On the Contrary

Probably one of the reasons this is not getting much attention is because the financial guys start talking financial speak and we all drift off to la-la land.  But with banks resuming their same old practices of big bonuses based upon risky investments backed by our tax dollars, it is time to focus a little light down in this rat hole.  The good news is this is really a no-brainer.  We have two approaches here.  One is to leave the existing system as is and regulate the hell out of it, and the other is to break up the existing big banks.

Well actually there are three approaches because some of our really brilliant Republicans have proposed that we have no regulations. Republican Congressman Don Manzullo of Illinois, Patrick McHenry of North Carolina and Spencer Bachus of Alabama proposed an amendment that would allow agencies that watches over the financial sector to just die off after five years.  Ideology run amok once again.

I think we can all understand that pure free capitalism in this world runs amok every time.  If it is cheaper to pollute the environment and therefore you gain a competitive edge, you pollute the environment.  If you can rig bids by payoffs, you make payoffs. If it is cheaper to send our airliners to South America for their required yearly checks, you send them to South America. All these examples are true and are on-going.  The history of labor unions is based on corporations enforcing a slave wage because they could.  Need I mention the last financial crisis, or the fact that the rating agencies could make more money by giving the ratings the securities firms demanded?  Where the profit motive is involved, there is no morality and governments must regulate.  Money corrupts absolutely.

As I like to say the devil is in the details, so what kind of regulations.  “Aye, there’s the rub” as Hamlet would say.  What regulations would protect the public and yet not overly limit innovators to innovate?  The other problem with this discussion is that as Congress creates arcane rules, there is major room for mischief here.  Should we be controlling bank executive’s salaries?  Should we have a government regulator nix a deal if it is too risky in his eyes?  If we did that would anyone have funded Apple?

But I told you this was simple and it really is.  First we need clear simple regulations to address the obvious.  But the real solution, believe it or not, comes from Paul Voicker and Alan Greenspan.  NO COMPANY CAN BE TOO BIG TO FAIL.  In the words of the New York Times Article that interviewed him, “He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.   Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities. Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.”

“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.”

So we have a simple solution.  Insulate banks and the backbone or our financial system from the security market, and then let the security markets do what they do, and if they fail, boohoo.  One has to wonder why the Obama Administration is ignoring this sage advice and sticking with Timmy-boy and Larry-boy, both creatures of the status quo in the markets?  Or said more graphically. suckled on the fat tit of Wall Street.  These guys have never been you or me.  Remember who Paul Voicker was:  He was the one who raised interest rates back in the eighties and save us from inflation.  He knows what it is like to stand tough with an unpopular, but effective approach.  Oh could our President learn from this man.

By the way, the debate goes on, and if you are interested you can follow economist Paul Simon on the Baseline Scenario as this debate rages.  Trust me, it affects all of us.  Some think the banks are already headed down the road to even a bigger meltdown as we again incentivize risky behavior backed by the U.S. Treasury.  It is amazing to me that we keep turning to Wall Street experts, those morons who did not see this coming or didn’t care.

I think it is time for a reality check.  In America we only seem to remember the last problem as long as it personally affects us and then it is forgotten to come back and bite us another day.  Take ex-Vice President Cheney.  Here is the guy who had the memos and intelligence to prove WMD and an Al-Qaeda connection in Iraq and now we are listening to him on the efficacy of torture?  Oh well what can I say?  More importantly have we missed the lessons of our latest problems as things seem to be abating and we have changed nothing,  Here are some things that I think are patently obvious or as one of my math professors used to say, glaringly obvious to the casual observer, but totally being ignored by the mainstream, media or otherwise:
•    Economy – On Tuesday there was an article in the New York Times that the economy might be getting better (Markets Rise on Consumer Optimism).  Simon Johnson in his Baseline Scenario blog noted that “…among the people I talk with on Capitol Hill, there is a very real sense that business is returning to usual; certainly, the lobbyists are out in force, they want what they always want, and it’s hard to see many of them as seriously weakened.”  If this is correct then nothing has really changed and we still have a fundamentally flawed market and banking system.  But I don’t think they have it right.  I think the worst is yet to come.  Those on Wall Street are all patting themselves on the back because the banks haven’t failed, but the U.S. is up to its eyeballs in debt bailing them out and they have not been restructured.  They are still too big to fail which is how we got here in the first place.  Almost every state is facing cutbacks and layoffs.  More and more mortgages are defaulting as people lose their jobs.  I think what we have is that the middle class and working people are continuing to suffer and that suffering is getting worse, while the investment class has been saved from feeling the effects by the bailouts.  As more states tighten their belts and more people get laid off, there is going to be anger like we haven’t seen in a long, long time.  There is a real disconnection between working men and women and our upper classes.  We have corrected nothing and restoring the status quo is a recipe for disaster.
•    Iraq – The reality here is that it is going to get bloody and there is nothing we can or should do.  The “Awakening” is over and the results for the Sunnis were not what was hoped for.  Now we will see a great deal of violence as each party jostles for position in the coming power grab.  This is inevitable and the Iraqis will have to sort this out among themselves if they are ever going to stand on their own two feet.  Delaying our withdrawal will simply delay the inevitable and get us caught up in the middle of their local power politics.  Al-Qaeda will be a minor player and should be of little concern as Iraqis dual for power and control, use Al-Qaeda if it suits their means, and then abandon them when they secure power.
•    Afghanistan – The reality here is this will also get a lot bloodier.  As we step up our efforts to eradicate drugs and empower a very corrupt government, we are going to be in the middle of tribal warfare.  I have mixed emotions here as I see that if we are willing to fight the hard fight, the fight that should have been fought seven years ago (thank you Dick and George), it is going to be another 10-15 years before Afghanistan is stable.  I really wonder if it is worth it.  I guess I would have to say no since if I don’t want to sacrifice my own son for this endeavor, then I cannot justify sacrificing anyone else’s.
•    Health Care – This one is a no-brainer.  Without a single payer, government option, nothing is going to get accomplished.  I have written at length about the business model of health care insurers and nothing is going to fundamentally change that until you take profit out of health insurance (See Health Care Wars and Scare Tactics and Reinventing the Wheel – Universal Health Care).  We need a pared down Medicare plan for everyone as a choice with the ability to add additional services and benefits by piggybacking private insurance.  That really is their only role and the only place where profit makes sense in health care.
•    Energy – I don’t think we are getting anywhere fast on a real energy policy that will change our country in a fundamental way.  As soon as gas prices dropped, our eye was off the ball and the forces of the status quo swiftly reasserted them selves in our choices.  But the reality here is that this is the lull in the storm, but in the meantime we are losing precious time.  The cap and trade bill to reduce our dependence on polluting fuel sources is being watered down by special interests invested in the status quo.  If you are not even going to make a dent, why bother.
•    Infrastructure – On the infrastructure side, there may still be hope if I am right about the economy.  If I am, and the economy will stagnate further and a massive infusion of money this time actually focused on rebuilding our infrastructure is our only hope.  It provides good jobs in the short term, and is a long-term investment in a viable economy in the future.  I am not the only one who sees this no brainer.  See Bob Herbert’s column in the New York Times on Tuesday (Our Crumbling Foundation).

I don’t know about the rest of you, but it seems like we are being lulled asleep again and we are failing to make the big changes that are necessary to really change our direction.  I almost feel like we have lost our momentum for change and the Republicans will be allowed to obstruct any real progress as we lose our sense of urgency.  I hope I am wrong.

In order to put our house in order, economically speaking, it is clear that there are three problems.  The first has been somewhat addressed by the stimulus bill.  The other two are interrelated and that is the banking problem (credit frozen) and defaulting mortgages.  Good ideas are being discussed on how to approach these later two problems (The Baseline Scenario), but there is resistance to any change in the status quo that come from two camps and I have called them the Enemy Within and the Enemy Without.

The Enemy Without has been on display during the stimulus bill debate and its aftermath and that is the Republican minority whose intransigence to any change in their economic policy of tax cuts is bordering on lunacy.  They have used the deficit as their juggernaut against further stimulus spending when they ran up a trillion dollar deficit.  Hypocrisy anyone?  They have attacked the bill as pork spending, but when you ask them to list what they considered pork, it turns out that it is spending they just don’t happen to approve of, but is stimulative according to most economists.

They have called this a spending bill, which of course is the whole point, but the word spending terrifies their base who can’t understand that tax cuts are just another form of spending with major long-term impacts to our deficit.  They have redefine history and called the stimulus spending in the 1930’s the cause of the problem.  They have offered no alternative other than tax cuts which doesn’t invest in our infrastructure or our future.  Let’s just bankrupt the government while allowing people to continue to buy crap with no strategic plan for spending to secure our future.  They have become the lunatic fringe.

We even have Republican Governors like Bobby Jindal of Louisiana who says he is considering refusing the money. “I could help my people stay employed and in their homes, but I am an ideologue so screw you” (my paraphrasing).  Pragmatism is not part of their ideology.  As an aside I have always wondered why the press always refers to Jindal as a smart new Republican.  Anyone who thinks creationism and evolution should be taught side by side doesn’t understand the difference between science and religion and raises serious questions about their other logical processes.

Anyway the point is made:  The GOP has become the Grand Obstructionist Party (MSNBC) that will compromise nothing and represents an ever shrinking and radicalized base.  The problem is that with the filibuster in the Senate and in California the two-thirds majority to pass a budget, change is being held hostage to bankrupt thinking. We are going to have to eventually get rid of these supermajority requirements for anything but constitutional changes.   So we know what the Enemy Without looks like, but then there is the Enemy Within.

We are facing a critical crisis in our banking system, but the banking system’s leverage on the Democrats with their minions filling almost all critical positions that must steward this correction, and their lobbying leverage on both Democrats and Republicans make them the Enemy Within to thwart any real change.  The Banking industry has a vested interest in returning to the status quo that made them wealthy.  Our country has a vested interest in breaking up these large banks and making them and their stockholders feel some of the pain for their toxic investments.  As Simon Johnson, former IMF chief economist wrote on his blog, The Baseline Scenario:

“The banking lobby has become too powerful, in large part because big banks have balance sheets that are too big relative to the size of the economy.  If a bank has total assets of over 10% of GDP, it is obviously too big to fail.  Of course, the smart people who run these banks know this and act – politically and economically – accordingly.”

My own concern is that there is a level of arrogance in the financial and banking community that sees their interests as superseding the interest of our common good.  In fact their definition of common good is based upon them creating wealth for themselves.   The rest of us are just pheasants to serve their banking needs.  Banks are going to have to suffer the consequences of their poor management and presently they don’t see that. They are too big to fail.  In the recently rolled out mortgage plan by the Obama administration, they weren’t happy because they were asked to participate in the pain (mark down the loan balance).

Mr. Johnson’s point is that they are so intertwined into both the administration and Congress that our government may not be able to move appropriately to limit their power and influence.  If we can’t we are setting us up for more disasters in the future.  It will be interesting to see how the administration addresses this problem.

Note:  Simon Johnson appeared on the Bill Moyers Journal and a transcript is available.