Main Street's Disneyland folly
By Julian Delasantellis
Very much by design, visitors to Disney-themed amusement parks share a common
introductory sensory experience. After passing through the gates, they emerge
in the middle of what is called "Main Street, Disneyland", a block-long
depiction of life in an American small town from around the start of the 20th
century.
Since just about no one now has much memory of what life was actually like in a
small American town at the dawn of the 20th century, the experience of the town
has developed into something originating from others' memories (in particular,
Walt Disney's memories) of what these places were like, and, more
critically
now, fantasies of what life was like. Thus, a traveler through a Main Street,
Disneyland, will see a block of small businesses, non-franchised storefronts
containing such establishments as a barbershop, an ice-cream parlor and an
"Emporium" general store selling Disney souvenirs.
Since most of our more distant memories are colored by a sepia hue that
bleaches out recollections of the bad, only the good - or what park visitors
born 75 years or more after the reality of these places would imagine was good
- is included on Main Street, Disneyland. There's no horse dung or drunks
underfoot in the gutter; behind the shutters, there's no hunger, prejudice,
disease or abuse of spouses or children. Thus, Main Street, Disneyland, is
nothing but a commercial manifestation of American geo-iconography - a
reflection of the belief that all values, indeed, all things, in the nation
wise and wonderful owe their genesis to this particularly petit-bourgeois
American conception of Eden, and all things evil and pernicious have originated
somewhere else - like on Wall Street.
Last week, President Barack Obama, flailing about in the worst political crisis
of his life just 52 short weeks since the bright promise of his inauguration,
reached out in desperation to associate himself and his presidency with the
Main Street canon. Whether it will work as well as a policy guidance as it does
a motivation to loosen parents' wallets in the souvenir store remains to be
seen.
Last week, media commentaries were focused on what is now being called the
Massachusetts miracle; Obama and the Democrats are probably rather calling it
the Massachusetts massacre. In having unknown Republican state senator Scott
Brown defeat a successful career Democratic politician, the state Attorney
General Martha Coakley, the Republicans took back a senate seat they had last
sat in 58 years ago, back before John F Kennedy's first election to the senate.
Worse still was that this seat, held by the late senator Edward Kennedy before
his death last August, was the Democrats' 60th in the upper chamber of the US
Congress. Through a most peculiar tradition that has spread through Democratic
majority congresses like kudzu, a supermajority of 60 votes is now required to
move significant legislation through the senate, making the passage of real,
change-producing legislation nearly impossible without that 60th vote.
But the worst effect of the Massachusetts massacre will most likely be the icy
shards of fear it deposits down the spines of the other sitting 59 Democratic
senators and 256 Democratic congressmen. They will interpret the defeat in a
previously Democratic fortress like Massachusetts to mean that no Democrats who
closely align themselves with Obama will be safe in November's elections, no
matter where they are; then, like so many chameleons or bark beetles, they will
shed their Obama skins by voting against just about everything he proposes
until, and only if, he wins re-election in 2012.
Cap and trade legislation to deal with global warming is dead, as is "card
check" union membership and financial reform legislation. Americans who last
year looked for four straight years of change and reform probably never
realized that those would be four years as measured by Obama's Portuguese Water
Dog Bo.
Around the time of the holidays came evidence that perhaps Obama was getting
the message that was soon to be flowing down from Massachusetts, maybe even
that he was trying to build up some type of homeopathic resistance against its
most debilitating effects. He renewed his attacks against this latest quarter
of outrageous bonuses being granted to the "greedy bankers" running the
financial system. Amazingly enough, at an estimated US$145 billion for 2009,
these are expected to exceed those of both the crisis year of 2008 and the last
partial boom year of 2007.
With the public not willing even to try to understand the issues of moral
hazard and excess leverage that actually caused the financial crisis, outrage
over the financial crisis at first centered on the bonuses, particularly those
granted to bankrupt Insurance giant AIG. However, after months of being fleeced
by all the false hopes that became the great health care debate in congress,
public indignity had substantially shifted to Washington and Obama rather than
just to bankers' boardrooms.
By the middle of January, Obama knew he had to kick up the public outrage
against bankers further still, lest the wave of healthcare hostility breach him
- all the while attempting to be true to the wonk's creed that policies
advocated by educated government leaders should do more, should actually
attempt to further the public interest, rather than just throw bread to the
mobs baying for blood at a gladiatorial circus.
While the role of "too big to fail" in the actual crisis may be in some
dispute, much public opprobrium has been attached to the concept, the idea that
the existence of some banks and other financial institutions, through their
growth to gargantuan size and proportions, becomes vital to the continued
viability of the financial markets as a whole.
As the financial system stumbled and crashed through 2007-08, the world learned
that there were more of these "systematically important institutions (SIIs)"
necessitating emergency government intervention and rescue than people ever
realized. Nobody had previously thought that investment banks like Bear
Stearns, which collapsed in March of 2008, or insurance company AIG, saved in
September of that year, were SIIs, but there they were receiving taxpayer money
in furtive late-night rescues, and none were all too happy about it.
It was during the neo-liberal frenzy of Bill Clinton's last term and George W
Bush's two terms that many of the SIIs were bred, institutions since late-2008
limping along only on government life support. If it was government policies
that nurtured the SIIs to their present unmanageable and socially detrimental
size, couldn't other policies discourage the creation and nurturing of these
future economic and societal dysfunctions?
On January 15, the White House released the details of a proposed new tax on
big banks - called the "Financial Crisis Responsibility Fee" - which it said
"would require the largest and most highly levered Wall Street firms to pay
back taxpayers for the extraordinary assistance provided so that the TARP
[Troubled Asset Relief Program] does not add to the deficit".
In framing this as just a way to ensure that the monies from the hated and
despised TARP financial bailout were paid back promptly to the Treasury, the
White House asserted that "[T]he fee the president is proposing would be levied
on the debts of financial firms with more than $50 billion in consolidated
assets, providing a deterrent against excessive leverage for the largest
financial firms. By levying a fee on the liabilities of the largest firms -
excluding FDIC [Federal Deposit Insurance Corporation] assessed deposits and
insurance policy reserves, as appropriate - the Financial Crisis Responsibility
Fee will place its heaviest burden on the largest firms that have taken on the
most debt. Over sixty percent of revenues will most likely be paid by the 10
largest financial institutions "
Still, the Financial Crisis Responsibility Fee received scant more public
traction than the campaign against the bonuses. The public square was then
still far too preoccupied with the tremendous political explosion caused by the
death blows the Massachusetts election was inflicting on the healthcare
initiative. (Interestingly, proclaimed populist Scott Brown, the winner of the
Massachusetts election, came out in opposition to the bank tax, proving once
again that the opportunities for continuous public image re-invention in
America are so numerous that you can call yourself a populist and still be an
open defender of the interests of big banks.)
On the Wednesday after the Massachusetts election, the healthcare initiative
completely collapsed in congress; on Thursday, Obama was back at it again,
desperately trying to whip up some popularity on the backs of the banking
industry.
If, as illustrated above with the Disneyland example, "Main Street" is the
eternal repository of all small-town American values right and true, its polar
antithesis, its fiery underworld in a Hieronymus Bosch-type triptych in a
depiction of heaven and hell in American life. Would that be Hades on the
Hudson, the Gehenna opposite Jersey, the Babylon 18 kilometers south of the
Bronx, yes, none other than Wall Street, USA.
From the beginning of the 20th century, writers have postulated different
values possessed by those on Main as opposed to Wall Street. More recently, the
charge has taken on a new dimension, that Wall Street has become a sort of
parasite of Main Street, draining from it the necessary resources - capital -
it needs to survive and thrive. In the present circumstances, the proponents of
this view feel that it is virtually self-evident, as Wall Street bathes in
baubles and bonuses while Main Street gasps and wheezes from the lack of
operating and new investment capital caused by Wall Street's continuing credit
crunch.
On Thursday, Obama took another reach for the populist gusto. With former
Federal Reserve chairman Paul Volcker standing behind him on the podium,
according to reports now taking on a role as a much more market skeptical eminence
grise than the likes of Ben Bernanke, Larry Summers and Timothy
Geithner, Obama announced that, from now on, Wall Street had to act a lot more
like Main Street
"It's for these reasons that I'm proposing a simple and common-sense reform,
which we're calling the ‘Volcker Rule' - after this tall guy behind me. Banks
will no longer be allowed to own, invest or sponsor hedge funds, private equity
funds or proprietary trading operations for their own profit, unrelated to
serving their customers. If financial firms want to trade for profit, that's
something they're free to do. Indeed, doing so - responsibly - is a good thing
for the markets and the economy. But these firms should not be allowed to run
these hedge funds and private equities funds while running a bank backed by the
American people.
Back there on Main Street, there's no real secret as to how money is made. At
the hardware store, they may buy a hammer wholesale for $9, sell it for $14,
and that $5 spread might be called the business profit margin, or, in Wall
Street terms, its "bid/offer spread".
A lot of this happens on Wall Street as well - businesses simply executing and
satisfying customer needs. Thus, if you call in an order to buy 100 Bank of
America (BAC) shares, and your brokerage is a market maker in BAC, the process
may work in a very similar fashion to that of the hardware store. If BAC's last
trade was 15, the broker may quote a spread of 0.02-0.03, meaning that it will
sell you the shares at $15.03, buy them back at $15.02, the profit here being
one cent per share (or, in the case of this 100 share trade, $1) instead of the
hardware store's $5.
But it's not customer trading such as this that has generated the gargantuan
salaries, bonuses and lifestyles. For that, the bank must trade for its own,
rather than the customers', accounts. This can be accomplished through
bank-owned or bank-managed hedge funds, private equity funds, special
investment vehicles or other conduits that eventually collect for the bank the
profits earned downstream and send it back up to the mothership.
Obama says he has no objection to these banks trading for their account
practices; he just says that, when they do so, he wants it made absolutely
clear to their counterparties that the federal guarantees at the heart of "too
big to fail" - such as FDIC deposit insurance - will not be paying them back
should the trades fail. Without the protective blanket of the federal
guarantee, it is hoped that the ground will not be so fertile for future growth
of standard size banks into "too big to fail" behemoths.
It was in some of the comment accompanying this proposal that one could see
just how serious this problem had become. In Monday's Asia Times Online, David
Goldman noted that it is only proprietary trading that has sustained bank
earnings - that has kept the banks themselves from collapse - while loan demand
has collapsed. On Bloomberg, it was noted by reporters Bradley Keoun, Christine
Harper and Ian Katz that Goldman Sachs "generated at least 76 percent of 2009
revenue from trading and principal investments", which Goldman chief financial
officer David Viniar said represented only 10% of its nominal business.
Reading between the numbers, it seems that Goldman does not make much money
doing an enormous amount of customer brokerage business, but that only sets up,
or hides, or misdirects, critical attention from the enormous profits it makes
doing far less numerous but much more highly leveraged trades for its own
account. (For more on the Goldman proprietary trading strategies and high
frequency trading see
Goldman Sachs, the lords of time, Asia Times Online, August 5, 2009.)
It could be even harder than that to discern proprietary from customer trading.
As stated above, "making a market", or providing a bid/ask spread, is the core
function of operating a customer brokerage. However, using the above example of
Bank of America trading at $15, if any bank or investment house wanted to amass
a speculative position in BAC virtually undetectable from the regulators it
could do so in this manner.
Instead of posting with the electronic exchanges its willingness to buy BAC at
$15.02 and sell it at $15.03, it could post a bid offer spread of something
like $15.10/$15.11. If the last trade of the stock was at $15.00, traders could
make a quick, significant profit, time and time again, through buying from the
market (until the market price rose, of course) at $15 and selling at $15.10.
Very quickly and very quietly, the bank would soon have a fairly significant
BAC position on its portfolio, all from the seemingly normal filling of
customer brokerage orders.
The difficulty in differentiating between the morally pure customer brokerage
business and morally depraved speculation only illustrates the false dichotomy
between Main Street and Wall Street that now shapes public debate on economic
issues.
Main Street may say that the deposits in its banks stay in the local community
for local enterprises and needs, but through the correspondent accounts the
small banks have with the Wall Street banks, even grandma's Social Security
check will probably eventually get sucked into the abattoir of global
turbofinance.
Then again, where did the benefits, all the money, generated by Wall Street go
but to Main Street, to all those home construction, appraisal, contracting,
home improvement and appliance dealers that were given the breath of life by
all that phony money flowing into US real estate? All these merchants probably
had checking accounts at the Main Street banks - do these bank managers really
expect us all to believe that they never questioned from where and how all that
money came from?
Like the implausibility of World War II German townspeople denying knowledge of
the Holocaust even as the stench of burnt flesh stung their nostrils, does Main
Street really expect us to believe it knew nothing of the shenanigans Wall
Street and the financial markets were doing even as the sound of the bulldozers
clearing hillsides for new home lots filled their ears from morning to night?
"Denial ain't a river in Egypt", the recovery movement says, but it does seem
to be a fast-flowing waterway that bisects most of America's Main Streets. The
fantasy seems to suit the country better; then again, who ever thought that
"Tomorrowland" would refer not to a bright and shiny Disney attraction, but to
a boarded up, vandalized, abandoned and crumbling never-occupied housing
development?
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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