Robert Samuelson, dean of America's economics journalists, today offers historical and economic perspective on the lingering finance crisis (or growing financial crisis, depending on your perspective).
His point: things could get very bad, but at present there are many reasons to think that they aren't that bad and won't turn out to be.
Meanwhile, SWNID decries the McCain campaign's craven concession to the Democrats of the metanarrative about the financial crisis. Listening to McCain ads, the longest of which was ably delivered though sadly not factually and tactically corrected by Sarah Palin last Thursday night, one would think it a matter of settled common sense that the financial crisis is entirely the consequence of the government's failure to regulate greedy Wall Street capitalists and predatory lenders.
Such a perspective is hardly accurate or complete enough to be deemed "true" in any true sense of the word. Worse, it cedes the discussion to a kind of "bipartisan" consensus in the completely wrong direction of making the American economy more hostile to business development. Such a political scenario reminds us entirely of the way that the Hoover and Roosevelt administrations (different only in the degree to which they applied the approach, not in the approach itself) approached the Depression in ways that kept things depressed: with government intervention that never improved the business climate.
Whacking personae who don't represent a significant portion of the electorate ("Wall Street," "speculators," "the wealthiest 1%") may be the kind of thing that focus groups respond to, but it isn't a platform from which to govern effectively.
8 comments:
For these reasons and more I have been extremely disappointed in the McCain/Palin campaign.
Tens of thousands of home loans were backed by the top financial institutions in order to make a quick buck, when almost everyone in the industry had to know that the vast majority of those loans had very little chance of being repaid, given the way they were structured. (Even I knew that and heard many others warning about it as early as 2002.) If you don't want to call such lending the result of greed, then fine, call it something else. But there's clearly something seriously wrong with any sector of the economy that, when left to regulate itself, engages in such economically irresponsible behavior and then demands that the taxpayers pick up the tab. I think the electorate has every right to require that these folks be held accountable for their actions.
And even though the Wall Street elite represent only 1% of the electorate, their antics have managed to throw all of us into a financial crisis. I would think that such influence, power, and ineptitude require a very heavy dose of external oversight, since these folks are either unable or unwilling to regulate themselves. The fact that such oversight has itself been problematic from time to time is no reason to conclude that the financial sector should be left to its own recognizance.
McCain's mistake wasn't that he (and Palin) bought into the idea that the culture of Wall Street is to blame for our current financial ills. You can find any number of examples to back up that claim. (E.g., last year, the five largest brokerage firms on Wall Street gave out $39 billion in executive bonuses, while losing $79 billion for their stock holders. Is that not a prime example of a culture of financial irresponsibility?) Instead, McCain's mistake was that he didn't refuse to sign the $700 billion bailout unless the senate first removed the extra $150 billion in pork-barrel spending. Then, at least, he would have shown that he has some understanding of financial accountability. Instead, he's managed to align himself with Obama on the issue.
We disagree that "Wall Street" is especially to blame in this in ways that justify its villification. There's blame enough to go around: to the public officials who demanded mortgages be given to less credit worthy borrowers to increase home ownership, to borrowers who willingly threw caution to the wind in taking such loans, to investors (including investors in mutual funds and related consumer-oriented investments) who sought higher marginal yields in derivative securities, to investors who believed that Fannie and Freddie are so a part of the government that their paper was as safe as Treasurys (a belief that seems to be coming true), to sellers of homes who raked in significant capital gains on real estate with prices inflated by easy credit and rampant speculation, to consumers in general who have enjoyed twenty years of easy credit to finance their consumption.
To say that there are people who have warned of a reckoning day is hardly surprising. Warnings, especially in finance, are widely issued, often by people who are doing the very thing they're warning about.
On bonuses to executives, Thomas Sowell has already soberly explained that cheap executives can be more expensive than costly ones, which is not to say that there hasn't been a "bubble" in executive pay as well. But what gives us any confidence that Barney Frank will be a better judge of what the CEO of Goldman Sachs ought to make than has been the board of Goldman Sachs?
True, there are many who share responsibility in this crisis, but only Wall Street is being rewarded with a $700 billion bailout. That alone gives the electorate a right to demand accountability from its leaders.
The fact that warnings often go unheeded is hardly a reason for ignoring them. Besides, some very dependable institutions, such as Bank of America, did heed them. That alone should have been reason enough for the others to take the warnings seriously.
I'm not quite sure why you think the only alternative to corporate self-regulation is letting Barney Frank call the shots, but it is worth noting that there are other possibilities. For instance, the government might require publicly-traded companies to stop allowing their CEOs to sit on each others' boards. Such a conflict of interest inevitably results in a culture of quid pro quo, which diverts the attention of the directors away from what's best for their companies to what's best for themselves. It also encourages a kind of groupthink within the industry that's vulnerable to the sort of hair-brained schemes that have led to the current disaster. It's not going to happen, however, unless the government—with or without Barney Frank—intervenes. The current arrangement is much too lucrative for those in charge.
We can actually agree to almost all your specifics, as well as insisting in the future that those organizations that sell mortgages must have a financial stake in whether the mortgages pay off or not.
We think it will be very tricky to make sure that executives aren't paid out of "bailout" proceeds, not only because the monies are fungible but also because these guys are excellent at finding ways around regulations when it suits their purposes to do so. It's akin to the way that tax revenues from the "rich" go down when marginal rates go up: the rich "shelter" their income. Nevertheless, we do not object to attempts to discourage wanton behavior in that regard.
What we can't agree is that "Wall Street" is the beneficiary of the bailout. On the one hand, stockholders of banks are not seeing much reward. On the other hand, everyone who needs money is suffering along with them. Exactly what is "Wall Street" anyway, and how is it being "rewarded" differently from everyone else who will be better off if the financial system doesn't shut down?
Your question is a fair one. When I (and, I believe, most other critics) say "Wall Street," I am primarily referring to the leadership of the financial institutions. They are, after all, the ones who made the decisions that brought down their institutions. And from what I can tell, they are also the ones who stand to receive the lion's share of the $700 billion in order to rebuild what's left of those institutions, while their stockholders, other investors, defaulted homeowners, and anyone else who will suffer as a result of the crisis will get little more than a $700 billion bill, along with all the additional debt in interest attached to it.
Of course, the hope is that eventually the government will get the $700 billion (and interest) back as investment on the bailout, but don't expect Uncle Sam to turn around and distribute that return to the above-mentioned stockholders, etc. so that they can rebuild what's left of their life savings.
[By the way, I know that "hair-brained" is considered incorrect usage. (See my last post.) What can I say? In the heat of an argument, I made a harebrained mistake.]
First, we mildly agree that "Wall Street" means to most who use the metaphor the executives who run big investment entities, but we insist that such an identification is a big part of the problem. We think that most Americans confuse the executives of corporations with the owners of corporations, and likewise confuse executive remuneration with corporate profits. Thus they refer to corporations metaphorically ("Wall Street," "Detroit," "Big Oil"), personify the corporations in the two-dimensional personae of their executives (a habit in good times cultivated by some corporations who use their more charismatic CEOs as spokespeople/personifications), and then assume that big profits go entirely into executives' pockets and that big losses should be picked from the same.
Now the last move isn't entirely without merit, as bosses do have responsibility for what happens with their companies which ought to translate into their remuneration. But the first two moves leave hair/hare-brained populists thinking that in bringing retribution on the CEO, they've fully brought retribution on the entity that deserves the retribution. In fact, shareholders are the ones who ultimately own the corporation, who vote or provide proxies for voting, and stand to profit or lose, as we all know.
Second, we'll more vigorously dispute your contention that these CEOs stand to benefit most from the bailout. Even in the most egregiously inflated cases, CEO compensation represents a fraction of the book value or cash flow of major corporations, or even of profits over the long term, maybe the most imprtant comparison. Compensation may currently be bubbled up out of proportion to the real value of the CEO (even if the competitive pressures of the global marketplace make effective executive leadership even more valuable than it was in the recent past), but it is nevertheless still a fraction of what the corporation makes or is worth.
So if the bailout does mean that many "Wall Street" CEOs end up with extremely better compensation than they would if those banks, brokerages and insurance companies went bankrupt, the shareholders of the corporations are saved much more as over time their stock regains value versus becoming completely worthless. Only if executive pay exceeded the capitalization and market value of these corporations could it be otherwise.
It will be unseemly if during the bailout, executives do what AIG's did in treating themselves to a weekend at an exclusive spa. "Nero fiddled" and all that. But let's not let the metaphors confuse realities, including the realities of real costs and real benefits.
Yes, shareholders own the corporation, but they don't run it. The CEOs do. That's why they are the ones most responsible for our current crisis. Think about it. When asked to justify their enormous pay, what do they themselves say? That they deserve it because they have greater responsibility by far than anyone else in the company. It's a sweet job that has responsibility for success, but not for failure.
To reuse my earlier example, the five largest brokerage firms on Wall Street gave out $39 billion in executive bonuses while they were guiding their stockholders to a $79 billion loss. In what world does such compensation represent just a fraction of the profits? There were no profits! True, one year is still considered a relatively short term, even by corporation standards. But things are going to have to go very rosy indeed and for quite some time for the $39 billion in bonuses (along with the astronomically high executive salaries) to represent only a fraction of future profits "over the long term."
Having said that, I do agree that eventually things will improve. I do not agree, however, that the improvement will balance out the harm in any sense other than on a utilitarian calculation. The problem is that those non-Wall-Street-executives who reap future benefits won't be exactly the same individuals that are losing so much now. How many retirees, for example, who are victims of the current crisis are still going to be around to enjoy a stock market rebound? And how many of the non-Wall-Street-executives who lose their jobs as a result of the associated economic downturn will still be looking for work by the time that rebound arrives? By contrast, I think we can safely say that the bailout will enable the vast majority of investment executives to keep their jobs or, at the very least, be quickly swept up by other firms looking to spend a chunk of that $700 billion. In other words, even though things will eventually get better, many of those individuals who suffered the "real costs" will not see much in the way of "real benefits," and most of those responsible for incurring those costs will—unless we demand that they be held accountable.
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