Tag Archives: bailout

On Wall Street and Self-Regulation

Matt Taibbi has a new piece in Rolling Stone, using Senator Levin’s report on the financial meltdown to show that Goldman Sachs broke the law repeatedly. You have to take Taibbi with a grain of salt, especially when it comes to Goldman (here is the NY Times on the same report), but here is a stunning fact pattern on how prosecutions of financial crimes have gone steeply downhill in the past 20 years:

William Black was senior deputy chief counsel at the Office of Thrift Supervision in 1991 and 1992…. Black describes the regulatory MO back then. “Every year,” he says, “you had thousands of criminal referrals, maybe 500 enforcement actions, 150 civil suits and hundreds of convictions.”

But beginning in the mid-Nineties, when former Goldman co-chairman Bob Rubin served as Bill Clinton’s senior economic-policy adviser, the government began moving toward a regulatory system that relied almost exclusively on voluntary compliance by the banks. Old-school criminal referrals disappeared down the chute of history along with floppy disks and scripted television entertainment. In 1995, according to an independent study, banking regulators filed 1,837 referrals. During the height of the financial crisis, between 2007 and 2010, they averaged just 72 a year.


How Free Markets Should Work

If you really believe in the free market, you don’t think governments should bail out private entities. The whole essence of free marketeerism is the belief that markets will most efficiently allocate resources. Econ 101, and all that.

So why are so many “conservatives” defending too big to fail banks and pushing for Iceland to pay off investors in its private banks? Check out my friends at Baseline Scenario here and here for more investigation and analysis.


See yesterday’s post, and repeat. Names change, facts remain the same.

Deficit Reduction: Suck it up, People!

The bipartisan deficit panel has come out with its first set of recommendations, and everyone is hopping mad. Lefties say the cuts in spending are unacceptable, and conservatives are adamant that tax revenues never go up again. Good! I have no opinion about the specific recommendations made by the panel chairmen, but I know that if both sides are pissed off then the panel must be doing something right.

Listen people…this deficit is serious business. It will bite us in the ass if we don’t fix it, and fixing it is going to require some pain on everyone’s part. We’ve been living for too long with this fantasy that government could increase spending while cutting taxes. Now the party is over, and the hung over cleanup has to begin. Headaches? Nausea? Yes, exactly.

So liberals, accept the fact that spending will be cut, and not just military spending. I hate it too, but Social Security has to be on the table. Increasing the retirement age by two years over the next 65 years? That’s really not so bad. Tying other benefits to inflation? Also not unreasonable. We need a safety net, of course, but we need to be smart about it.

And conservatives, you too are in for some pain. Face facts: spending cuts alone won’t balance the budget. We need to increase taxes. You like to claim that any tax increase will kill the economy, but the facts don’t bear that out. This chart shows that in Germany tax revenues are 40% of GDP, far more than America’s 28%. And yet Germany’s economy is doing fine, kicking our ass in exports, despite having to absorb East Germany. This chart shows that marginal tax rates for individuals are lower than ever. In fact, during America’s economic heyday, in the 50s and 60s, top marginal rates were in the 70%-90% range, far higher than today’s 35%, and yet there was still plenty of investment, of people working hard, of entrepreneurs starting businesses. All the arguments the right uses against raising taxes are belied by that glorious period of American business. Speaking of that great Happy Days era, the chart below shows that the share of taxes paid by the wealthiest citizens back then was significantly higher than it is now. Again, showing that higher taxes do not necessarily stifle economic growth.

There will be plenty of unpleasantness to go around; Democrats and Republicans will each get their share. Our legislators need to get off their high horses, stay away from the cameras and microphones and acknowledge that their pet causes are secondary to the national cause. But as either Mark Shields or David Brooks (I still can’t tell their voices apart on radio) said on the PBS NewsHour, our politicians won’t make this happen until the public forces them to. Our culture needs to accept the need for hard choices, and then push our politicians to make them.

Goldman Sachs Helps Bankrupt Greece

Here is economist Simon Johnson’s take on the news that Goldman Sachs helped Greece hide the overwhelming debt that is currently forcing the European Union to bail out the birthplace of democracy.

Financial Regulation Does Not Hinder Growth

David Wessel of the Wall Street Journal wrote a column today in which he proposes that the US has to choose between economic stability and economic growth. I am usually on board with Wessel, who does not follow the Journal’s usual slash and burn libertarianism, but in this case I think he’s wrong. His dichotomy is false.

The regulation that Wessel is discussing is financial regulation to curb the boom and bust cycle that we have just lived through. He asks whether “wise government rule to prevent market excesses” would also prevent the dynamic innovation that fuels economic growth. I answer emphatically NO.

As I noted yesterday, financial innovation is unrelated to business innovation. In yesterday’s post, I pointed out that the companies driving recent growth – the Googles of the world – have not depending on the innovations coming out of Wall Street. But today I will go even further. Between World War II and the S&L crisis, we had a long period of mostly financial stability, without the crises we’ve seen since then, and with a regulatory regime that had general consensus on Wall Street and in Washington. That long period of stability didn’t hinder economic growth; in fact, as the graph below shows it was one of the greatest growth periods in our nation.  Notice how much higher the growth is (the red lines) before the S&L crisis in the mid-1980’s.

Growth in GDP

Growth in GDP after WWII

I would argue that not only did financial stability and economic growth coexist during this period, but that the stability was actually helping the growth. After all, it’s a lot easier for companies to plan and budget if the financial markets are not booming and busting. And potential entrepreneurs are more likely to take the leap and start a new business if they aren’t worried about their retirement savings disappearing in a Wall Street flame-out.

So let’s not worry about financial regulation slowing down growth. Let’s focus on smart regulation that will spur growth.

Reason & Financial Regulation

National Affairs recently ran an article on financial markets and regulation that was the most clear-headed, non-ideological commentary I have seen. The author, Nicole Gelinas, makes five main points:

  1. Capital markets are important because they allocate a key resource (money!) among various projects and sources
  2. A free market of buyers and sellers, or lenders and borrowers, is the most efficient form of capital market
  3. Some regulation is essential to the smooth working of a free market
  4. This includes regulation of leverage, speculation and complicated instruments
  5. Explicit or implicit government guarantees (eg. too big to fail) distort the free market

But read the article yourself. It’s not long, and it’s awesome.

The Benefits of Financial Regulation

Harvard Magazine recently published an article regarding bank regulation. Like many articles (in fact, like the vast majority of articles I’ve seen), it makes the case that the current situation virtually guarantees another financial meltdown, since all major financial institutions now have implicit government backing, under the “too big to fail (TBTF)” doctrine. However, this article is a little different than many because it’s written not by a journalist, but by David Moss, a professor at Harvard Business School, which is, of course, the main source of the overconfident financiers who created the recent meltdown.

Professor Moss suggests a number of solutions to the TBTF problem and the moral hazard it creates. Most of these suggestions revolve around making the implicit guarantee an explicit one, with transparent limits and with the government charging for the guarantee. He would also add a tight regulatory regime.

The most interesting thing about Moss’ article was the graph I’ve inserted below. This graph has the date on the X axis, from 1864 to 2000. The Y axis shows the number of bank failures during each year. As you can see, bank failures were a regular occurrence in the American economy until 1932, when in the wake of the Great Depression a whole series of regulations were implemented, including Glass-Steagall. Then there is a long, calm period with very few bank failures, running up to the early 1980’s, when bank deregulation began under the Reagan administration. This graph speaks volumes.

Bank Failures Over Time

Bank Failures Over Time

Bank CEOs and Republicans are arguing strenuously against new bank regulations. CEOs have a good reason: they want to make as much money as possible. But Republicans are fighting regulation simply because they have an ideology that regulation is inherently bad. I think the last two years have proven this ideology wrong, but even if you don’t buy that, it’s hard to argue with the chart. So the question for Republicans is whether they are going to look at 136 years of data, or listen to the anti-government ramblings of people like former exterminator and creepy dancer Tom Delay, or fact-hindered quasi-philosopher Ayn Rand?

Slate on $100 Million Bonuses

Slate business writer Daniel Gross has another take on Andrew Hall’s bonus, about which I wrote last week. Gross notes that hedge funds primarily exist to make traders rich, and do little for non-employee shareholders. So he questions why Citigroup shareholders would want to retain Hall and his Phibro operation.

Congress Flies in Private Jets

Please read this Wall Street Journal article about how Congress has appropriated $550 million to buy some new private jets. And not even simple jets,  but the highest end of private: Boeing 737 business jets and Gulfstream Vs. This was an appropriation beyond what the Defense Department asked for. And this is the same Congress that lambasted (rightly) banks and car companies for flying private. This is the hypocrisy that makes citizens hate Congress. Let’s hope that during the August recess our representatives get a full dose of voter anger during town halls and constituent meetings.