Wall Street's great escapers
By Hossein Askari and Noureddine Krichene
Consider this: Goldman Sachs, an investment banking firm recently bailed out by
US taxpayers, prepares to pay a minimum of US$16.7 billion in 2009 bonuses to
its employees, with the top executives possibly getting bonuses in the $50
million to $100 million range. Other bailed out banks are doing the same, only
on a smaller scale.
All this while one in eight Americans taxpayers who paid for the bailouts and
will continue to pay for the foreseeable future goes to bed hungry; while the
broader measure of US unemployment, or "U-6", which accounts for those who have
stopped looking for
work or who can't find full-time jobs, stands at 17.5%, namely, at the highest
recorded level and going higher; and while the federal deficit soars to
dangerous levels threatening intergenerational equity, the future of the US
economy and the nation's social solidarity.
Our nation should face up to a number of well-constructed myths before
inequities and divisions between ordinary taxpayers and Wall Street titans
unfolds into a calamity that endangers the future of the nation:
1. Wall Street in its present form is essential for the prosperity of
the US economy. 2. The talent on Wall Street is irreplaceable and their pay is deserved. 3. Bailouts along these lines were essential for economic recovery. 4. Wall Street has learned its lesson, supports financial reform and is
sure that the fiasco will not be repeated. 5. Congress can do nothing about Wall Street bonuses and pay structures.
Myth 1:Wall
Street in its present form is essential for the
prosperity of the US
economy. Our financial system does not produce a final good
that we need for our survival. If the entire economy were financial services,
we would all starve and die! It's that simple. Subtracting Wall Street banks
from our economy would not cause our economy to be less productive but would
marginally reduce our national output. Let's explain.
The financial system provides an important service. It functions as an
intermediary between those who save and those who need savings (real goods) to
finance their investment. This service, if well performed, should increase (i)
savings (savers are encouraged to save more because they will get their savings
back, hopefully with an added return or dividend, when they need it in the
future) and (ii) investment (which channels savings to the most productive
investors at a lower cost than if individual savers had to find and assess
productive investors) and thus (iii) economic growth, the thing that matters
most.
With well-functioning competitive markets, the revenue of the financial system
should be roughly proportional to the extra real output that its services
produce (above what the economy would produce if the financial system did not
exist) by acting as a useful intermediary; its share of profits in the total
profits generated by US corporations should be roughly commensurate with its
contributions to the US national economy. This has been far from the case.
Simon Johnson, a former chief economist at the International Monetary Fund and
now a professor at Massachusetts Institute of Technology, gives the following
figures:
"From 1973 to 1985, the financial sector never earned more
than 16% of domestic corporate profits. In 1986, that figure reached 19%. In
the 1990s, it oscillated between 21% and 30%, higher than it had ever been in
the postwar period. This decade, it reached 41%. Pay rose just as dramatically.
From 1948 to 1982, average compensation in the financial sector ranged between
99% and 108% of the average for all domestic private industries. From 1983, it
shot upward, reaching 181% in 2007." [1]
If the enhanced
productivity of the financial sector is reflected in these dramatically rising
profit and pay figures, then one of the following, or both, must be true: the
US investment to gross domestic product (GDP) ratio must have increased
dramatically, more than doubling; and/or the real growth rate of the US economy
must have jumped to a higher plane (presumably because the financial sector has
channeled savings to more productive investments).
Unfortunately, the numbers don't support either of these assertions. Private
sector investment/GDP was 14.8% in 1986, 15.3% in 1996 and 17.2% in 2006; GDP
growth rates were 2.3% per year during the period 1986-1996 and 2.1% per year
from 1996 to 2006. Yes, the investment rate went up negligibly from 1986 to
1996 and slightly more from 1996 to 2006, but nothing would justify a doubling
of the financial sector's share of aggregate profits. As for the all-important
indicator, namely, real economic growth, it in fact declined.
Even if we were to set aside the fact that Wall Street banks have grabbed a
growing and disproportionate share of revenues and profits from the US economy,
the concentration of wealth acquired by Wall Street bankers has ominous
implications for the US as a cohesive society going forward into the future.
The real incomes of middle-class American families have stagnated for the past
25 years, while the income of those in the financial industry have increased as
never before. If Wall Street banks continue to amass wealth at this rate, the
economic equilibrium of the nation will be at risk. Clearly, Wall Street banks
have subtracted from, rather than added to, our economic prosperity and
national wellbeing.
Myth 2: The talent on Wall Street is irreplaceable and their pay is deserved.
The assertion that the level of talent on Wall Street is unparalleled is,
perhaps, the biggest urban myth manufactured by Goldman Sachs and company. If
Wall Street bankers are so smart how come they never foresaw any of the
financial failures they were a party to? How could they have made the bad loans
they made to so many developing countries in the 1980s, followed by the stock
market crash of 1987, the dot.com bubble and now the real estate bubble?
The reason why Goldman Sachs and other successful firms on Wall Street earn so
much is not because their employees are so much smarter than others in the
financial industry. It is, instead, because they have a savvy model called
unparalleled access and influence. Goldman and other financial institutions
have taken the revolving-door model of the US defense industry and refined it
to an unparalleled degree. When Goldman employees subsequently go into
government service, Goldman Sachs likes to label this as "public service", but
it would be more accurate to call this "public disservice".
While holding public office, do these erstwhile Goldman Sachsers favor their
old firm, be it with helpful de-regulation, tax policies or invaluable insider
advice? You can bet that after the ongoing bailout of bankers is off the front
page, many current government insiders will suddenly find lucrative employment
on Wall Street. The financial industry was the largest contributor to the
recent presidential and congressional campaigns. The reason why meaningful
change will not come easily is because the financial industry owns our
politicians, be they Republicans or Democrats.
Look at the economic team in the administration of Barack Obama: the White
House has Rahm Emanuel (who amassed quite a fortune, $16.2 million, in just two
to three years at a financial institution in Chicago between working as an
advisor to then president Bill Clinton and successfully running for Congress in
2002), and Larry Summers (who pushed de-regulation while he was a well-paid
speaker on Wall Street); the Treasury is run by Timothy Geithner, who was
mighty cozy with Wall Street as the president of the New York Federal Reserve.
Make sure to keep an eye out for whatever his next job will be!
Robert Rubin, who was head of Goldman Sachs before becoming Bill Clinton's
Treasury secretary, became being a principal advisor to Obama during his
presidential campaign.
Then there is Congress, utterly beholden to the financial industry for
donations and a veritable paper tiger when it comes to adopting measures to
protect taxpayers and regulate the financial industry.
What we find most galling is who handled the financial bailouts supposedly on
behalf of the US taxpayer. Henry Paulson represented the US government as
Treasury secretary while his friends and former partners, Rubin and Lloyd
Blankfein, represented Citibank (where Rubin moved after his stint as secretary
of the Treasury) and Goldman Sachs, respectively. Was Paulson hard-nosed enough
to get the best deal for the USA from his old friends? The Citibank deal was
akin to a sweetheart deal. While the rescue of Goldman Sachs and Morgan Stanley
were lifesavers for Goldman, did Paulson cut the same deal as secretary of the
Treasury as he would have when he used to run his old firm?
The bankrupt AIG received bailout money then turned around and paid its
creditors 100 cents on the dollar. Never in the history of man has a bankrupt
company previously paid 100 cents on the dollar to its creditors, and this with
public funds. These and other deals negotiated with troubled financial
institutions gave the potential upside gain to the bankrupt firm, not to the US
taxpayer. Yet, Fed chairman Ben Bernanke, in an opinion article in The
Washington Post, dated November 29, 2009, still refuses to admit that the
bailouts were implemented to favor Wall Street bankers: "The government's
actions to avoid financial collapse last fall - as distasteful and unfair as
some undoubtedly were - were unfortunately necessary ..."
The troubling and lingering questions are (i) who represents the taxpayer and
the future of the country if Wall Street owns politicians and many senior
government officials? (ii) why did Obama, the champion of change, surround
himself with those so closely connected with Wall Street and with the past
policies that brought on the financial turmoil?
With the current financial and economic team and with Rubin as a major campaign
advisor, it should be no surprise that we are unlikely to see a change in our
financial landscape any time soon unless we as a nation show our collective
outrage and demand a total revamping of the financial sector.
What has become of the tradition of public service in the US? Do patriots and
traitors only show up on the battlefield? Or in this day and age, when economic
strength is arguably even more important, do patriots and traitors also show up
in the halls of government, in the boardrooms of financial and non-financial
corporations and even in ordinary business dealings on Main Street?
Greed seems to have invaded every corner of our national psyche and is the
order of the day. Unfortunately, greed will not, of its own accord, evaporate
from Wall Street. Banks and non-bank financial institutions must be forced to
pay a price and to change their ways for the good of the nation. These
so-called modern day capitalists invoke Adam Smith's market-based solution, but
they forget to embrace the complete man - his compassion and spiritualism.
Myth 3: Bailouts along these lines were essential for economic recovery.
The government and the financial industry frightened the general public with
threats of impending economic doom and socialism if bailouts were not handled
their way.
One-by-one negotiated bailouts - the method adopted by Treasury - are slow and
unfair. Why was Bear Stearns bailed out and Lehman Brothers allowed to
collapse? How do we ensure a good deal for the public in negotiated bailouts,
especially given the revolving-door culture described above? Bailouts lead to
more bailouts because they give an incentive to bankers to take excessive risks
in pursuit of extraordinary rewards. Most importantly, after bailing out the
big financial firms, we find ourselves saddled with firms that are still too
big to fail and with no easy solution. In fact, because of the mergers and
takeovers that the government supported, our financial institutions are now
even bigger than before. We have done very little to avoid a worse catastrophe
in the future.
The other way to rescue the financial system would have been to nationalize all
threatened institutions that were too big to fail, break them up, so that they
are no longer too big to fail, and auction the pieces one by one to get the
best price for the public. This would have saved the financial system, restored
financial stability in quick order, and resolved the problem of "too big to
fail" once and for all, as long is is linked to the adoption of financial
regulations to avoid such an eventuality in the future - regulations to keep
size in check. We are still burdened with the same problem - "too big to fail"
institutions; institutions that have the power, which they use freely, to block
meaningful reform.
The main reason why the US did not go the nationalization route was the
public's fear of plunging America into socialism, a misguided fear propagated
by the very institutions that have the most to lose from such action. It is
time to stop selective bailouts of banks and adopt sensible corrective measures
that restore economic stability for the long term.
Myth 4: Wall Street has learned its lesson, supports financial reform and is sure
that the fiasco will not be repeated. Wall Street bankers have
learned very little, possibly nothing, since the onset of the crisis. The only
lesson they have learned is the wrong one, namely, that banks can get their way
in Washington no matter how egregious their practices, as long as they spend
money and keep the revolving door wide open.
Wall Street has the audacity to pay exorbitant salaries and record bonuses
while its benefactors, US taxpayers, struggle to put food on the table. Wall
Street dares to block meaningful financial reform, regulation and supervision
by frightening ordinary Americans into submission. Wall Street shows no remorse
for the millions of lives it has destroyed and the trillions of dollars in real
economic damage it has caused in the US and all over the world.
The frightening reality is that the crisis is far from over and Wall Street
bankers only care about themselves. They don't realize that if the real economy
fails to recover, they too will fail.
The Fed has pushed billions of dollars into the US economy and banks are flush
with cheap funds. Rather than directing these funds into our real sector, banks
are buying safe US government paper, trading on their own account (propriety
trading where taxpayers take the risk for their losses and they get the
rewards, adding nothing to the real economy), keeping excess reserves with the
Fed and getting paid for them, generally making money hand over fist, and
slowly returning to their old practices and underestimating risk.
Meanwhile, the US unemployment rate keeps going up, the number of foreclosures
increases, the dollar weakens, the Chinese accumulate more US debt, oil and
food prices climb, and financial bubbles build.
Where we will go is anybody's guess - a lost decade, as happened with Japan, or
inflation. Sustained recovery is, at this point, unlikely, given all the
economic and financial uncertainties, the ill-advised bailout policies, the
absence of real and effective change in the financial industry, and a Fed that
tries to resolve every ill by running the printing press in overtime mode.
Myth 5: Congress can do nothing about Wall Street bonuses and pay structures.
With such a dysfunctional economic and social landscape, you would think that
Congress would be grilling the perpetrators and adapting legislation to address
all the problems at hand to eliminate the likelihood of anything like the
current crisis in the future for us, our children and our children's children.
But no; instead, Congress sits idly by watching. Some in Congress plead that
their hands are tied! There is nothing they can do! All the while, lobbyists of
the financial industry run amuck on Capitol Hill brandishing promises and
threats.
The reality is that today Wall Street owns the US Congress lock stock and
barrel. Congress will do nothing, even if hell freezes over, unless the
American electorate take the time and reclaim their nation that has been sold
to the financial industry. Thomas Jefferson must be turning in his grave to see
a nation and an electorate that have gone to sleep and are not heeding his
warnings about the danger of banks and bankers:
"I believe that banking
institutions are more dangerous to our liberties than standing armies. If the
American people ever allow private banks to control the issue of their
currency, first by inflation, then by deflation, the banks and corporations
that will grow up around the banks will deprive the people of all property
until their children wake-up homeless on the continent their fathers conquered.
America must awake before it is too late. Americans must force Congress to act,
and act now. Our nation must hold the financial industry accountable for the
damage it has caused. If we do not act, Wall Street banks will revert to their
old ways and the social and economic consequences to future generations will be
unthinkable.
To us, the root cause of financial bubbles and the subsequent economic collapse
is invariably the creation of excessive debt, something that is sure to be
repeated with the current financial system. Recognizing the connection between
debt and speculation, John Maynard Keynes even called for "[The] euthanasia of
the rentier" (the lender).
A friend, a former Wall Street banker himself who left the financial industry
in disgust, expressed surprise at our naivety after reading the above. He told
us there was no chance that Congress would enact meaningful reforms to rein in
the excesses of Wall Street, and even if Congress did, Wall Street bankers
would find ways to get around any restrictions. Either the role of finance has
to be redefined and limited to activities that focus the financial sector on
its intermediary function or the entire financial sector will have to be taken
over and federally administered.
In any case, his advice for us was to expose Wall Street bankers from the moral
high ground and encourage a national movement to discredit Wall Street bankers
and open up their activities to closer public scrutiny.
Hossein Askari is professor of international business and international
affairs at George Washington University. Noureddine Krichene is a former advisor, Islamic
Development Bank, Jeddah.
(Copyright 2009 Asia Times
Online (Holdings) Ltd. All rights reserved. Please contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
