This is a blog of random thought, book & movie reviews, poems, stories, cartoons and short essays. It is probably the closest thing I'll ever have to a journal or dairy. The idea of recording everything I do, every day would make for pretty dull reading. My hope is that it will be a useful way of developing and holding onto my thoughts about what's going on in the world.
Are we misreading what going on in the Mideast? Or, to put it another way, are we missing its broader implications? Is what we're seeing there a precursor of what we're likely to see here and in other countries in the future? Are the spread of Wisconsin-inspired demonstrations related to the unrest we’re seeing elsewhere? Are these revolutions the natural consequence of the mal-distribution of wealth?
We're a country caught between two virtues, the virtue of Personal Responsibility –the idea that each person should make his own way in the world and control his own fortunes – and the virtue of Social Responsibility – the notion that we are all in this together and the wealth of the nation should devolve to the benefit of all, that we'd all be better off (even the wealthiest among us) if the wealth were distributed more equitably.
The challenge is to reconcile these two seemingly opposing virtues.
I believe that the fundamental problem is that there just isn't enough work and that this will only get worse. As the use of technology expands, jobs slowly disappear; work gradually becomes obsolete.[1] Today, most workers are At-Will employees, with the employer holding all the cards. Purchase new technology to displace personnel? Great—Fewer people to feed and the government will pick up the tab. Contrast this with the 1950s, when 28% of our workforce belonged to unions,[2] virtually all employed in the private sector. But, such is the wealth of the nation that even the poorest will survive, somehow. Look at Egypt where the majority live on two dollars a day. Even they get by.
As the divide between the rich and the poor grows, and it becomes harder for the rich to hide their fortunes, the unemployed and poor get angry. They feel cheated. Sometimes, as in Saudi Arabia, the government tries to buy off its people, but usually, by the time anger has boiled over, it’s too late. You can put a lid on it, but it only boils all the harder. As long as there have been revolutions, it has ever been so.[3]
Our system requires that we work or accept being poor. But in the USA, there are five applicants for every job opening, and this is not likely to improve soon, if at all. A college education is no longer a guarantee of employment.[4] Time will tell whether today’s high unemployment is cyclical. Evidence suggests it’s not.
The prevailing fiction is that the wealthy earn their money by the sweat of their brow and deserve to keep every penny. However they gained their advantage, they're now in a position to leverage their power and resources to acquire even more of both without much personal effort, at a cost to our nation’s well-being. The trend of the past ten years is indisputable; the rich have become much richer – 50% richer – while the rest of the population has lost ground; many, are far worse off. Most would agree that, whatever the cause, for the good of the nation, this trend must be reversed. But how?
The challenge is to get our leaders, most of whom are part of the privileged classes, to talk honestly about our problems without being drowned out by the chattering classes and a well-financed opposition. Corporate influence in Washington and its ownership of the media ensures that the ideology that favors wealth is in ascendance. This must change. We need to achieve a balance.
Our political leaders hide behind the popular illusion of American Exceptionalism, a fiction they contradict at their peril. But what if it turns out that we’re not exceptional; that we’re just the same as everyone else, and what we're witnessing is a worldwide phenomenon, a quake with its epicenter at a fruit-stand in a small village in northern Tunisia that set off a tsunami that just hasn't reached our shores yet? What then?
The only thing that prevents us from talking about these things is ideological stasis, and the fear of being wrong. Stipulated: Democrats are wrong 80% of the time … and so are Republicans. Now, let’s talk.
[1]See my previous blog post: In the Shrinking of a PieFurther evidence: Census figures show that from April 1, 2000 to April 1, 2010 US population grew from 281,422,000 to 308,745,000, an increase of 27,323,000. In contrast, Bureau of Labor Statistics figures show that from April, 2000 to April, 2010 non-farm payrolls decreased from 131,660,000 to 130,162,000. (No, everyone didn't suddenly decide to go into farming...)
[2] In 2003, 11.5% of workers are union members, three-fourths working in the public sector. In 1954, virtually no public workers were union members.
(a profile of Treasury Secretary Timothy Geithner)
This is a review of an article in the April issue Atlantic Monthly. Link to article>>
Historians will write the final chapters on whether the government’s response to the Great Recession was appropriate, and that may not happen for many years yet. After all, John Kenneth Gailbraith’s The Great Crash, 1929 wasn’t published until 1955. Even twenty years hence, it is unlikely that historians will agree. But about one thing everyone will agree is that Timothy Geithner, as President of the NY Fed under Bush and Treasury Secretary under Obama, was a central figure in this drama. Joshua Green writes, “The fact that most of the bailouts driving this anger occurred under George W. Bush has been easy to overlook, in part because Geithner is the most visible constant between the two administrations.” Along with Paulson and Bernanke, Geithner was part of the team that oversaw Lehman Brothers, Bear Stearns, and the bailout of AIG, Citi and Bank of Am.
In Geithner’s own words (from the article), “In the end, what people care about is, what did you do? Did it make things better or not? That’s what you’ll be judged by. Now, will it vindicate the president over time? It should, but I’m not sure it will. I think probably not. The country is dramatically better off today. People say the financial strategy was politically costly for us. And I say to them, relative to what? Would it have been better to have the stock market where it was in March, the economy still falling, and unemployment much higher?” (My italics)
Since the efficacy of every other road not taken is hypothetical, there’s just no way of knowing.
For those interested in context, of gaining insight into how and why choices were made, this article is excellent. While much is written today that simply recasts what we already know or confirms our worse suspicions, reading this article provides new insights, extends knowledge, and for some, will evokes admiration; for, no matter how you feel about it, to have faced the political storm and resisted the public’s calls for retribution, required an uncommon level of confidence and courage. To quote from the article, “It requires abstaining from moral judgments and pumping tax dollars into the same institutions that inflicted the pain, as part of an all-hands-on-deck effort to restore economic confidence.” And that took courage.
No doubt, some people think that moral judgment was, and is, exactly what was called for. But as satisfying as that would have been, for those who understood how close the world came to a worldwide depression that could have lasted a dozen years or more, with tremendous social costs, it is certain that history would have judged a political response with retribution as its goal as irresponsible and callous, when the inevitable disastrous social costs were taken into account.
When it comes to abstract thinking, the American polity does not do well with second and third-order effects.
What I appreciate most is Joshua Green’s elegant presentation of the opposing, yet coupled, philosophical underpinnings of the current crisis. Highly influential was the University of Chicago’s conviction that “regulatory capture” rendered regulation ineffective; that is “…if regulation couldn’t function as a disinterested public good, it should be abolished.” (No talk of how to make it work or the danger inherent in deregulation!) Then, from the liberal side, there was a drive towards “corporate liberalism.”
“Where conservative neoclassical economists and Marxist historians converged was in their desire to “sever the corrupting ties between industry and government,” as Eduardo Canedo, an economic historian at Princeton University, puts it.”
According to Green, a vast cast of characters played a role. Ralph Nader, Jimmy Carter, Ronald Reagan, Bush 41, Clinton, Bush 43 to name a few, perhaps unwittingly, worked to remove safeguards that had served us well since enacting the Glass-Steagall Act in the 30s, hastening the day when we would face another crisis, potentially worse than the Great Depression.
When it comes to history, Americans don’t do well with events occurring more than 25 years ago. Conveniently, they can rationalize abandoning safeguards by assuring itself the fundamentals have changed.
Green writes; “When Bill Clinton was elected, pent-up Democratic desire, gladly facilitated by the new Republican leadership in Congress in 1995, unleashed the wave of deregulation that culminated in 1999 with the repeal of the Glass-Steagall Act, the seminal New Deal banking reform.” Consequently, “The assets of securities brokers and dealers … which represented less than 2 percent of gross domestic product in 1980, grew to 22 percent in 2007.”
As Wall Streets grew, so did Wall Street political contributions. But, as Green points out, more than political contributions was a work. “…[The University of Chicago’s] George Stigler’s idea about regulatory capture was widely accepted” so regulations were replaced by repeating the mantra of “… faith in financial markets.” Green sums up the trend as follows: “…The regulatory philosophy of the last three decades—that the government should step aside…” took hold. “This consensus narrowed the parameters of respectable debate to the point that criticizing Wall Street came to be considered unsophisticated.” (My italics) After all, the thinking went, “…‘Where’s the harm in this?’ If banks are making a little more money to keep up with their international competitors, what’s the big deal?”’
Geithner became President of NY Fed in 2003. Green writes, “Once he’d settled in, Geithner chose to focus on derivatives, delivering over the next few years a series of prescient speeches about their risks.” “Geithner was warning of “fat tails,” a term that suggests that catastrophic events at the far end of a bell curve are more likely to occur than statistical models imply.” Quoting Geithner: ‘“I felt like my entire time in New York,” he said, “there was a fear that this was going to end badly.”’ Boy, did he get that right!
As Treasury Secretary, Geithner became the chief architect of the recovery strategy. Green goes onto explain Geithner’s recovery plan as having three “cannons”, address monetary policy, fiscal policy and recapitalize banks, which required a lot of international coordination. What is not well understood is that the plan was designed to minimize the amount of taxpayer money required, by drawing in as much private capital as possible. By and large that was successful, but at a high political cost for the Administration. At the heart of the strategy were “Stress tests” for the big banks. In Greens words, “…investors, uncertain of how bad the crisis could get, assumed the worst”. To attract private capital, it was important to counter this perception. “The basic strategy,” Geithner says, “was to dispel the cloud of uncertainty.” “Geithner’s plan was wildly out of sync with the public desire for swift, retributive justice against the banks.”
Geithner’s strategy was, essentially, attract private capital, rather than government funds, to the extent possible, to fix the problem. Like it or not, that required, in affect, the “coddling of Wall Street.” Green writes, ‘“In a crisis, you have to choose,” Geithner told me. “Are you going to solve the problem, or are you going to teach people a lesson? They’re in direct conflict.”’ Or maybe, to be addressed at different times. If laws were broken, they should be prosecuted. Sadly, aside from Bernie Madoff and others, and aside from fraud within the mortgage industry, technically, most of what occurred was probably legal. But, legal or not, reforms (below) must ensure that Banks invest, not speculate -- another word for gambling -- and certainly not by putting at risk depositors' or tax payers' money!
Green writes, “Geithner likes to point out that after a year on the job, he’s spent $7 billion recapitalizing financial firms while private investors have put up $140 billion. TARP money is being repaid faster than anyone imagined, and if Obama gets the $90 billion tax on big banks he proposed in January, it could eventually be recouped.”
As for reforming Wall Street, unbelievably, reform is still resisted by Wall Street and viewed as unsophisticated. Was this a missed opportunity? Should the Administration have pushed harder in the midst of the meltdown? Maybe there were just too many balls to keep in the air. Hopefully, memories will not fade.
The Administrations legislative proposal, drafted by Geithner, contains these elements:
1. Enforce leverage limits
2. Require higher capital reserves
3. Promote shareholder control of bank salaries
4. Establish a clearinghouse for derivative trading
5. Create a consumer finance protection agency
6. Require corporate “living wills”
7. Improve oversight of the entire financial system
(In my view, number five, the most controversial reform that runs the greatest risk of being gutted, is the most critical.)
While some believe bank size is a problem, Geithner disagrees. Green reports, ‘“It’s risk, not size, that matters,” Geithner told me.’
Clearly, this is an ongoing story. Whether Secretary Geithner and President Obama made the right decisions – or at least not too many bad ones – will become clear only if the economy fully recovers, including improved employment and lower deficits, both of which could take years. Let’s hope Doctor Geithner’s painful prescriptions prove a lasting cure; economically and politically. It's critical that the President press hard to ensure that the financial reforms pass without being watered down. It's important that Geithner makes this happen.
For a more critical view of Geithner and Wall Street, read Frank Rich's column in the NY Times at: Frank Rich
If people only had been able to borrow what they could afford, would we have had a housing bubble and the ensuing “Great Recession?” Is the problem that banks are too big to fail? Should we blame the Fed for keeping interest rates too low for too long? Or is the problem that subprime, NINJA mortgages (No Income, No Job or Assets) were marketed with abandon to starry-eyed Americans addicted to “Flip This House?”
Paul Krugman (NY Times, Op-Ed, 2/1/2010) points out that there are only six major banks in Canada. Nevertheless, Canada weathered the financial storm quite well. And yes, throughout the last decade, Canada’s interest rates tracked closely to ours. But, what Canada has that we don’t is a financial consumer agency that blocked the industry’s slide towards irresponsible lending practices. In Canada, banks are required to maintain “skin in the game” – that is, to hold on to some portion of their loan portfolios rather than pass them on to be “securitized” by Wall Street. If adopted by the US, this one requirement alone could be the keystone needed to prevent a future housing bubble and collapse.
The seismic failure that caused the Great Recession was a failure to make prudent mortgage and commercial loan decisions. This was the quicksand upon which everything else rested and the entire economy got sucked under. Establishing a financial consumer agency is the most important remedy we can adopt to ensure future stability and regain confidence in the markets. Yes, there are other things could and should be done, but let’s start at the foundation. If the loans written over the last decade had been sound, would all the speculation have made any difference? If you agree that the house of cards came tumbling down because it was erected on a seismic fault-line called imprudence, than we’re all to blame. Now let’s fix it.
