ share of GDP has been falling. Management used to reinvest profits in the business, and/or pay dividends. But since the marginal tax rates came down beginning in the 1980’s, management instead pays itself ever more exorbitant compensation packages.
To make up the difference, ordinary people stopped saving then started borrowing. The financial sector aided and abetted this by devising ever more clever means to hook people on debt.
Now the golden goose is dying because people can’t afford to buy stuff any more. People are cutting back on credit and saving as much as they can. Business can’t get credit because the banks are hoarding the money and so no one is hiring. The gov’t is stymied by “deficit hawks” who would rather see unemployment keep rising than spend public money to make up for the decline in private demand. And the rich? The people whose share of income has more than doubled over the past few years? Don’t even think of raising their taxes back to where they were in the Clinton years. That’s Communism!
A second commenter notes this:
I would add that what I find really remarkable is that many of the rich seem to be willing to allow the golden goose to die.
Peter S. Goodman wrote about this in the NYT last month:
The shock that accompanied the end of the American real estate boom once seemed a sentinel event that would bring tighter government scrutiny of the financial realm. Yet as fear of catastrophe fades, the question is how quickly the momentum in Washington for tighter financial rules is diminishing and whether unemployed workers and strapped homeowners will feed a groundswell for change strong enough to offset government turf wars and the influence of financial industry lobbyists.
[...]
So the question now is how many people have similarly changed their sense of what the American economy needs. Mostly, it is a matter of whether the country is still feeling lucky; whether the recent crisis will come to feel like an unavoidable toll on the highway to fortune, or whether something deeper has shifted in the American psyche, leaving us shaken in a lasting way.
- The Financial Crisis and America’s Casino Culture
But is it just hubris, or is it a last-ditch effort to steal as many eggs as possible before the entire farm goes under? Maybe oligarchs always think this way. Simon Johnson has the oligarchical analysis:
First, obviously nothing can stop Goldman Sachs and JP Morgan. With unfettered access to the Federal Reserve and no effective controls on their ability to take risk, they are in the catbird seat. The weakness of other big banks is further icing on their cake. GS and JPM are symbols will loom large over the national and international economy for a long time to come, with the main threat (to them) coming from their rather too blatant market share in many products.
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Johnson suggests here that key people in the Obama administration are beginning to understand “what they have wrought” in catering so slavishly to the crisis “experts” (many of whom were enlisted directly from intimate relations with the industry, and may never have really left).
Obama from all this remains the mystery. He said coming into this crisis that he would try one thing and if it didn’t work he’d try another. We can only watch him as he negotiates his learning curve. I like him, I think him greatly talented, and vital to any chance of better days ahead for us.
I have to suppose that what we see him achieve reflects all that any good president could have achieved. He’s leaving a lot of deep cancers that most people would like to see cut out. But in truth the system health is so rotten, with political and institutional gridlock, theft, incompetence and sheer inertia so widespread, that he may have to spend some time raising the general health and immunity of the American nation before he can operate.
