Larger Economic Problems
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What Doesn't Matter So Much
Earlier this week, the stimulus was passed with only 3 Republican votes. Is it good? Is it bad? Necessary? Wasteful? It's impossible to say because it's too big. To give meaningful answers, you'd have to really get in and decompose the whole thing.
At a high level, the stimulus is three things. First, and probably foremost, it's about confidence. It's about doing something and doing something big enough that people believe it's going to work. As far as confidence goes, if you believe it, it's there, if you don't, it's not.
Second, the stimulus is about responding to people's anger over the bailout. The banks get $700bn, and the real number is in the trillions, for doing a bad job and the average guy calls foul. You can't undo the bailout, so you try to balance the scales by giving more money away. As far as that goes, the Republicans and other's who supported the ill-conceived and poorly executed bailout under Bush have only themselves to blame for the stimulus.
Finally, the stimulus is a land grab as well. As far as that goes, it's about funding the projects that the Democrats wanted couldn't fund under Bush. It's about opportunity to do good and opportunism to grab some pork.
Confidence, evening the score, and opportunity--the stimulus was guaranteed to happen because of what went before. It's entirely predictable and would have happened no matter what. McCain--had he won--would have done a stimulus too, and it would have been pretty similar in presentation, and probably a lot of substance. The Democrats would have used it as their latest football, etc. It's so predictable and boring as to be tiresome.
What Really Matters
Culture
In November, Vikram Pandit, CEO of of Citigroup, appeared on Charlie Rose. At no point would the man take responsibility for anything. When Rose asked, As the CEO, isn't risk management your responsibility?, Dr. Pandit said, Risk management is my responsibility, but immediately followed up with the statement that Citigroup's failure was due to external forces outside his control. As if he was forced to leverage the company into creating bad debt and buying toxic assets. It was ridiculous.
At one point, Pandit was talking about how the company was going to become leaner and more focused. Rose asked, Then was it a mistake for your predecessor to bring all these non-banking services in house? Pandit immediately answered, No, he was a great man who did great things. I'm paraphrasing of course, but the double speak was no less clear.
The man's attitude was that the company had never made a mistake, he'd never done anything wrong, and there was nothing to learn from any of this. We are to trust that Pandit and his kind know best and whatever they do is what should be done. Success is due to their greatness and failure is always external. Mistakes never happen, and we're foolish to question any of it. Not only is this attitude disgusting, but it's frightening.
Even when apologetic, they still don't get it. In February 2009 Pandit appeared before Congress, saying he'd asked the board to cut his salary to $1 till the company made a profit and canceling the purchase of a private jet bought after receiving $45bn in bailout money. Reformed? Hardly. It's pretty easy to give up your $1 million salary when you got a $216 million signing bonus. It's an empty gesture. True contrition demands giving back the $216 million paid to you on the promise you'd do a good job. The man was simply preventing Congress from demanding he be fired.
But the culture of greed and egomania exhibited by Pandit and those like him is not really the big problem. Consider that neither his board, nor the Congress who bailed out his company have fired the man. Despite his manifest incompetence and complete inability and unwillingness to explain his utter failure except to blame it on confidence, we allow the man to keep his job. We allow these people contracts that give huge signing bonuses and tremendous exit packages with no ties what-so-ever to performance or merit.
Regulation
The problem is banks and investment firms aren't dealing with their own money, they're dealing with other people's money. They've shown they're not mature or smart enough to handle that responsibility, so regulation is what must happen. I understand why regulation is bad. I'm against regulation in theory, but in practice when you have people who are empirically incompetent wrecking the economy, we'd be stupid not to reign them in.
Banks and Securities
We need something like the Glass-Steagall. The law was passed after the Great Depression forbidding consumer banks to mix with the securities market. Why? Because the purpose of banks is not to make money, it's to provide ready credit to highly reliable individuals and businesses. Stability, not profits, is the measure of a successful consumer bank.
Glass-Steagall was repealed (primarily) because as the financial system became international, US banks complained they were at a disadvantage vis-a-vie the rest of the world which tended to allow it's banks to do risky things. Glass-Steagall was probably due for an overhaul, but the basic reasoning behind this argument is faulty because it ignores the benefits banks get by agreeing to confine their activities to low risk areas.
Essentially, banks are guaranteed by the government to make modest returns with almost no risk. That's the function of a bank, and people that want higher returns shouldn't be bankers. The problem was that investors bankers decided they wanted it all, so they hired a bunch of lobbyists to help them create a system where--they hoped--they would be able to make the same kind of profits as Wall Street, but still enjoy the same perks a bank gets from the government.
And it worked--sort of. It caused a meltdown, but the government did step in and bail out a bunch of greedy businessmen with taxpayer money. The investors that took over the banking system after the repeal of Glass-Steagall emknew/em a crisis might happen. Unless they were fools, they knew it would almost certainly happen. But they didn't care, because they knew they'd rigged the game so that all their loss would be nationalized. When it all fell apart, they simply held the credit system hostage until the government paid up (with our money). In the meantime, they got to keep all the money they made in the 20 years between repeal and meltdown.
The real credit problem we're currently experiencing--good businesses with good credit unable to get loans--is a direct result of the repeal of this law in 1987. There were good reasons for the repeal, but there were much better reasons (like a financial meltdown) for keeping it on the books. It did need to be updated, but the fundamental principal is sound. Use solid deposits for solid loans. Don't allow bank executives to mix in high risk investments for their own profit. It doesn't serve the bank, the customer, or society.
The single thing that frustrates me the most is seeing everyone form Vikram Pandit to John Mackref group=notesPandit's a bit of an ass, and Mack seems pretty decent. The point is this uncharted waters nonsense is widespread./ref endlessly repeat the phrase uncharted waters. Don't believe it. There are differences, sure, but we've seen this all before and we figured out the solution for it a long time ago. At the very least, we've understood the basic problems and solutions for about 90 years. These water's aren't only charted, but the charts are in every history and economics book ever written.
Derivatives
If you can't explain it, you shouldn't be able to invest other people's money in it. At least not without a lot of disclosure, and certainly never if you're a bank.
Notes
references group=notes /
