RSS Feed MenuEach week that passes seems to reveal new details of Wall Street’s ineptitude, even criminal malfeasance in the lead up to the near collapse of the financial markets in 2008. I say “seems” because in reality the news is not that revealing at all. Only the names have been changed. The news that Lehman Brothers had utilized a nominally independent bank, Hudson Castle, to hide its exposure or that Goldman Sachs derivatives trading was highly irregular is hardly a revelation at all – we’ve known about ‘off the books vehicles’ and the problems caused by derivatives for almost two years. Yet the news of a pending SEC investigation of Goldman Sachs, and the Angelides Commissions’ findings about Lehman, have both sent news organizations, talk radio commentators and political pundits about eagerly rehashing the details of the collapse of Wall Street.
Mainstream analyses of complex issues tend to rapidly devolve into morality plays, and the financial meltdown certainly lends itself to a jeremiad about immorality, greed, and corruption. Certainly political leaders are not averse to amassing bad press on Wall Street at a time when Democrats seek financial regulation and Republicans want to capitalize on populist sentiment against both Washington and Wall Street. But I suggest a more complicated explanation, one rooted in human psychology.
Ultimately, the collapse of the economy is rooted in excess debt. That debt was generated by the conflict between rising middle-class expectations and stagnating middle-class incomes.
Personal debt skyrocketed and savings rates declined as more and more Americans began to count on potentially volatile holdings like home values and stock portfolios as income and savings. Elizabeth Warren, formerly of Harvard University and now tracking TARP spending for the White House, found that middle-class spending on clothing and consumer durables declined since 1975. Debt was financing such items as rising tuition expenses.
So long as the economy continued to purr, the underlying structural weaknesses of a debt-driven expansion in consumption could be papered over. But when a crisis in the mortgage market suddenly led to a massive revaluing of all mortgage-backed securities, the entire credit market seized up. Layoffs commenced, and the loss of jobs transformed serviceable loans into bad debt.
We already know about the causes of the initial crisis: overleveraging, off-the-books vehicles, under-regulation in the derivative market, etc. But not enough is being said about the preconditions that turned the crisis into a nationwide calamity. If income stagnation and debt were the true underlying causes of the crisis, then they must be addressed in order to put the economy on sound footing. But how? Several proposals, probably a measure of each, illustrate one way forward:
Liberals and progressives suggest radical restructuring to make work pay better. The Employee Free Choice Act (“Card Check”) and the “Living Wage” would enable working families to avoid amassing huge debts or potentially risky investments by paying for things with wages, just like the good old days, and maybe even putting some away. But this could produce rigidity, stagnation, even inflation.
Others have pointed to aggressive job creation through investment, tax incentives and retraining. Programs like “Green Jobs” and investments in high tech are designed to make America a leading “new economy” job creator. But there is no guarantee of success and we may not see the results for decades.
Tax cuts, the favored conservative route, may guarantee more hiring. But the ultimate issue from the 1990s was not a lack of jobs, but a lack of upward mobility and income. Tax cuts, particularly on the payroll tax, will increase take home pay, but they would have to be extremely, extremely deep in order to appreciably make up for decades of wage stagnation.
Any of these proposals would face significant opposition and some are frankly politically untenable. Against liberals, the American public has no faith in Washington, and abhor tax increases and raising the minimum wage. Against conservatives, Americans have little affection for business and tax cuts. Lawmakers are caught between a rock and a hard place and face difficult choices in the next months and years if they are to put our economy on a sound and sustainable basis.
So perhaps that explains our obsession with repeating the gory details of the financial meltdown: not even a desire to get to the bottom of what caused the crisis itself, but more a desire to angrily relive the trauma and more basically, and more importantly to mechanically repeat what we all know and not face the difficult decisions we have to take. A national repetition compulsion.
Oskar // Apr 22, 2010 at 2:44 pm
Nationalize finance and heavy industry!
Rob_654 // Apr 22, 2010 at 2:50 pm
Will the Far Right never stop blaming little joe and little jane America for every disaster that befalls the country?
We had your tax cuts during the Bush Administration – we had De-regulation under the Bush Administration – we had Regulators back off companies during the Bush Administration – we had all sorts of Far Right practices – and where did it get us?
rbottoms // Apr 22, 2010 at 3:00 pm
Heavans let’s rehash to destruction of ions of jobs or the spectacle of entire lifetimes of savings wiped out for a few thousand whining pinkos.
What’s to be gained by reining in the bastards now. Goldmand Lehman were doing God’s work afterall.
So you have to retire at eighty, at least you aren’t living in some Gulag, at least not until Obama finishes destroying democracy yet.
Stop yer complaining.
Carney // Apr 22, 2010 at 3:06 pm
How about ending the practice of hounding and forcing lenders to handout loans to the unqualified with the threat of being persecuted as “redliners” if they refuse? The spectacle of government forcing lenders to make high-risk loans without being allowed to charge the high interest rates needed to compensate for the predictably high default rates, in effect forcing banks to take on toxic bad debt as a cost of doing business, then turning around and castigating those same banks for “recklessness” for doing what they were forced to do, is all the more disgusting because the media won’t call them out on it. Government creates the problem with its interference, then presents MORE interference as the solution. And the media plays along.
forgetn // Apr 22, 2010 at 3:07 pm
At the very least Wall Street is guilty of ethical failures. Nobody can deny that Wall Street was starring at bankruptcy had the TARP (yes I agree a horrible horrible solution) not been enacted. Those who preach “let the domino fall where they may” just don’t understand the risk to the “real” economy.
Yes, there is a real need for Perp walks by some of Wall Street star players. Why the SEC is moving so slowly is beyond comprehension, but seriously Wall Street has so far gotten off very lightly. They have suffer no consequences to their egregious actions.
GS is a perfect example, one thing that the SEC action demonstrates is that it treated Paulson as a preferred client and treated IKB as a trading counterpart. The very least as the FT pointed out was that GS was “economical with the truth”
TerryF98 // Apr 22, 2010 at 3:11 pm
Wow, another Wall-street apologist comes here to distort and lie about the causes of the crash.
Nothing about derivatives boosted in value up to 40 times their worth. Nothing about betting against your own position and not telling your investors, nothing about the rating agencies who were complicit in this loaded casino of an industry.
Far past time to get this fiasco of an industry in line. They nearly brought the country to bankruptcy, and now the taxpayer who bailed these bastards out get the blame. You must be F***ing joking mate.
Rabiner // Apr 22, 2010 at 3:25 pm
If you don’t think Redlining was a problem that had to be regulated you must of been white and affluent.
Carney // Apr 22, 2010 at 3:35 pm
Rabiner, or maybe you just have open eyes. What’s the premise behind all these bureacrats, prosecutors, and pressure groups? That a bank, especially a publicly traded one under intense pressure to maximize profits, is going to deliberately refuse to do business with well-qualified potential customers, out of racial animus? That low-risk, high-income, high-collateral, job-stable applicants with no law enforcement history — in other words profits — will be turned away? That regulators need to force banks to do what is in their own financial interest?
No? Oh, so banks should be forced, for reasons of racial politics, to lend money at a loss to high risk, low income, low collateral, chronically unemployed, people in constant trouble with the law? Then let’s be explicit about this, that this is a handout or shakedown, not a business investment.
But the mythology that well-qualified applicants are being turned away continues.
sparty // Apr 22, 2010 at 3:45 pm
Carney:
“How about ending the practice of hounding and forcing lenders to handout loans to the unqualified with the threat of being persecuted as “redliners” if they refuse?”
I’ve heard this claim many times in the last several years. Can you provide any evidence/links that banks were (systematically) “hounded and forced” to lend to unqualified buyers? How much of an impact did these loans have on the meltdown as a whole? How much blame should the banks take on, in your mind? Little? None? Some? Majority?
The problem I see with your line of thought (ie: it’s poor (minorities) people’s fault we’re in this mess) is that you/conservatives may have a point, but not a “great, 100% of the problem” point, but rather a “10% of the problem” point. You then take this little 10% nugget of truth and hysterically expand it to “poor people caused the meltdown – the poor banks were helpless!” That not only makes you look Beckish/crazy – it also diminishes your 10% point in the eyes of reasonable people.
Diomedes // Apr 22, 2010 at 3:53 pm
And why should we back off from our scrutiny of Wall Street?
Why is that finance is the one industry that somehow feels it is immune from recriminations? Any other profession, whether it be medicine, engineering, education, et cetera, must always justify its actions and face routine witch hunts to track down issues that may or may not have occurred. When a plane crashes, do engineers cry up in unison that they are being ‘bashed’ by individuals who were attempting to find out the technical fault that caused the calamity? Of course not.
Yet for some reason, when it comes to world of finance, the amount of hubris and denial that I see is on levels that would make a communist regime envious.
This recent debacle in our economy had multiple sources. And sorry to rain on the Wall Street pundits and apologists, but you DID play a role in this mess. So stop the infantile moping and sulking and own up to your hand in this.
ceartas // Apr 22, 2010 at 3:55 pm
@Oskar “Nationalize finance and heavy industry!”
Wow! An actual socialist! That makes you, Bernie Sanders and my Mom, who’s dead.
@Mr. Brackett
Aren’t you just adorable? We should all STFU while the money party rages on in the nation’s largest unregulated casino, where people who make NOTHING earn millions in bonuses.
I took early retirement back when things were looking good, and have little hope of re-entering the workforce at age 60, while my wife, at 55, has little hope of retiring, until they force her out. Our individual retirement accounts have been hammered, and we’re $50,000 upside down on our mortgage.
Meanwhile, Lloyd Blankfein wraps himself and his firm in the flag a claims to be doing “God’s work”, acting as if Goldman-Sachs were NASCAR, the corporate embodiment of all things both pious and patriotic. I’d be laughing if I wasn’t so pissed.
It isn’t going to fly. Reform is coming, the chinks in the armor are already getting bigger. Reform is coming, and has been since Bob Corker bucked the GOP line and refused to trash legislation that he helped write. Reform is coming because too many Republican Senators realize this is a political no-brainer, except for Scott (tell me my opinion again?) Brown, recently revealed to have near-Palinesque intellectual skills.
So lie, and bash the little guy all you want, pal. This train has already left the station.
LauraNo // Apr 22, 2010 at 3:55 pm
No one ever forced a bank to make bad loans. They did encourage them to make lower-profits on some loans. Which of course is nowhere near the same thing. But at the height of the recent insanity, one scurrilous lender after another was calling and mailing homeowners non-stop while also advertising home equity loans at ridiculously low rates that then magically escalated a few years later. We were there, we watched it happen and you can’t rewrite history now. Deregulation encouraged all of this. Not a moral to be had in this country, therefore everything has to be monitored like it or not.
Rabiner // Apr 22, 2010 at 3:58 pm
Carney:
Redlining was the institutional practice of denying giving loans to customers simply due to where they lived. Just so happened Redlining only occurred in minority low income communities (is anyone surprised?). The CRA only dictated that for every dollar a bank takes from a community it needs to give out loans by a certain % into that community so that it is not void of investment. This can mean business loans and mortgages. If you think banks should be able to take deposits from communities and then institutionally not give loans to those communities at all then there is no reason for these communities to even have banks.
Oskar // Apr 22, 2010 at 5:20 pm
ceartas, mom knows best.
Mercer // Apr 22, 2010 at 7:52 pm
The Goldman case illustrates how Wall Street hurts the rest of the economy and screws the taxpayer. GS created “synthetic” mortgage bonds. Synthetic meaning no money went to help homeowners just an instrument to allow two parties to bet on the mortgage bond market. The losing parties were financial institutions that were bailed out by taxpayers. Why should taxpayers have to pay people who gamble on the bond market?
Businesses complain that they have trouble getting Americans who have a math or science education. Thousands of people with math and related backgrounds work in Wall Street creating “synthetic” products for people to gamble in the financial markets. How is it good for the economy to have all these people creating gambling products instead working on products that benefit the economy like electric cars, computers, solar and nuclear energy?
Rob_654 // Apr 22, 2010 at 8:14 pm
Anyone who believes letting the businesses do what they want is in the best interest of the country and taxpayers clearly does not know how companies operate.
Companies, particularly publicly traded companies measure their performance EVERY 3 MONTHS – those “quarterly earnings” that you always hear about.
Executives are usually older – their compensation is tied to stock performance and “quarterly” and “yearly” results – they are not tied to how the company will do 10 years from now – in fact plenty of those executives won’t even be with the company 10 years from now – so unless they have some “moral higher calling” they don’t necessarily care how the company will do 10 years from now if they can cash out big over a few years.
Even for those who do care – the vast majority are not in it for 10 years out – they are in it to make money within a shorter period of time.
We saw this scenario in the financial industry – these clowns (at best) – ran their companies in many cases to simply maximize short term gains – and who the hell cared what happened long term.
Mortgage loans were being made – not out of “fear” but were being made to anyone who was at room temperature simply to make money and churn the product for all of the hands in the pipeline.
Now – there is nothing really “wrong” with that – after all – business is not about morality – BUT – realize that this is what they are doing – and then if it all falls apart – the taxpayers have a choice – let these companies go under (with the massive job losses, and huge repercussions of inter-related companies being brought down) – or bail them out.
Unfortunately – without Regulation – the casino will be back open and of course we will bail them out again next time.
After all if we do not bail them out – the Tea Party folks will out DEMANDING that the government do something when the economy really goes under when these institutions that truly are too big to fail are allowed to run their legalized gambling operation.
kevin47 // Apr 22, 2010 at 9:50 pm
“If you don’t think Redlining was a problem that had to be regulated you must of been white and affluent.”
Well, we regulated it. We know how that went.
And yeah, the harping on Wall St. is transparently opportunistic. The White House didn’t do a damn thing to prosecute those who flaunted existing laws, or rescue those who had been hoodwinked. This is about finding the biggest fish to fry, and frying it.
“Executives are usually older – their compensation is tied to stock performance and “quarterly” and “yearly” results – they are not tied to how the company will do 10 years from now”
But they are measured by how their previous companies performed.
“We saw this scenario in the financial industry – these clowns (at best) – ran their companies in many cases to simply maximize short term gains – and who the hell cared what happened long term.”
Can you explain how the legislation on the table addresses this?
“the taxpayers have a choice – let these companies go under (with the massive job losses, and huge repercussions of inter-related companies being brought down) – or bail them out.”
Completely fine with eliminating bailouts. What do you make of the fact that smaller banks dislike this legislation, while bigger ones like it?
COProgressive // Apr 23, 2010 at 12:31 am
Bracket wrote;
“We already know about the causes of the initial crisis: overleveraging, off-the-books vehicles, under-regulation in the derivative market, etc. But not enough is being said about the preconditions that turned the crisis into a nationwide calamity. If income stagnation and debt were the true underlying causes of the crisis, then they must be addressed in order to put the economy on sound footing. But how?”
But how indeed? One way to start is with killing the false notion that “Greed is Good!” espoused by the fictional character Gorden Gekko of “Wall Street” fame and adopted by everyone in the financial industry it seems. Businesses and their leaders must balance their self agrandizing need for market share and compensation with some seemingly unheard of “Corporate Responsibility”. There need to be a balance.
On the other side of the problem, Americans have been “sold” to with neverending pitches for new cars, RX drugs, to reach for the American dream with a “Solid Investment” in your own home and on and on. Get it NOW!
The problem with that is the American consumer HAS overshot the mark a bit by buying into the complusive consumerism that is everywhere around us. In the 90’s, as home prices soared and the 401k constently increased in value, it was hard not to feel prosperious. It problem was when we started using our homes as ATM’s with Re-Fi’s to pull some of the equity out for a new deck in the back, or the fishing boat you’ve always wanted.
There is blame on both sides of the equations. But those I hold in the least blame are those who were reaching for the “American Dream”, hoping to be able to get their foot on the first rung of that ladder to success and building a future for their families.
That said, let me switch focus to the Wall Street financial markets where the majority of the blame, I feel, lies. The deriviates market is huge! Estimated to be $300 to $400 TRILLION! That’s nearly 20 times the GDP of OUR country. That’s $400 TRILLION in paper. It builds nothing. It produces nothing. Nothing except “Big Winners” and “Big Losers” as we’ve seen in the last 18 months.
I posted this yesterday on Politico and haven’t receive and answer. Maybe someone here that believes we are picking on the financial markets when EVERYONE knows it was those in our society looking to get a foot up to the “American Dream” that brough down the MIGHTY Wall Street.
TeamPOLITICO: Apr. 21, 2010 – 4:41 AM EST
“Having this totally unregulated, unrecorded, hundreds-of-trillions-of-dollars derivative market created systemic risk,” Conrad said in an interview.
He’s especially concerned with the over-the-counter derivatives market, which he said “began in 1981 and remain to this day largely unregulated.” This is significant because these commodities have “balloon[ed] to approximately $300 trillion in notional value in the United States – that’s nearly 20 times the size of the American economy.”
Okay, answer this, “What part of ” totally unregulated, unrecorded, hundreds-of-trillions-of-dollars derivative market” and “$300 trillion in notional value in the United States – that’s nearly 20 times the size of the American economy.” makes sense to you?”
“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.” – John Maynard Keynes
sdspringy // Apr 23, 2010 at 8:25 am
Although CRA, Community Reinvestment Act, Fannie and Freddie played a role. The American mentality of get rich quick and media hype played a part.
The ability to aquire “No Interest”, Subpime, and various other vehicles by such companies as CountryWide, a very large contributer to Chris Dodd/Obama were certainly to blame as well.
Now after all we have learned, who is writing the new Bank Reform (BR), Dodd. Can we please all say “Stop the Madness”.
Also the new BR will not prevent another housing bubble, there will be no separation of function so there will be more “too big to fail” banks.
We get another government agency, which will not only monitor Wall St. but will also monitor our, yours and mine bank accounts.
I understand the need for better monitoring of financial vehicles used by GoldmanSachs, however there are even more GS employees in this administration than the last. And as we have all read GS, CEO has been meeting privately with Obama during the run up to the new legislation.
Anyone seriously believe that the current reform will affect GS?
DFL // Apr 23, 2010 at 11:13 am
As a conservative, I have no use for Wall Street. Wall Street destroys communities in search for the almighty dollar. Wall Street ships jobs to foreign countries to the disadvantage of American workers. Wall Street manipulates the economy for its own material gain at the expense of the average American. Wall Street supports illegal immigration and the demographic revolution that the Left wants to put in place in America. Wall Street funds left-wing polticains from Charles Schumer to Barney Frank and Christopher Dodd. When the Wall Street casino blows up in Wall Street’s collective face as happened in 2008, Wall Street comes hat in hand to the government for money. So let us regulate, if not kill, Wall Street and force the Blankfeins and Paulsons to eat at The Cracker Barrel rather than at Mario Batali’s at $ 250 a pop and wine parings.
forkboy1965 // Apr 23, 2010 at 1:22 pm
While majorly left-of-center, I do find some credence to the suggestion that average American’s had a hand in the downfall of our economy via overspending/debt.
However, and this is a major however, why did average Americans do such? What would make an average American husband and wife decide to leverage their home into an ATM? Wall Street did.
Wall Street told everybody that there was no limit. The old ways of thinking about the economy were over. The economy was only going to go up, and up, and up, etc.
Wall Street lied. Hell, they even began to believe their own lies. And Wall Street, being the “experts”, were trusted by everyday-Americans and so we made our decisions thusly. And Wall Street reaped the rewards of our trusting them.
Now…. well…. now everyday-Americans are screwed while Wall Street says “Hey! Not our fault” and puts their collective hand out for help from the government. And fights regulation that might help reign in the more egregious insanity wrought upon our financial markets by men and women who, as others have stated, produce nothing, create nothing, except for very fat paychecks.