From Marylou
I know. This is a cheap way to blog. Sent the first response from a friend posted in this run to a colleague with an opposite view on things. So, here’s his response. “”… dismantling Glass-Stegall Act’s separation of types of banking functions was a really bad idea, and unless we create a new version of it, we are in for more trouble.”
I agree completely. The underlying problem is that bank deposits are currently protected by FDIC. As a result, the depositors don’t pay much attention to what the banks do with the money, giving the bankers a free hand to gamble as they wish; if they win they become rich, and if they lose the government (taxpayers) bail them out. It wasn’t always that way. Jim Grant, a very smart guy with his own newsletter, recounts the story of a bank in San Francisco during the 1840′s. There was no FDIC, and if the bank failed, the owners were personally on the hook for every penny of debt. As a consequence, the bank in question carried a 25% capital cushion (currently we think 8% is OK).
When property prices shot up during the gold rush in 1849, the bank took out an ad in the paper stating that property was in a bubble due to the gold rush, and they would no longer write ANY mortgages for new purchases based on the current valuations. Imagine that happening today! But back to the present.
We need to not allow banks to gamble with taxpayers money, which is what Glass-Stegall was about, and which we need to return to. Hasn’t happened yet.
1. 1% share of GDP is grotesquely large. So what? It’s the natural result of a richer world, in which everyone on average has more money. Are there still problems with fairness for the other 99%? Yes, but generating instant billionaires like the founder of Facebook is a side effect, not a problem. A lot of political discussion revolves around the ‘fairness’ of some people making more than others, but the real issue is C. If we continue to grow world wealth eventually we can C. If someone becomes a trillionaire in the process, so be it.
2. ‘these guys’ is somewhat vague. Some billionaires have had a positive effect on the world, and Warren Buffett is an example of a financial guy doing well for himself and the world. There are a lot of bankers however, who fit the description of parasite.
3. ‘new financial instruments that generate no jobs’ is too broad a description. The futures market, for example, allows a farmer growing corn to lock in a price today, so that he can know how much he will make before he plants, and not be stuck with a horrific loss if the prices drop during harvest season. I would say that futures are useful even though it is possible to speculate on the future price of corn and not grow any of it. Most of the people who made
the news with large gambles on interest rates or credit defaults, for example, are offset by hundreds of others who made similar speculations but were wrong in either their direction or timing. People speculating and making or losing money has been with us for a long time, and isn’t a problem AS LONG AS THEY ARE RISKING THEIR OWN MONEY. The problems start when banks do this risking depositor’s capital.
4. “They did it irresponsibly and brought down the economy.” Well they at least endangered the economy. But again, if they hadn’t been able to do this with money backed by taxpayers, this wouldn’t have been a problem. You can’t get enough scale without a government guarantee behind you.
5. There isn’t anyone to punish. Well maybe legislators and regulators, but they never get punished. There was certainly some fraud in the sub-prime mortgage market, there always is in any ‘hot’ market, but the underlying problem is the ability of financial institutions to take risks and not be responsible financially for the results. Since the current regulations allow this, acting irresponsibly isn’t a crime that someone can be punished for. Note I’m not saying that bankers don’t deserve to be punished for being irresponsible, but by the current regulatory system there isn’t any letter of the law to use against them.
The bank in San Francisco followed a much different path because of the banker’s personal liability. I don’t want to go back to no FDIC, but in exchange for that support banks cannot be allowed to invest their capital in anything but conservative strategies. Figuring out what the
‘conservative strategies’ are is the next big challenge.”
Marylou,
I have to take exception to your claim that “There isn’t anyone to punish” and “…there isn’t any letter of the law to use against them.” In fact there are numerous theories of Common Law Negligence, Fraud and Misrepresentation that are well developed and which definitely apply to certain behavior that ought not simply be brushed off as merely “acting irresponsibly”.
While there was/is plenty of behavior that’s not a violation of these Common Law crimes, with regard to some of the actual causes of The Great Recession there was definitely many instances of a dishonest abuse of Capitalism and The System and the misrepresentation of facts and circumstances which are certainly crimes and for which a relatively small group (who caused a large problem leading to larger problems) ought to be charged and prosecuted.
The lack of accountability is a huge part of the problem both in terms of seeing Justice done and in preventing the same behavior by similarly situated, dishonest individuals and groups. That said, I have scant hope anyone will be truly held to account (the fact that nothing has happened in that regard is good evidence of this) and that’s too bad – it suggests that no one has the stomach for it and that the forces aligned against such Justice are quite powerful and entrenched.
That’s a sad and discouraging situation – a great many Americans were negatively affected by the bad behavior of a small group of abusers, suffered and lost because of it and through no fault of their own, yet they seem to have no meaningful recourse. That’s obviously wrong in so many ways.
The Federal Reserve published a report yesterday showing that the average middle class family lost 40% of it’s net worth during the Great Recession, equivalent to 18 years of savings. The top 10% improved their position over this same period.
While I believe more can be done to prosecute fraud related to this crisis, these cases are difficult to make. First, much of the activity was legal due to the repeal of Glass Steagal. Second, the subject becomes so complex especially in the case of derivatives that juries do not understand them well enough to convict – this happened with three straight hedge fund cases in NYC 2009-10.
Moreover, the government gave up it’s leverage when they made the bailout deals (which I believe they had to do) without switching out senior management and securing commitments to vest the infused capital rather than dish it out in bonuses immediately upon receipt. The Europeans did a much better job on this front.
If you think this crisis knocked the middle class of this country to its knees, wait and see what happens the next round. And it will happen for reasons expressed by Keynes 80 years ago. When I think about the generations of people often poor immigrants, who built our country, fought our wars, raised their families, it just sickens me to think that a handful of people think they can do this utterly without conscience and with complete impunity.
It’s no wonder that JEB Bush does not believe that he, his father or Ronald Reagan could not be nominated y the current Republican party.
The US economy has faltered at different times under leadership from Republicans and Democrats. At some point, should we be able to draw the conclusion that the economy is much too complex to simply blame tax rates and political propaganda? Tax rates can rise and fall independently from economic growth….anyone see a problem?
In the 80′s, we saw a lending boom that accompanied very high interest rates and questionable loan,s followed by a housing/banking crash. The current economic downturn occurred with very low interest rates, questionable loans, and a housing/banking crash. Guess we can rule out interest rates as a singular cause.
In both cases (the 80′s and the 2000′s), moderate growth led to rapid growth, high risk investments, and an economic downturn, followed by partisan politics and finger pointing. It’s at least worth considering.
I think it’s a helpful exercise to ask: What was the appropriate Governmental Response to The Great Depression? What effect would current GOP policies and approaches have had on that Depression (and why)?
It can be argued that without the Governmental response to that Depression (especially including the Public Works and Public Assistance Programs which prevented millions of Americans from falling off the grid, into deep and long poverty, etc.), America would simply NOT have become the ‘World Powerhouse’ (or whatever term you like) it so soon became – that the Nation would have slugged along slowly and in 2nd or 3rd rate position in the world, hardly prepared for WWII, NOT prepared in any way for post-war growth, The Marshall Plan and so much that helped to many millions AND would simply not have been in a position to boom during the late 1940′s and 1950′s.
Yes, it’s speculation, but it’s educated speculation given the stark choices and alternatives the Depression created. Had America not recovered and gone on to enjoy unprecedented boom growth and prosperity, the Nation would be a different place today.
So in what way do these factors NOT apply to The Great Recession? That doesn’t mean I believe that all definitely apply across the board and on equal footing; just that these are challenging questions that can lead to productive discussions, ideas and even solutions.
The propaganda Talking Point ‘Smaller Government; never, ever raise a single tax on a single wealthy American (“some of those deadbeats who don’t pay any tax at all should pay!”)’ etc. etc. would have NOT been remotely appropriate during The Depression. Compare & Contrast, as our English Professor’s used to challenge us…
Do you think it would be possible to prosecute the genuinely bad guys? Or would we just get a string of mid-level scapegoats? Are we talking Blankenfein, Dimon, and Greenspan? Or Smith, Jones, and Othergenericsurname?
Even that weak catharsis might be worthwhile, as long as it didn’t distract from fixing the laws that allowed things to get out of control in the first place.
To the issue at hand, it has been a terrible source of frustration for me that this economic crisis has not provided the impetus that it should have in terms of providing safeguards against and retributions for the American citizens who have paid the price for crimes that lead to this economic crisis.
And yes I do believe that there were crimes committed despite the narrative that banks were simply “acting under the law”. “Nobel prize winning economists George Akerloff and Joseph Stiglitz, former Fed chairman Alan Greenspan, leading economists such as Robert Shiller, Anna Schwartz, James Galbraith, former lead S & L regulator William K. Black, former Tarp overseer Elizabeth Warren and many other leading financial experts say that criminal fraud was the primary cause of the financial crisis.”
While I have been extremely disappointed by my own country’s response, both by its citizenry and its political parties, I have been heartened by the response seen in other countries.
One particular success story that is seldom heard about in our corporate owned media is that of Iceland. Icelanders actually pelted their parliament with rocks in 2009 “demanding their leaders and bankers answer for the country’s economic and financial collapse.”
The courageous efforts of angry Icelanders forced their government to put the needs of the people before the needs of their financial markets. The Icelandic government refused to bail out the banks and instead forgave the mortgage debt of their citizens. In America our government bailed out those who caused the crisis with our tax dollars, allowed millions of citizens to lose their homes, and are now insisting that we cut our medicare and social security in order to decrease the deficits (did anyone read the CBO report yesterday? I nearly choked).
As a result of this approach, Iceland is on its way to recovery. Paul Krugman writes about Iceland in his blog today and he includes a nice little graph on where they were and where they are headed:
http://krugman.blogs.nytimes.com/2012/06/13/guess-whos-emerging-from-the-crisis/#postComment
Now I know there will be naysayers who state that we cannot compare an economy of 320,000 people to America and in many ways they are right. However, I believe that there are very tangible lessons to be learned from Iceland and these lessons should put America to shame, not just in terms of economic policy, but in terms of engagement, outrage, motivation and desire to protect democracy. In fact, in response to their economic crisis and the political upheaval that ensued (they actually prosecuted their Prime Minister for not preventing the crisis!), Iceland decided it was time to rewrite their Constitution. “The new constitution stresses checks and balances between the three branches of government as well as between power and accountability. It stresses transparency, fairness, protection of the environment, and efficient and fair exploitation plus national ownership of the nation’s natural resources. It is intended to stamp out corruption and secrecy.” http://www.voxeu.org/index.php?q=node/7077
So while something good came out of something bad in Iceland, here is America we have failed to learn any lessons or implement any substantive reform to protect ourselves from the next blow- if we ever recover from this one.
When the rail barons monopolized the transportation system connecting the midwest and western agricultural centers with the eastern population centers, and increased prices, the government intervened, passed the Sherman Anti-Trust act, and broke up the Northern Trust to insure competitive pricing for the public. When the stock speculation and bank failures broke the back of the American economy in 1929, the government investigated and instituted broad reforms to the banking and stock market industries that protected depositors and small investors. When the pension system was corrupted in the 1960′s, including organized crime influence, the government investigated and instituted broad reforms (ERISA) which protect pensioners. When the S&L’s failed in the 1980′s, the cleanup was the third most expensive thing the U.S. Government had ever paid for, after the cumulative historic cost of the Social Security system and WWII. The government investigated, cleaned up the system, conducted hundreds of prosecutions, and disqualified thousands of individuals from ever being involved in banking again.
Non one – i mean no one – questions the value these reforms have had for our economy. In this case, we actually have a man running for president who is campaigning AGAINST the reforms necessary to address these problems. It is simply unbelievable.
http://www.cnn.com/2012/06/14/opinion/carville-middle-class/index.html
This is a must read. From James Carville. In today’s on-line CNN. Entitled “What Would the Rich Do If They Lost 40% of Their Income”. This article is a sad satire coming on the heels of yesterday’s FED statement that the median U.S. household lost nearly 39% of its wealth from 2007 to 2010, while the wealthy top 10% actually rose.
The Republican solution: More tax cuts for the wealthy.
That is a riot. And right on the money.