I admit it, the past week has left me speechless. As I sat and read the news about how the last of the investment banks shuffled off into extinction (kinda; they’re just becoming regular old banks now), it did feel like I was sitting in front of my television again watching the Berlin Wall come down.
In this sense, the fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism — it tells the world that this way of economic organization turns out not to be sustainable. In the end, everyone says, that model doesn’t work. This moment is a marker that the claims of financial market liberalization were bogus.
Only this time there doesn’t seem to be as much celebrate.
Sure, there’s vindication in the failure of deregulation.
This will come to be seen as the greatest regulatory failure in modern history. The degree of leverage that these institutions took on is indefensible. The average large securities firm was leveraged 27 to one in mid-2007. They were not regulated by any prudential supervisor. In effect, they regulated themselves. The lack of transparency was stunning. Many big lenders did not disclose off-balance-sheet risks. In some cases, they did not understand these risks themselves. More fundamentally, we allowed a second, huge financial system to develop outside the normal banking network. It consisted of investment banks, mortgage finance companies and the like. It was unregulated, not transparent and way too leveraged. But with nine separate and mostly ineffective financial regulators, these risks were ignored. That is, until this second system crashed.
There’s the failure of market fundamentalism — no surprise since, as with other types of fundamentalism, it’s success depends on the purity of belief and action of all participants. And there lies the irony of the coalition of market fundamentalists and religious fundamentalists under the umbrella of conservatism. They should talk more, really. Because the latter could fill the former in on the whole story of the “fall of man” resulting in a “fallen world,” where “…nobody is born truly innocent and pure, but has the inbuilt desire to sin.”
As long as people are compensated hugely for taking risks with other people’s money, and do not suffer equally on the downside, then those risks will inevitably become outrageous. Whether markets are efficient or not, I don’t know for sure. But I do know that, if there’s a way for someone to make money at another’s expense, he will.
… So where next? And, most important, what should be done? I’ve taken to comparing the current situation to “Hamlet”: We’ve had the deaths of Polonius, Claudius and Laertes – that is, the falling house prices, the rising commodity prices and the collapse of banks. As of now there is no sign of Hamlet himself, a catastrophic fall in the markets. Yet it’s difficult to believe that markets are not going to undergo a climactic implosion some time soon. If the current situation doesn’t fill investors with fear, then what are they smoking?
I believe that, to get to the root of the matter, we have to address the bad side of greed. We know from Ivan Boesky and Gordon Gecko that greed can be good. Greed makes the world go around. It makes people take risks that ultimately lead to economic or scientific advances.
But the greedy must also face the consequences of taking those risks. And thus the current system of compensation at financial companies does not lead to anything good at all.
But the greedy aren’t facing the consequences. At least not that I can see. Not when the administration is asking taxpayers for $700 billion to bail out Wall Street, after already forking over $600 billion in bailouts thus far, and with a potential $1 trillion tab hanging over our heads as a consequence of all this. And to ask for this historic bailout with no strings attached, no accountability on the part of those being bailed out, and complete immunity from any legal or administrative review beats all standing, sitting or leaping records for gall.
No, this crash carries with it none of the hope that came with watching the Berlin Wall come down. Instead, there’s the gnawing sense of dread that I felt after watching the towers come down — and the fear was not so much what outside force might strike next, but what the administration might try to push through in a moment when people were frightened, confused, and desperately wanting someone to “fix it.”
Financial-market wise guys, who had been seized with fear, are suddenly drunk with hope. They are rallying explosively because they think they have successfully stampeded Washington into accepting the Wall Street Journal solution to the crisis: dump it all on the taxpayers. That is the meaning of the massive bailout Treasury Secretary Henry Paulson has shopped around Congress. It would relieve the major banks and investment firms of their mountainous rotten assets and make the public swallow their losses–many hundreds of billions, maybe much more. What’s not to like if you are a financial titan threatened with extinction?
If Wall Street gets away with this, it will represent an historic swindle of the American public–all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called “responsible opinion.” If this deal succeeds, I predict it will become a transforming event in American politics–exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion. As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice.
As someone who goes to work every day, comes home, pays bills, and takes care of my family — a “home economist,” I guess — I tend to think of money in terms of opportunity cost.
The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits (UTILITY) that you did without because you bought (or did) that particular something and thus can no longer buy (or do)
Sure, I might want a new computer, but buying one right now might mean my family does without something else — like heat if I skip the paying the gas bill to make that purchase, or new clothes for my almost-six-year-old who seems to outgrow his another item of clothing every 20 minutes. The opportunity cost of going to Iraq has been the loss of billions that weren’t used for things here at home — health care, education, foreclosure relief — including another $13 billion lost, stolen, or wasted in Iraq thanks to this administration’s trademark lack of oversight. The opportunity cost of this bailout, which administration officials say is an economic necessity, is going to be more of the same that we won’t be able to do on health care, education, and so many other things here at home, depending on how things get done.
There may be a chance that lawmakers will not be cowed by the figurative smoke rising from Wall Street as they were by the smoke that was literally rising from Ground Zero after 9/11 — that, amid the steady cries that “something must be done,” they will take the time to consider what might be the right thing to do. Otherwise, in the vernacular of the neighborhood were I grew up, we are about to get “jacked.”
To get robbed, mugged, rolled or beaten up by someone.
The proper term, then, may not be “opportunity cost” but “opportunity jacked.”
People far more knowledgeable than I am on economic matters — including Thomas Ferguson and Robert Johnson, Robert H. Dugger, William Grieder, Robert Kuttner, Dean Baker, Robert Reich, Paul Krugman, Chris Hedges, Bernie Sanders, and Jared Bernstein — have offered suggestions on how we might avoid getting “jacked” in the course of this massive bailout. My favorite at the moment (after making arrangements to allow delinquent homeowners to remain in their homes as owners if the government comes into possession of their mortgage) was best summed up by Reich (though his proposal about Wall Street executive’s campaign contributions runs a close second.)
Wall Street executives and directors of Wall Street firms relinquish their current stock options and this year’s other forms of compensation, and agree to future compensation linked to a rolling five-year average of firm profitability. Why should taxpayers feather their already amply-feathered nests?
I like it. In fact, in my current mood, I’d make it retroactive. After all, if they’ve run the financial system into a hole that’s $700 billion to $1 trillion deep, someone’s — a lot of someones, in fact — are sitting on some ill-gotten gains as a result of their deplorable (and in some cases, dishonest) financial dealings. Cap their salaries? Sure. Stop their bonuses and severance packages? Sure. But why not make it retroactive? Seize their accounts, along with any goodies — boats, vacation homes, etc.— they bought during their deregulated bender, and bill them for what can’t be recovered. After all, why should we (and our children, and our children’s children) be the only one’s getting jacked?
In my darker moments, my preference is for something like this scene from Good Times.
Yet Henry Paulson calls for a “clean bill,” which means his Wall Street pals keep their “winnings” The same man who said, “There is little public policymakers can, or should, do to compensate for untenable financial decisions,” is — with a straight face, mind you — has asked the public to “compensate for the untenable financial decisions” of the executives at Bear Stearns, Fannie Mae, and Freddie Mac, and is asking us to “compensate for untenable financial decisions” yet to come to light. And at the time he’s trying to push through a plan that mostly benefits his old cronies at Goldman Sachs and Morgan Stanely, who — despite running their businesses into the ground — already had access to the Fed’s open line of credit. (The rest of the Wall Street pack is already sniffing around for an angle on the bailout.)
Conservatives — who want to do for health care and social security what they did for banking, with more of the same deregulation that got us into this crisis — are asking us to “compensate for the untenable financial decisions” of Wall Street on, while opposing $50 billion stimulus intended to create jobs through infrastructure projects; the same projects that, just a month ago, drew interest from investment firms like Morgan Stanley and Goldman Sachs. (Never mind seeking to bar Americans from voting if their homes are in foreclosure.) The Bush administration resists giving taxpayers a share in the profits if the firms we’re bailing out recover, but insisting we take on the risk those firms incurred through their own “untenable financial decisions.” Meanwhile, they have no “plan B” if this one doesn’t work out.
While almost no one wants to dwell publicly on the possibility that a $700 billion package could simply be too small to forestall a financial meltdown, privately some aides were already thinking of what the government might do if the Treasury plan passes but fails.
In a statement Monday, President Bush said that “the whole world is watching to see if we can act quickly to shore up our markets and prevent damage to our capital markets, businesses, our housing sector and retirement accounts.”
What the president didn’t say is that the whole world will be watching to see not just if Washington can act but whether Washington’s actions can still make a difference.
Under the current plan, the U.S. government will buy up to $700 billion in assets from private holders on Wall Street. That would help banks stabilize their balance sheets, and in theory provide an incentive for banks to begin extending credit among themselves again — a critical component of a functional financial system.
So what’s Plan B?
There really isn’t one.
In other words, we get “jacked.” The future gets “jacked.” And any opportunity the country has to recover from the consequences of conservative misrule are “jacked” for a good long while.
And when you consider that the only solution conservatism offers is more of the same deregulation that created this crisis, and the “fix” is a bailout almost certain to leave us holding the bag, you gotta wonder if the country getting “jacked” wasn’t the point in the first place.