For some unpleasant but essential reading about the financial mess, read this piece by Simon Johnson in the Atlantic. It's very gloomy, but it contains analysis of our current situation that provides backdrop for the objections of Paul Krugman, Joseph Stiglitz, and others to the administration's current financial bailout strategy.
Johnson is no bomb-throwing lefty, either - he was the chief economist for the IMF for the last two years. His central thesis is that we've seen this before - in fact, it's the same situation that the IMF has faced numerous times in emerging market economies. Those economies often get hijacked by oligarchies that loot their countries' financial systems and then their national treasuries for personal gain, and Johnson's central point is that's what's happening here too. The IMF's solution has always been to insist that the power of those oligarchies must be broken, and the institutions must be reduced in size so that they aren't too big to fail.
Put simply (as he does toward the end of the piece), Johnson's point is that we've been looking to the wrong Roosevelt for a model of how to deal with this problem. We've been focused on FDR's New Deal, and that sort of regulatory environment is what we should end up with, in order to prevent a repeat performance of this catastrophe. Before that regulatory resurgence can have a chance to work, though, we have a financial cartel in this country whose political power must be hobbled, and whose financial influence must be broken up into pieces small enough that their failure is their problem, not ours. For that, we need some Theodore Roosevelt style trust-busting.
...so I don't have to. Seriously, I could restate this post, but I probably wouldn't improve on it. For the line that really convinced me, see this (in the introduction):
"Tim Geithner, the man most in need of a break, will go to the community
college of Sunday Morning Talk Shows, to be furtively probed by David
Gregory. Obama could have gone himself, but why bother: Gregory would
spend the whole day asking him why he's raising taxes on the rich nine
Yes, at some point, I do believe that all of Obama's favorite "bowling" jokes can become "Meet The Press" jokes."
Perfect description of Gregory's lame attempt at being "incisive". Tim Russert was a font of beltway village CW, but at least he could ask a sharp question from time to time that actually shed some light on a subject. How are the mighty fallen.
Before it disappears into his archives, I just want to bookmark this March 15 post, and this March 22 comment from one of Josh Marshall's readers about the central question in the AIG bonus matter (and in the bailout plans going forward). Both are very well worth reading, but here's the nut, from the comment:
The real problem behind the AIG public relations mess is not the tin
ears of all the President's men, or their tone deaf commentary, or
their ham-handed approach to decision-making. The real problem is that
the AIG situation implies that they, the President's men, don't think
Hale Stewart has an interesting piece up on HuffPo that argues that Paul Krugman's analysis (which has seemed sensible to me to this point) is wrong. I'm not sure it's right, but it's worth reading, as are this piece and this one, from two different people involved at AIG-FP.
The upshot is that while I'm still unimpressed by the level of outrage on the part of some in the financial world (including the two AIG-FP players and Jake DeSantis, the guy who wrote the open resignation letter published in the Times last week), I'm beginning to think that I may have been painting with too broad a brush in previous posts, and I'm willing to give Secretary Geithner and President Obama a bit more benefit of the doubt about their plan than I have been to this point.
Thomas Frank has a good post up on Huffington Post, entitled, "The 'Populists' Are Right About Wall Street". In it, he notes the inclination among both the commentariat and certain segments of the Democratic Party to call the anger at the Wall Street bandits who trashed the economy "populism", and so to attempt to characterize it as somehow illegitimate or irresponsible.
Populism has certainly had some unappetizing associations over the course of its history (including virulent racism and a variety of other mob manias), and at present, there is an element of this anger that is fueling a good deal of sentiment that supports completing the destruction of the financial system just for the satisfaction of watching the people who gambled it into insolvency twist in the wind. The Republican "Recovery Plan" is the product of combining that sort of anger with both a desire to blame individuals for the systemic failures Republicans led the charge to create and an ideological requirement to maintain that reducing the size of government is the paramount task of government, regardless of the consequences of doing so.
As Frank points out, though, what many of the "populists" are angry about in this case is a spectacular and quite possibly criminal malfeasance on the part of some financial managers that has trashed millions of people's savings while making those managers incredibly wealthy. More to the point, some of that anger is about a "fix" for the problem that seems to be more focused on preserving the system that got us into this mess intact, reinflating the asset bubble that has put us in this position, and leaving the perpetrators of this massive fraud in charge of our financial futures.
I'm certainly aware that any attempt to save the financial system is likely to occasion some "collateral benefit" (in Barney Frank's deathless phrase) to those who are guilty of wrecking it. That's aggravating, of course, but when it starts to seem that the "fix" under discussion will not only provide far more benefit to the guilty than the innocent, but that it may well not work, much of the anger of the "populists" starts to make a lot of sense.
The primary assumption of the bailout plan announced by Treasury Secretary Geithner on Tuesday seems to be that most of the toxic (now "legacy") assets clogging the veins of our financial system are undervalued due to panic, and if we can just stem the panic, all will be well. The primary "fix" looks like an attempt to reinflate the bubble that just burst, by underwriting hedge funds and other private equity firms (at no cost) to buy bad paper from the banks and other financial services companies that wrote it in the first place. That doesn't solve the underlying problem, which is that we have a huge misallocation of resources in single-family housing that people can't afford, and collaterally, that most of these institutions are actually insolvent and everyone knows it.
Even if that "fix" inexplicably does work this time, it leaves us entirely vulnerable to repeat performances in which more of our savings disappear into some fat cat's bank account as fees and salary/bonuses, while our futures are imperiled further. It will continue the consolidation of the remaining institutions, exacerbating the "too big to fail" problem by an order of magnitude and creating a huge "moral hazard" problem.
What it won't do is correctly value the toxic assets, so the system can move on. Any value that is placed on those assets now will include the full faith and credit of the US government, which means we as taxpayers will have just made the same lousy bet on mortgage-backed securities that got the banks in trouble, except at a much larger scale.
Anger at this solution may be "populist", but it is far more rational than most of the dismissals of "populist rhetoric" admit.
Update: Josh Marshall has a great post describing the same distinction.
Late Update: I missed this, but apparently, Keith Olbermann was also working this side of the street recently:
Yesterday morning, NPR's "Morning Edition" ran this story about a perk at GM called the "Product Evaluation Program", in which managers' cars and gas are subsidized by the company.
The NPR package points out that a subsidy of gas for GM's managerial staff may blind people to the costs of driving a big gas guzzling car on a day-to-day basis. The piece includes an annoying story about impact of last summer's $4/gal. gas prices - one GM manager complained that he had to swipe his card twice to fill up the tank of his SUV. Needless to say, this does not engender sympathy from those of us who also have to pay the credit card bill when it shows up!
The story questions the value of the "evaluation program" as anything but a perk for managers (saying that nobody collectrs or uses any data from the program), and there is a completely tone-deaf quote from some flack at GM who says that getting rid of the perk now would be "extremely disruptive", because "employees have built their lives around it. It allows many to live far from their offices and commute at little expense." - apparently GM doesn't realize that the workers it wants to make further cuts in wages also have to pay commuting costs.
If a company car is a good way to compensate managers without paying them more (and it should be, for a car company), that makes sense to me, and it does seem that it is a standard in the American auto industry, though I think a compelling case could be made that if wage workers are being asked to make ever-deeper cuts in wages, the company had better be demonstrably getting full value from the managers who are getting their cars for free. Even if they can do that, though, paying for the gas (something other automakers' company car programs don't do) is still a big problem.
The problem is that the program almost certainly does provide some feedback to GM, even if they're not trrying to get it. If the company buys gas for its employees, the feedback they get is that their employees who are evaluating the free cars they get don't care how much that gas costs, because they're not paying for it, either. In good times, GM's shareholders pay for it, and right now, we do. That's distorted feedback, and the distortion is built right into the program.
Jake DeSantis, an executive VP at AIG Financial Products, the London-based outfit that trashed its parent company and had a huge hand in blowing up the country's and the world's financial system, has written an Op-Ed for the NYT that consists of an open resignation letter from his firm. In it, he describes how he had nothing to do with what AIG-FP did to the economy, how he has worked hard and in good faith for the bonuses he and his colleagues were promised, and how betrayed he feels by the public anger at those bonuses and by CEO Liddy's request that he and his colleagues forego them. He goes on to say that he will personally donate all of his most recent ($742,000 after taxes) bonus payment to charity, "to help those who are suffering from the economic downturn".
This letter has been the subject of a great deal of laudatory sentiment on my television today, from Morning Joe to Wolf Blitzer's Situation Room. It appears to be the most highly visible of a series of articles in which various Wall Street executives are stamping their pretty feet about how unfairly they are being treated by the public and its elected officials for trashing the economy (which appears to be something they feel they own and can do with what they will).
It would be a lot easier to be sympathetic to Mr DeSantis if he hadn't at very least had a front row seat to the destruction of more wealth than we will likely rebuild in the rest of my lifetime, and if we weren't going to be paying the bills for this mess for generations (if not forever). If DeSantis isn't actually actively complicit in AIG-FP's outright fraudulent practices (and this seems unlikely, considering his position), he certainly either is entirely guilty of letting them happen without saying anything or maintained a sufficiently ignorant position about them to fully qualify as incompetent. Considering he became sufficiently well off over the last ten years at the company to be able to turn down three quarters of a million dollars to make a point, it's not easy to excuse that incompetence.
If you want a pretty thorough description of the kind of pillaging that went on at AIG-FP over the term of Mr. DeSantis' employment (and if you don't have a blood pressure problem), take a look at this article in Rolling Stone by Matt Taibbi - it's about the best plain-language explanation of the story I've seen yet, and if it doesn't curl your hair, I guarantee it will give a perspective on what Mr DeSantis and his colleagues at AIG-FP have been up to that will leave you considerably less sympathetic to the plight they are complaining about now.
The article is long, but the end of it contains a perfect answer to the entitled whining we've been hearing from a multitude of sources all day today, including from Mr. DeSantis:
"No one ever asked you to
stay up all night eight days a week trying to get filthy rich
shorting what's left of the American auto industry or selling $600
billion in toxic, irredeemable mortgages to ex-strippers on work
release and Taco Bell clerks. Actually, come to think of it, why
are we even giving taxpayer money to you people? Why are we not
throwing your ass in jail instead?"
Enjoy your retirement, Mr. DeSantis, and thanks for the tip.
The Daily Show replayed Jon Stewart's thrashing of Jim Cramer last night, and I have to add one thing to my extended rant about Stewart's hashing of Cramer and CNBC the other day. (In case you missed the smackdown, don't, it's priceless. It's here, here, and here.)
On seeing it for the third time, though, I have to admit that while I think the piece deserves all of the praise it has gotten around the blogosphere, there are two places in it that provide sobering reminders that caveat emptor didn't get to be a cliche by being wrong. The first is that at one point Stewart asks whether CNBC's audience is the Wall Street insider crowd or the general public, as a way of accusing CNBC of not serving its audience as a journalistic enterprise should. The problem with that question is the real answer, which Cramer didn't provide - CNBC does exist to serve the Wall Street insider crowd - that's its primary audience. You can make a case that others with less knowledge and just as much interest also watch, and that's very true, but they're not the audience CNBC sells to its advertisers. None of that excuses the journalistic lapses of which the network and much of the financial press are guilty, but it is true that the answer to the question simply isn't what Stewart implied it should be.
The other bit that struck me also slipped by pretty quickly, but was worth more attention than it got. Several minutes in to the piece (third clip), in the middle of what was mostly a pretty pathetic defense of his network's coverage of the financial world for the last several years, Cramer did say one thing that made some sense. Asked by Stewart, "In what world is a 35:1 leveraged position sane?", Cramer replies, "The world that made you 30% year after year after year beginning from 1999 to 2007."
Again, that doesn't excuse the irresponsibility of cheerleading a bull market that you know perfectly well is a bubble, nor does it excuse the inside baseball that is CNBC's stock in trade (so to speak), but it is true that, dumb as it was, the crazy leverage rates that led to the collapse took a long time to break the system, and in the meanwhile, they made a lot of people a lot of money, and not just Wall Street insiders.
Nobody on Wall Street, financiers, bankers, regulators, journalists, or rank & file investors, covered himself in glory during this debacle, and Stewart's basically right that CNBC has a duty as a news organization not to engage in irrensponsible boosterism, but it's also true that there was a healthy dose of self-delusion in this reporting, along with a dose of playing the rubes for fools.