Notwithstanding another admirable Presidential speech, the gambling in the banking system is at least as dangerous today as it was a year ago.
“Lost in America” is not quite my favorite Albert Brooks movie but it does feature my favorite scene from an Albert Brooks movie. It’s the one in which Brooks, playing a young and recently successful advertising man, tries to persuade a Las Vegas casino owner to return the $150,000 “nest-egg” that his compulsive wife, played by Julie Hagerty, gambled away the night before.
Brooks, in full-court-press sales mode, draws his hand through the air to shape an imaginary billboard and asks the hardened but bemused pit boss to imagine the sign: “the Desert Inn, Casino with a Heart.”
My mind flashed to this hilarious scene this morning as I absorbed the President’s speech marking the anniversary of one of the scariest days in the history of the U.S. economy, what the BBC calls the great financial earthquake of 2008.
As an emblematic signal about who really runs America, nothing (not even the bizarre and ugly
obstructionism to health insurance reform) compares to the lack of reform, prosecution and restitution for last year’s market collapse. Given how deep and widespread the damage of the implosion was, it seems inconceivable that we would not even be discussing the commensurate structural and regulatory reforms necessary to ensure this never happens again.
That we didn’t pursue the accountability and the reforms we need can best be explained by the fact that American politics is now well-rigged to benefit the titans, not the citizens. Moreover, judging by the battle lines drawn in this week’s oral arguments before the U.S. Supreme Court in Citizens United v. Federal Election Commission, it’s all the more likely that, by this time next year, the hold of the Lords of the Financial Universe on the political process will be even more suffocating for the rest of us.
Notwithstanding the soaring rhetoric of the President’s speech, we seem only to be going through a dainty negotiation with the nation’s wealthiest banks to determine the size of the two or three croutons they’ll ultimately be asked to forego as they make their way back to the buffet line for seconds.
Even Obama supporters are pointing this out.
“I wish I could be optimistic,” writes former Clinton Administration Labor Secretary Robert Reich, in a posting this morning entitled The Continuing Disaster on Wall Street, One Year Later. His [Obama's] milktoast list of proposed reforms is inadequate to the task, even if adopted.”
It’s stunning to think about. Even as the country is still badly damaged by the recklessness of our high-rolling bankers, Wall Street today is as unsentimental and unrepentant (e.g. former Treasury Secretary and Citibank director Robert Rubin) as the Desert Inn Casino boss that Gary Marshall played in Brooks’s movie. It’s as though nothing much really happened here, and now that the economy seems to be crawling to its feet it’s “geez fellas, don’t we have other things to talk about?”
Should we be surprised that the casino lacks a conscience as well as a heart?
If more proof is needed on this front, go read Jenny Anderson’s September 6th story in the New York Times where she reports that while last year’s “debacle gave financial wizardry a bad name generally..bankers are [now] scurrying to concoct new products” like the ingenious credit default swaps that would have sunk AIG were it not for the billions of dollars from the U.S. Treasury.
The main example used in Anderson’s story is one that you might think was concocted by comedy writers. It’s a new type of contract called a “life settlement” executed with the holder of a standard life insurance policy. Once executed, the deal with the policy holder is bundled with hundreds or thousands of other such settlements and converted to a security that can be sold as a bond.
“The earlier the policyholder dies,” Anderson reports, “the bigger the return–though if people live longer than expected, investors could get poor returns or even lose money.”
Gee, you wonder how those investors, banking on people to die younger, will feel about, say, health care for seniors? And here the crazy tea bagger crowd (which, I gather, will oppose government regulation of this practice) thinks Obama’s out to kill grandma.
Sorry, I digress.
But here’s the reason for the rest of us to not just care, but to be very alarmed. Reich summarized it in his post. It’s great that Ben Bernanke and the Fed, and the Treasury, were able to shove enough money into the banks and AIG to prevent an outright collapse of the system. The problem is that we haven’t adjusted the signal we’re still sending to these grossly overcompensated money changers. As Reich notes, the primary lesson that this intervention gave to those who perpetrated the disaster is ‘we will bail you out’ if you make bad bets–a message that only encourages the very sort of behavior that caused the near-collapse in the first place. And this is why Reich believes the Wall Street crisis is continuing, only with “bigger bets and bigger bucks.” Nobel laureate economists Paul Krugman and Joseph Stiglitz continue to offer similar critiques, including this one from Krugman who criticizes Obama’s recently expressed reluctance to crack down on bankers who profit from destructive practices.
A lengthier and very compelling explanation in support of Reich’s diagnosis is provided by Peter Boone and Simon Johnson in The New Republic. In a new article entitled, The Next Financial Crisis, they warn:
“Over the past century, we have moved away from a system where bank shareholders and senior executives paid dearly for bad management–and toward a system where fired bank bosses make off with fortunes or launch brilliant political careers. No one is on the financial hook, other than the taxpayer…Enabled by the Fed, our system’s tolerance for risk is out of control. This is an increasingly dangerous system. It is only a matter of time until it collapses again.”
Johnson said today he notes a disconnect between Obama’s speech and the mildness of the reforms that Treasury Secretary Tim Geithner, and Congress, are willing to consider. And, like Reich, he repeated his message that Obama’s half steps are not fundamentally changing the basic signal that government is sending to Wall Street, which is that you’re free to take new risks because, as we’ve just shown, we’ll be there to back you up with tax dollars if you fail.
As I opined last September on this subject, what we clearly witnessed with the massive federal intervention in the markets last year was an end to any reasonable argument that capitalism works as a self-regulating system.
This is true even while the American ego (on full display at the 9/12 gathering in Washington, D.C. this past weekend) still wants to drown the government (other than the military, of course) in Grover Norquist’s proverbial bathtub. America’s angriest taxpayers are lost in a fog. They air their misplaced fury at a new administration that had no choice but to try to deal with the utter disaster caused by the wave of deregulation launched by Ronald Reagan and continuing under Clinton and both the Bushes. Among other problems, there’s an astounding level of ignorance about what kinds of behavior caused last year’s crisis and how the Fed and Treasury responded. (I’d wager that not one in twenty voters understands what happened with the bailout of AIG, and how that bailout delivered nearly $13 billion in taxpayer dollars to Goldman Sachs to cover for the bank’s absurd lack of banking acumen.)
As a consequence, the Obama Presidency resembles nothing so much as an overwhelmed team of paramedics being taunted by onlookers as “socialists” whenever they catch a falling banker in their rescue nets.
The rescues went as well as anyone could have hoped. In a crisis, we essentially decided that the bankers, however large their mistakes, were too big to fail. But it’s the bold but necessary reforms that are missing so far and, as Frank Rich noted Sunday, Obama seems to have wasted his best opportunity, this summer, to formulate and push the strong steps that this historic debacle really demanded.
Finally, amidst all the sirens and unfathomably loud and nutty criticism from the right, an important social justice issue is being all but completely overlooked. There’s no question that the rescue of Wall Street has largely benefited the richest at the long-term expense of the American taxpayer. Not that this is a new development, but it is coming into much sharper focus as the wealthiest Americans, largely through corporations and corporate lobbyists, effectively exert their political influence to protect those interests. It’s undeniable that these interests now include using taxpayers as a financial backstop to protect fortunes and the very instruments of fortune-building.
The high-flying bankers and the hyper-wealthy have done a terrific job of enlisting us taxpayers to shield them from the consequences of their mistakes. Of course, the bankers’ argument is that by not allowing them to fail, we actually protected ourselves. Well, isn’t that an endearing explanation for taking us all hostage to their diamond-studded American dreams? Perhaps they can persuade the Treasury to send us all little merit badges for this.
But in the process of this less than subtle exercise in economic blackmail, I think we’re coming ever closer to withdrawing the basic compact between rich and poor in America. This is the general notion that a middle class can contentedly thrive in the fields outside the castles of the wealthiest. For the most part, Americans don’t begrudge rich folks their private jets so long as we see our shiny new trucks as the product of the same equation. Food’s still cheap for most of us, and the phones still work, as does the microwave ovens and color t.v. sets. Gee, what’s to be bitter about? Pass the chips and pour me a cold one.
But those days may be numbered if they haven’t already passed. Capitalism has always had a rocky marriage with economic justice, but the evolving strain of American capitalism may be reaching a point where all but the most devotedly ignorant will begin to notice that we’re lost in a different country than the one we thought we’d inherited. And that we’re being played time and again for fools.
–Tim Connor
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