Ending the Banker's Holiday: Part Two

“Politics are hard to predict,” Lawrence Summers
(aka “The Professor,” Obama’s Chief Economic Advisor)

So the first attempt by the Obama team to address the banking crisis last Tuesday was a bust. It didn’t even please Wall Street, who at this point would seem to be the only constituency being given any serious consideration. I was hoping for better but, knowing what they had to offer, Summers and Geithner could not anticipate this political reaction?! The closest to an actual “plan” was barely distinguishable from ideas floated by Henry Paulson and the Bush team last fall. And still hung-up on the same question: what price should the public pay for the “bad” assets amassed by the banks?

“Markets are a great way to organize economic activity,
but they need adult supervision.” –Wall Street Journal

Most distressing is the contrast between the Obama team’s dithering and what is emerging from smart Economists as a few obvious needed steps to be taken:

1) Quit the charade to—what?— fit some myth of private ownership that has always been a gross distortion of American history anyway. Nationalize the banks, even if only for a temporary period. It is an insult to taxpayers to pour hundreds of billions of public money into the private banks black hole, from 450 billion (Krugman) to 2.5 trillion (Reich), without any means to exercise control over how the banks spend that money. On the one hand, 18 billion paid in bonuses to bank managers since the meltdown is small potatoes; on the other, it is indicative of the fact that these people do not operate in the world where the rest of us live, where people actually have to work for a living, and is a flagrant slap in the face to the public bailout. These are NOT people we can trust to make Wall Street work for Main Street, duh.

2) Many agree that a crucial tipping point in our current predicament was the repeal of the Glass-Steagall Act in 1999. This Depression Era legislation set rules about the appropriate business of banks and established boundaries to avoid conflicts of interest in the financial sector. Its repeal— ratified by the Clinton-Rubin team, lest you’d like to blame all this on the Bushies—unleashed unsavory links between investment banks and junk money managers and fraudulent real estate mortgage companies. Prior to the repeal subprime mortgages constituted 5% of the real estate market; by 2006 the number had reached 30% (Wikipedia). Capitalism is by definition cyclical, alternating between bull runs and bear markets, but it’s the repeal of Glass-Steagall that has blown this most recent bubble to such gigantic, at this point still seemingly bottomless, toxic, world-wide proportions. (CounterPunch.)

3) The crux of this bubble trouble was the simple fact that Wall Streeters and their minions were making beaucoup dollars selling and reselling debt assets without any personal financial risk, without having to maintain any minimum of capital to debt ratio, let alone any responsibility for reporting these tenuous financial arrangements. The credit rating agencies whom should have cried foul failed miserably. Even though as early as ’03 Warren Buffett and a few other prominent members of the business community were calling unregulated derivatives markets “timebombs,” the Securities and Exchange Commission, our government watchdogs, did nothing. Perhaps the poor reception on Wall Street to the Obama team’s vague, tepid plan indicates that at this point even a majority of Wall Street has had enough of this insider’s game. How could we expect the Wall Street elite— including Geithner and Summers— to reform themselves? It’s time to clean house, closing the revolving door between Wall Street and Washington, establishing new independent government oversight that will reestablish rules that reward hard work and honesty. Isn’t this what Obama promised he’d do anyway? (Baseline Scenario.)

Steps 1 and 2 seem inevitable if it wasn’t for the dithering. But can they be carried out substantively without step 3? None of this should be surprising after watching Obama select as his economic advisors, one after another, from the Clinton team. A group as responsible as anybody for setting the stage for the current debacle. And, still, I want to hang on to something in Obama’s rhetoric. The stuff necessary to finally ending this second Gilded Age out of the simple, sober recognition— breaking with the supply-side, trickle-down delusions of the Reagan Revolution— that a healthy middle class is the most important investment for long-term economic growth.