Seven Reasons Why We All Need to Pick up a Pitchfork
Since the financial near-collapse of 2008, we’ve inaugurated a new president, bailed out big banks, and seen Congress fumble an attempt to reform healthcare. Most recently, we’ve seen our Supreme Court rule that corporations have a right to free speech. None of this sounds outrageously shocking. What’s the big deal?
The big deal is a shift in business as usual. Here are seven reasons YOU should be raising Cain with your Congressperson, no matter your party:
1) THE SHEER MAGNITUDE OF THE BAILOUT. It’s fairly well-understood that the financial crisis was very bad. So bad that the government had to enact unprecedented emergency funding of private enterprise followed by a substantial stimulus effort to keep the economy from plummeting into a 1930s-like depression. The cost to the taxpayers? ELEVEN TRILLION DOLLARS. Debt that will take decades to repay.
2) THE DISTORTION OF FREE-MARKET THEORY. What began as a return in the Reagan era to what some people (mostly conservatives) consider to be a bedrock philosophy here in the US: a belief in the righteousness of free-markets, has turned instead into the dark-side of Objectivist Randianism. Investment banks broke zero laws while dragging the entire world’s credit markets into the gravel by profit-raiding under the guise of re-selling debt. Our entire financial system nearly collapsed, and now our economy struggles in a deep recession, while the big bankers and clever investment guys lobby Congress against regulation, because we all know, regulation is un-American and anti-free-market. Regulation is bad, but relying on bailouts from government is okay?!? These guys mean business. From the NY Times:
The nine biggest participants in the derivatives market — including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America — created a lobbying organization, the CDS Dealers Consortium, on Nov. 13, a month after five of its members accepted federal bailout money.
To oversee the consortium’s push, lobbying records show, the banks hired a longtime Washington power broker who previously helped fend off derivatives regulation: Edward J. Rosen, a partner at the law firm Cleary Gottlieb Steen & Hamilton. A confidential memo Mr. Rosen drafted and shared with the Treasury Department and leaders on Capitol Hill has, politicians and market participants say, played a pivotal role in shaping the debate over derivatives regulation.”
Derivatives, of course, being the most profitable “instrument” in a financial institutions arsenal. And a large cause of the crisis.
3) LOBBYING IS PREVENTING EFFORTS TO REGULATE THE BIGGEST BANKS. The Senate banking committee is hearing testimony about whether or not to adopt policy called “the Volcker Rules” after ex-Federal Reserve Chairman Paul Volcker, who believes in a return to a separation of investment firms (higher risk) and traditional commercial banking (lower risk, or should be!). President Obama recently came out in support of the Volcker Rule. From Business Week:
The White House defines proprietary trades as those not done for the benefit of customers, a senior administration official said when the Volcker plan was announced. Regulators would have the power to ask banks whether certain trades are related to client business, the official said. If they’re not, the regulators could order firms to exit the positions.”
In other words, if the banks are risking YOUR money for their own private benefit, it’s not allowed. Due to heavy lobbying by the financial industry, the Volcker Rules will likely not pass in the Senate.
4) THOSE BIG, FAT BONUSES. Not only are bankers once again pulling down nauseatingly huge bonuses, they are currently testifying to Congress that regulation will hamper financial innovation. Hello? Didn’t financial “innovation” cause this entire problem? Gerald Corrigan, the Managing Director of Goldman Sachs, testified that he has always believed that banks are “special” and that he could agree to the pre-crisis rule where banks do not enjoy the discount window “so long as Section 13 lending remains a possibility in extreme circumstances.” In other words, as long as they could have a bail-out loans from the Fed if they needed one, lending previously reserved for traditional banks only, not bank holding companies like Goldman Sachs.
One commenter put it this way:
They [Goldman Sachs] were hours, if not minutes, from going the way of the dodo, and yet, 16 months later they are rolling in ill-gotten gains, denying ever having been in trouble, consolidating power, and flipping the bird to anyone who bothers to raise the subject. Chutzpah? Cojones? Sociopathic behavior? It probably doesn’t matter at this point. The predator class seems to hold all the cards, those being: recalcitrance, obfuscation, entitlement… When you have money, power, and are unwilling to “play well with others”, it is quite easy to dig in your heels, threaten to shut off the money supply to incumbent politicians, and sit back and watch your dreams (our nightmares) come true.”
5) WE ALL LOST IN THE RECESSION WHILE THE BANKS SCORED BIG. According to Simon Johnson, former chief economist of the IMF:
As a result of the crisis and various government rescue efforts, the largest 6 banks in our economy now have total assets in excess of 63 percent of GDP. This is a significant increase from even 2006, when the same banks’ assets were around 55 percent of GDP, and a complete transformation compared with the situation in the US just 15 years ago– when the 6 largest banks had combined assets of only around 17 percent of GDP.”
Assets in excess of 63 percent of GDP?!?!?! Meet your new overlords.
6) THE FINANCIAL INDUSTRY OWNS CONGRESS. Congress has little incentive to fight against this oligarchy of investment bankers. Because, many congressional representatives are in effect paid to protect business and profit.
From a paper cited in the blog of Mark Thoma, Dept of Economics of the University of Oregon: “By going through individual lobbying reports, we identify all lobbying activities by financial institutions related to the regulation of mortgage lending and securitisation. During the period of the boom from 2000 to 2006, we find 16 pieces of federal legislation aimed at enhancing the regulation of predatory lending practices, none of which ever became law. The amounts spent on lobbying in relation to these laws were substantial and were spent mostly by large financial institutions.” Emphasis added. Because this means that the crisis happened because lobbyists from financial firms influenced legislation AGAINST regulation. The authors further found that institutions that lobbied harder took more risks and fared worse in the crisis than banks that did not invest in lobbying. The authors concluded:
Recent reports show that financial institutions intensified their lobbying efforts in 2009 to fight against an overhaul of derivatives regulation and legislation. Johnson argues that substantial reform will fail unless the political power of the finance industry is weakened.”
7) THE SUPREME COURT JUST SIDED WITH BIG BUSINESS OVER VOTERS. Enter the Supreme Court with the Citizens United v. Federal Elections Commission (FEC). According to a press release from Feb 5, 2010: “The Federal Election Commission today announced that, due to the Supreme Court’s decision in Citizens United v. FEC, it will no longer enforce statutory and regulatory provisions prohibiting corporations and labor unions from making either independent expenditures or electioneering communications.” So there goes that nice idea that maybe we need to limit money’s influence on the political process. Thanks Supreme Court.
So we have two choices as average citizens. Either we make some noise, make some calls to Congress and work to pass some regulation and reforms (like the Fair Elections Now Act), or we sink into apathy and watch the “free market”continue to reward the grotesquely wealthy. I may be a progressive, but this storm of recent events should give even a staunch libertarian the shivers. Our government bailed out massive banks with taxpayer money leaving us with staggering debt. Now those same banks are arguing against regulation so they can do it all again. And the Supreme Court just exacerbated the problem by encouraging the influence of big business in our democratic process. Angry yet?
To Regulate or Not to Regulate?
REGULATE, FOOS!!
It can’t be undone now, but choosing to tackle a resource-demanding issue like healthcare reform in the midst of such a severe economic downturn was just stupid. Helloo? Obama? Pelosi? Agggh, stupid. I’d love to see meaningful, substantive healthcare reform, and especially A PUBLIC OPTION, but it just wasn’t going to go well when there were so many other issues that should’ve taken precedence. How about focusing on a decisive Gitmo solution and probably even torture prosecutions? How about a massive environmental policy turnaround to correct for the Bush years? And the biggest: re-establishing a foundation for an economy that doesn’t list like a drunken sailor every 5-10 years. I am not surprised AT ALL that Brown won in Massachusetts. The Dems have lost focus almost as bad as the Republicans.
The issue that should’ve been first and foremost on the agenda is working to see that the economy remains on solid ground. I’ve written before that we need a sustainable economy. Briefly defined, we need to account for external costs to the environment, move away from measuring success in the form of a gross national product, and establish a stable, sound economy that is not dependent on continuous, unending, unsustainable, resource-depleting, materialistic, consumer-based GROWTH rather than an economy that is balanced in an equilibrium with brief periods of expansion and contraction. (And, yeah, easier said than done. But at a minimum, can we get some accountability from the Fed?!?!?! Cause I’m just not so sure that their goals still reflect the goals of a democracy!)
This is even more relevant today. In a horrible case of life imitating the Onion, we have analysts saying that we may ALREADY be in the next bubble. By taking responsibility for so much bad debt, the US government has eaten the ugly bubble and is now looking like the stink spirit in a Miyazaki film. Result? A populace that sees our government as an over-reaching bloated hogstorm of irresponsibility with deep ties to the ultra-wealthy and little concern for holding fast to the ideals of our democracy. Both parties have sold out hard. Neither one of them is worth the price of socks. All the posturing about Libertarian ideals and the smothering evils of regulation — pshah!
Do we need to increase regulation of the finance industry? YOU BET YOUR ASS WE DO!!! And don’t let any smooth-talking faux Libertarian tell you otherwise. Alan Greenspan relied on the all-knowing invisible hand and just let it keep shaping more exotic financial “instruments,” which is code for “wrapped-up in 27 layers of legalese and fancy bows when we know damn well that there’s nothing in here but bait-and-switch crap.” I’ve read lots of nay-saying about regulation from free-market fools who claim that regulation will strangle financial “innovation.” Helllllooooo??? We don’t need innovation in finance! We need stability and integrity!! If you want innovation go invent a REAL PRODUCT!!
Right. So. Because smarter people than me say everything better, here is a link to an article that you must read: How Supposed Free-Market Theorists Destroyed Free-Market Theory. An excerpt:
The greatest lesson from the crisis that we haven’t yet learned is that “industry interests” and “free-market interests” are not the same. In fact, they are more like oil and water, as the industry profits most in the absence of true market competition. And so it should be no surprise that Wall Street has devoted itself to making contracts indecipherable, building boundless negotiating leverage and fighting for favorable breaks and regulation at every turn. What should be a surprise is that the same scoundrels that killed our markets (and also, mind you, wrecked the global economy and demanded taxpayer bailouts) have so ably sold themselves as natural heirs to von Hayek and Friedman — and that so many of us have let them.
Stay on it. Let your Congresspeople know that you care, and that you vote. (You do vote, right?) In an earlier post I explained that we have a “friend” who was a NY investment broker. He laughed as he explained his job to my husband two years ago, “I bundle up shit mortgages and resell them as prime investments to other banks.” Ha, ha! That’s pretty funny! He still has a house in the Hamptons. A second house. The first one is in a tony area of Manhattan. Some of my hard-working friends are struggling with no jobs and the threat of losing their houses. Not good. Yes, we need financial regulation. Without it, free-marketers will run us into the ground.
Obama Dissed, Volcker Speaks Out Against Bankers Gone Wild
If anything about the financial crisis made you beet-red angry, then you must read Simon Johnson. Johnson is a former chief economist for the International Monetary Fund who wrote one of the best pieces on the financial crisis in print, the Quiet Coup. This week he urges people to pass on the message of Paul Volcker, former head of the Fed Reserve (before Greenspan), and now the head of Obama’s Economic Recovery Advisory Board.
Obama met this week with the heads of the major banks in an attempt to discuss regulation and the return of stability to the financial system. Guess who decided to attend the meeting with the President of the Free World only by phone? If you guessed Lloyd C. Blankfein, the chief executive of Goldman Sachs; John J. Mack, chairman of Morgan Stanley; and Richard D. Parsons, chairman of Citigroup you got it right. (Thanks guys, cause that shows how much you appreciated the use of all our taxpayer dollars!!)
The meeting continued with discussions about executive compensation, regulation, and making more loans available to small business. From the NY Times:
…the banks are seeking to restore executive pay to high levels and asserting that the government’s demand that they hold bigger financial buffers against possible losses makes it hard for them to issue more loans. During the hourlong meeting in the Roosevelt Room of the White House, Mr. Obama prodded the executives to stop fighting the regulation legislation intended to deal with the problems that led to the financial crisis”
Paul Volcker was one of the few outspoken critics of the unprecedented response by the Federal Reserve in the financial crisis. Far oversimplified, he did not agree that it was a good idea to bail out failing banks at all.
After President Obama’s meeting with the top banking executives, Volcker had this to say (emphasis added):
Every day I hear financial leaders saying that they are necessary and desirable, they are wonderful and they are God’s work. Has there been one financial leader to stand out and say that maybe this is excessive and that maybe we should get together privately to think about some restraint?
I hear about these wonderful innovations in the financial markets, and they sure as hell need a lot of innovation. I can tell you of two—credit-default swaps and collateralized debt obligations—which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of? [...] Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.
Paul Volcker and Simon Johnson for the win.
Classic Liberalism: A Chance for Political Parties to Unite
In the old days, say 1850 and before, the country operated fairly heavily in the realm of “Classic Liberalism.” Classic liberalism is defined roughly this way:
Freedom of religion, freedom of speech, freedom of the press, and freedom of assembly were core commitments of classical liberalism, as was the underlying conception of the proper role of just government as the protection of the liberties of individual citizens. Also central to classical liberalism was a commitment to a system of free markets as the best way to organize economic life.
John Stuart Mill (‘Over himself, over his own body and mind, the individual is sovereign’) and John Locke (all true power of governance derives from the people) laid out the fundamental ideals of Classic Liberalism. Adam Smith is another famous proponents of Classic Liberalism, sometimes called laissez-faire liberalism. But somehow the country drifted away from these core tenets. Some of that drift has been justified correction. Some has been radical ideology worming it’s way into the basic configuration of constitutional intent. Some have radicalized the intent of Classical Liberalism turning it into full-fledged Libertarianism. At it’s best, Classic Liberalism provides core values that both parties can agree on, even if they arere split over the finer points of its implementation.
The Republican Party has become the bastion of theocrats hoping to Christianize the country, and self-serving arses who say any dollar earned is a good dollar despite environmental harm, harm to the greater good, or harm to individuals. It seems to have become the party to protect senior citizens from those greedy young people. At its best, it supports fiscal conservatism, a staunch adherence to the right to individual liberty, and — surprise! — land and environmental conservation.
The Democratic Party has been hijacked by misguided political correctness leading to a “we solve all your problems” brand of immature and fiscally reckless governance. It’s become the party that protects illegal aliens from paying for anything. At its best, it supports a moderate safety net, corrects for legal social injustice (like Jim Crow laws), and protects the environment. Democrats have supported individuals over corporations in the form of unions and labor laws.
Both parties could use a return to some of those core ideals in Classic Liberalism:
- Fiscal Conservatism: NO ONE should spend more than they have, not government, not individuals. How did we become a country that embraces debt as a money-making tool? It’s just wrong. Many Classical Liberals supported the Gold Standard. The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency. If not the gold standard, then at least adherence to hard currency and limits to or complete elimination of fractional reserve banking.
- Separation of Church and State: All people should enjoy the right to worship in the most personal and meaningful way. And this should have NOTHING AT ALL to do with government. See Thomas Paine’s Age of Reason.
- Legislative Restraint: No law should be passed, no individual liberty abridged, without a fundamental justification of its necessity. In other words, seatbelt laws save lives and money, yet constrain individual liberty. Our bar has been lowered way too far allowing laws to abridge individual freedoms in exchange for a nanny state. Once these laws are passed, like taxes, they never come back. Laws should be passed in the protection of freedom and to provide a reasonable framework for constitutional rights to be expressed in contemporary times (e.g. bans on automatic weapons and profit raiding or other modern excesses the founders could not have foreseen).
- Smaller Government: This one’s tricky for all of us these days. All government programs should be lean and efficient, including the military and the safety net of social programs. The military is bloated. Medicare is bloated. Prisons are bloated with non-violent offenders. State and county budgets are trying to cover more and more. As a result, taxes are going only one way: UP! The role of government at every level must be delineated.
- Individual Responsibility: Inherent in the ideas of John Locke in the concept that the individual is the government. Individuals must step up to the civic plate by voting and participating as officeholders. No more “They did it!! They made our taxes go up.” They are we. We must ensure that laws are reasonable, pay taxes for all the benefits we enjoy, and propose tangible solutions when we see problems. A passive citizenry leads to no good. Keep the participation constructive and push for solutions. Work hard to earn stuff. No one owes you anything.
Two immediate issues call for Americans to unite to find suitable solutions: the Banking Crisis, and Climate Change.
Regarding the banking crisis, Classical Liberal economists (Smith, and to some extent Friedman) argued against regulation since they believed that enlightened self-interest would preserve the system and constrain the greed-factor. It hasn’t. There’s been an egregious lack of the “enlightened” portion of that behavior. Classical Liberalism sought to balance the right to entrepreneurial pursuit and the right to protection of the individual over more powerful entities. Post economic meltdown and bail out, the more powerful entities seem to have gained the upper hand.
Where Climate Change is concerned, we are currently in the throws of a philosophical dilemma best summed up in the analogy called the Tragedy of the Commons.
The tragedy of the commons refers to a dilemma described in an influential article by that name written by Garrett Hardin and first published in the journal Science in 1968. The article describes a dilemma in which multiple individuals acting independently and solely and rationally consulting their own self-interest will ultimately destroy a shared limited resource even when it is clear that it is not in anyone’s long term interest for this to happen.
The phrase usually does not refer to the article but to the dilemma itself, typically in talking about a circumstance to which it is thought to apply. Perhaps most who use it are not aware of, nor have read, Hardin’s essay but are looking at conceptually parallel situations.
Central to Hardin’s article is an example, a hypothetical and simplified situation from medieval land tenure in Europe, of herders sharing a common parcel of land (the commons), on which they are each entitled to let their cows graze. In Hardin’s example, it is in each herder’s interest to put the next (and succeeding) cows he acquires onto the land, even if the carrying capacity of the commons is exceeded and it is damaged for all as a result. The herder receives all of the benefits from an additional cow, while the damage to the commons is shared by the entire group. If all herders make this individually rational economic decision, the commons will be destroyed to the detriment of all.
The Constitution intended to protect the common good. It seems that any party for the future needs to heed the lesson of the Tragedy of the Commons and provide a solution that accommodates a reasonably regulated and protected model for shared resources. The Constitution does not cover this explicitly. So far, the Democrats seem to have stepped up to this plate somewhat while the Republicans bury their heads and deny the threat of unrestrained population growth, environmental degradation, and resource depletion (see peak oil).
Neither party has come anywhere near solving our Bankers Gone Wild problem.
But the main point of this post is this: We can agree on most of what made, and still makes, this country great. Glenn Beck, Rush Limbaugh, and Daily Kos all spout hatred and sowing chaos where we should be looking for common ground. We have some big issues to attend to as a country. The sooner we join forces to get back to our core values the sooner we’ll find reasonable solutions.
Charts & Graphs & Flowcharts, Oh My!
My husband and I disagree somewhat on our politics. I believe we’ve entered a stage of “Argentinian Democracy” where the top 1% wealth owners have betrayed the trust of the people by overstepping the boundaries in a greed orgy that lead to big take-home pay for the executives of multinational companies and investors in hedge funds. He believes the people who took out all those mortgages and couldn’t pay them are the greed problem and the reason our economy is in the state it’s in. The sad fact is that we’re both right. What a mess! It’s so complicated that most people can’t grasp the complexity of what went wrong. To the rescue come graphic artists! Check out FlowingData.com for a list of 27 graphics to help us all understand what went down and to visualize how much it costs.
Don’t look if you don’t want to know. The graphics are awesome, but they paint a pretty ugly picture.
TALF: Our Government Bribes Hedge Funds to Return Money to the System
What I don’t understand at this point is why the Obama administration and the Treasury are not instituting a MASSIVE OVERHAUL OF DAMAGING INVESTMENT PRACTICES. Well, I do know why. The entire Federal government is in bed with the ultra-wealthy, who in fact are the very investors that average Americans are now suffering under. They made millions, they lost millions; everyone else lost jobs.
The latest government program, called TALF, offers super low-risk loans to hedge funds and private equity firms to re-invest in America. Did I say hedge funds?! I did. Because, let’s face it, they’re the only ones with any cash around here. And I can’t understand why no one is making a peep about this. Here’s an excerpt from a WSJ article that outlines the program. I’ve added some bold bits:
Hoping to jump-start the financial system, the Obama administration is considering turning to a new program run by the Federal Reserve that has been a challenge to launch and depends heavily on hedge funds. The Term Asset-backed Securities Loan Facility, or TALF, was announced in November after investors stopped buying securities backed by consumer debt. Under the $200 billion program, the Fed will make loans to almost any U.S. firm that is willing to use the government financing to buy securities tied to credit-card, small-business, student and auto loans.
Some hedge funds, which often use borrowed money to boost returns, are lining up to get in on the Fed program, seeing a chance to make high double-digit-percentage returns with little downside using low-cost loans made on easy terms. Some officials inside the Fed are nervous about relying on unregulated hedge funds. But they see it as a trade-off in order to get capital to consumers.
Broader philosophical issues could arise if the program is expanded. The White House has promised more transparency in how its funds are used. But lending to hedge funds may be problematic because their operations are opaque. Moreover, the program depends on many of the practices that helped to fell Wall Street firms in the first place, such as leverage, structured-debt investments and a dependence on credit ratings. Depending on the different types of collateral, investors will get roughly $100 of lending for every $5 to $16 of cash they put up to invest. The rate investors will have to pay will be set at one percentage point over interest rates based on London interbank offered rates.
The loans the Fed makes to investors are nonrecourse, meaning investors can’t lose any more than the money they put upfront on the security. If a hedge fund defaults to the Fed, its collateral is the securities themselves. There also are no margin calls, meaning the Fed can’t demand additional payments of cash from borrowers if the underlying securities fall in value. Investors see these as important inducements to the program. But a Treasury Department inspector general warned that the program was vulnerable to fraud by the private sector.
The activities of hedge funds are another potential issue. Some investors have privately expressed worries that hedge funds could game the system to use cheap Fed financing to fund other trading positions that run counter to U.S. goals. A firm might, for instance, buy debt backed by car loans with Fed financing and use the cash flows from the investment to fund short positions on auto makers that pay off if they struggle.
We are over a barrel here for the very reason that the hedge funds (the ultra-wealthy) still have all the money. In our country, it’s pure blasphemy to suggest that these private persons have too much money. That would be socialist and evil. We’re supposed to support the ultra-wealthy since they are kind enough to open factories and high-tech companies and give us jobs. But let’s call a spade a spade. The government is now offering bribes to these hedge funds to get them to return all the money they’re hoarding so we can have it back in the system, please, pretty please!, to fund our student loans and auto loans. And we’re trusting them not to short-sell on the investments, which they will be horribly tempted to do to hedge their investments. Yeah, hedge-funds.
Hmmm, something is not working here.
p.s. Great write-up about the TALF plan from a blog called Automatic Earth.
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