Why Did Wall Street Get Off the Hook?

February 11th, 2011 at 10:36 am David Frum | 17 Comments |

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Let’s face it: You won’t read every page of the Financial Crisis Inquiry Commission report. But FrumForum will, over the next days. So let’s proceed together, page by page, identifying the key points.

Click here to read the entire series.


When you think about the Crash of 1929, think about this. Suppose you were a prudent investor of the 1920s. Sometime about the summer of 1928, you recognized that valuations were going wild. You sold every holding, converted to cash, exited the market. Over the next 15 months, your friends mocked you for missing the best of the party. Then came October and you were vindicated. You watched as prices crashed and then crashed again. From a peak of 381.17 on September 3, 1929, the Dow Jones Industrial average tumbled to 198.60 on November 13.

So what would our prudent investor do? Return to the market of course. Stocks had lost half their value: time to buy!

And what would be the reward for his prudence? Over the ensuing three years, he would lose more than 75% of his wealth.

From the perspective of the next century, it’s difficult to appreciate the slow-motion juggernaut destructiveness of the Great Depression. Events from 1930, 1931, 1932 look crowded together at an 80 year distance. But at the time, people kept hoping that the worst was over, that the corner had been turned, that the next flight of stairs would lead upward, not down.

Yet we in our time have re-experienced this tendency of the human mind to believe the best even as things are tumbling toward the worst: We lived it during the first phase of the housing collapse in the spring and summer of 2007. From page 234 of the FCIC report:

Although government officials knew about the deterioration in the subprime markets, they misjudged the risks posed to the financial system. In January 2007, SEC officials noted that investment banks had credit exposure to struggling subprime lenders but argued that “none of these exposures are material.” The Treasury and Fed insisted throughout the spring and early summer that the damage would be limited. “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained,” Fed Chairman Ben Bernanke testified before the Joint Economic Committee of Congress on March 28. That same day, Treasury Secretary Henry Paulson told a House Appropriations subcommittee: “From the standpoint of the overall economy, my bottom line is we’re watching it closely but it appears to be contained.”

Smart guys all – and one and all, they failed to perceive that a crash in one part of the housing market would lead to the greatest destruction of wealth since World War II.

They did not understand the internal wiring that linked together all the elements of the credit boom of 2002-2007 into the financial equivalent of a weapon of mass destruction. Bad enough that the regulators did not understand it. More shocking: the people who built the bomb did not know what they had done either. Yet those people had earned salaries in the tens of millions – sometimes more – from actions that had created the risks they did not recognize.

The smartest guys in the room turned out to be the most ignorant.

By and large, the former smartest guys have not paid much of a price for their ignorance. None of those who contributed to the financial crisis has been prosecuted nobody has even been much disgraced. Unlike the collapse of 1929-33, the crisis of 2007-2009 did not cause many Americans to rethink old ideas.

And yet the authors of the disaster have reacted with furious defensiveness against the accusations that nobody brought against them. It’s strange. But it raises the question: if the financial sector feels so self-conscious that somebody could accuse them – how is it that nobody has accused them. Isn’t a consciousness of guilt a pretty good indicator of the existence of guilt?

More to come…

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17 Comments so far ↓

  • valkayec

    According to an article in the NY Times, former IMF and current MIT economist Simon Johnson states that the senior management did know what was going on, and what the risks were. They just didn’t care because they individually were making too much money.

    http://economix.blogs.nytimes.com/2011/02/10/ship-of-knaves/

  • balconesfault

    It’s pretty clear that the GOP is a wholly owned subsidiary of the financial sector … while the Democratic Party is at least majority owned by the financial sector. Thus, for example, while the GOP would hand Wall Street a massive bonanza and privatize Social Security tomorrow if they could, the Democratic Party will rather just support measures that set the gears for Social Security’s collapse in motion, the bonanza to be delivered at some future date.

  • Emanuelle

    “Why Did Wall Street Get Off the Hook?”

    Because hardly any politician on either side of the aisle wants to alienate such wealthy donors.

  • sublime33

    The financial services industry has pulled off one of the greatest public relations campaigns of all time. Their riverboat gambling/shell game/fraud nearly created a total collapse of the world economy and only government intervention prevented a total collapse. And who are the people mad at? The government! Yup – in a lot of peoples minds, Fannie Mae and Freddie Mac caused this because affirmative action forced them to make loans to poor (read: colored) people who couldn’t afford the loan or the home.

    Even a lot of George W. Bush supporters are mad that he bailed out the banks. To me, that is one of the few things that Bush essentially got right.

  • TerryF98

    Because the GOP blocked any re-regulation that was at all meaningful. The party of no succeeded in sheltering their donors from the Financial sector almost completely. Aided by some total tossers in the Democratic party (blue dogs).

  • balconesfault

    The ironic thing is that a few generations ago, you’d have seen populist Congressmen from the “flyover states” (or whatever they’d have been called then … whistlestop states?) leading the charge for hardcore investigations of Wall Streets role in the collapse of the economy and the hardships to the people of their states.

    Now? Those rural states have continuously elected representatives who are the biggest defenders of Wall Street and Corporate America.

  • Non-Contributor

    I don’t know why these guys got off but is anyone does please let me know.

    • valkayec

      Because you’d have to indict half or more of the entire financial industry and half of Congress for being complicit.

  • COProgressive

    David wrote;
    “It’s strange. But it raises the question: if the financial sector feels so self-conscious that somebody could accuse them – how is it that nobody has accused them.(?) Isn’t a consciousness of guilt a pretty good indicator of the existence of guilt?”

    First question, no one has accused them because the Justice department is under the control of the Excutive Branch and with so much wrong with the economy on 1/20/2009 this President wanted to get the same individuals who screwed things up to repair the economy and get it moving again. As a deal with the “perps” doing “public service” by restoring the economy any further legal actions were waved. This is the first mistake OUR President made, trusting the “perps”. They are crooks, and as Matt Taibbi said in his book “Griftopia”, “This story is the ultimate example of America’s biggest political problem. We no longer have the attention span to deal with any twenty-first-century crisis. We live in an economythat is immensely complex and we are completely at the mercy of a small group of people who understand it……….. We have to trust these people to do the right thing, but we can’t, because, well, they’re scum.

    The second question, yes. They know they’ve done wrong, in that very little part of their mind called “conscience”, but they work very hard to drown that voice out by throwing money at politicians who will tell them what great Americans they are and how they are the engines of the economy and without what they do America can’t survive.

    Politicians trade little white lies, and immunity, for hundreds of thousands of dollars. It seems to be working very well for everyone…………except for “We the People”.

    “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

  • Houndentenor

    *rolls eyes*

    David, are you ever going to ask real questions or are you just going to scratch the surface of this until you get bored and move on to a new topic?

    Wall Street execs got away with this because 1) they own Congress and 2) because of their contracts they get more money if they are fired than they would earn if they did their jobs well.

    I’m so sick of personal responsibility talk from the right. If you have ever worked for a CEO you know that there is no more entitled person in our society than the modern corporate executive.

  • unkownone

    It’s not so much that Wall St. didn’t pay a price. It’s that the federal government social safety net that was put in place after the great depression softened the fall for the average person. Unemployment insurance, medicare, medicaid and social security support a significant part of the population. These programs are defined benefits that continued to pay throughout the crisis and in the case of unemployment were extended. It’s the government doing its job. The unintended consequence is we are not as outraged at the financial community. If you want outrage then privatize social security and cut back medicare/medicaid and wait for the next crash…

  • jerry ebert

    well said, unknownone. I would just add that unemployed folks these days are still hyper-extended financially, and are too busy scrambling to pay the bills to attend any local anti-corporate-crooks rally, if such a rally were scheduled in their town. It may also be that folks have been so drawn into the tea party rhetoric, that they are distracted from the real cause of America’s recent problems. If that is true, then it may help explain why the corporate titans are shoveling money toward the radical right.

  • forkboy1965

    And I suppose this sick and twisted relationship between our elected officials and the might and power of Wall Street will only lessen now that unlimited amounts of money may flow from corporations into the election process?

    What?

    Oh.

  • armstp

    Nobody is going to prosecute the hand that feeds them.

    Bring back Eliot Spitzer. He was on his show the other night saying that you could make cases against these bankers.

  • Houndentenor

    @armstp

    Of course they could make a case against a great many bankers.

    But please don’t bring back Spitzer. A man stupid enough to bring a prostitute from NYC to DC, as if DC doesn’t have plenty of hookers, is too reckless to hold an office.

  • forkboy1965

    There’s no way to successfully charge, prosecute and convict these people. The juries empaneled simply wouldn’t have the intellectual capacity to understand what went on.

    After all, the experts (the bankers and those charged with watching over them) surely didn’t understand it. And what a jury doesn’t understand they don’t convict upon.