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Issues of financial reform and regulation can be intimidating to laymen (this layman anyway) because of its insanely complex nature. It is easy to imagine the system as a big Jenga tower, and moving one piece might cause the whole thing to come crashing down. No one wants to be seen as inadvertently – but earnestly! – advocating for a ruinous policy. Of course, that means the opposite extreme is then in play: Turning into Hamlet and endlessly agonizing over what to do at the expense of actually doing something. Not to mention the fact that, not to put too fine a point on it, wide swaths of our leadership has for years now been deliberately advocating ruinous policies both at home and abroad. That should certainly make those of us in the unwashed masses comfortable with forcefully advocating what seems reasonable based on available data. It’s not as though we could screw it up any worse.
Still, it would be nice to have a rule of thumb, compass point or guiding principle to go by. Having been a reasonably close observer of the meltdown and its aftermath, here is one I have come up with: It is necessary (but not sufficient) that any proposal be strenuously opposed by Goldman Sachs (GS). In a largely protected industry Goldman appears to be the closest thing to untouchable as we have. It is in Matt Taibbi’s already-legendary description "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." It has installed a revolving door between the highest levels of the government and its board room, enjoys privileged lines of communication with the Treasury secretary exceeding even that of our closest allies, was happily positioned as a key competitor died, then days later benefited as a key debtor was drenched in cash (Yves Smith called it a "massive backdoor subsidy to the likes of Goldman"), and as it happens was the second largest contributor to the president in the 2008 election cycle. More so than any other player in financial services, GS always seems to be nearby when bad things happen.
With that in mind, we can use Goldman’s position as a handy template for evaluating any reforms. The much heralded limits on executive compensation? They do not include Goldman. Therefore they are not real reforms. It is just so much transparently phony political grandstanding. The "Too Big Too Fail" bill making its way through the House looks like it will miss GS through a combination of loopholes and inadequacy (and may in fact be an enormous giveaway to the industry). The Consumer Financial Protection Agency seems to be a mixed bag, but note that the "financial autopsy" amendment was defeated. What might GS have thought of that? To get an idea here is the take of George Washington from Washington’s Blog (emphasis in original):
Instead of trying to pass a one-size-fits-all bill prohibiting certain specified conduct, it will force an annual analysis of what financial products are sticking it to the consumer. Remember, credit default swaps didn’t bring down the economy because they are toxic while all other financial vehicles are pure as the driven snow. CDS brought down the economy because they were the choice du jour of the looters. If we outlaw CDS (which I have argued for in the past), then the looters would create some other instrument for looting.
Considering GS’s plunge into the CDS pool I think it is safe to say a financial autopsy would not be great PR, nor would autopsies for whatever havoc Wall Street’s next adventure in casino capitalism produces. In other words, it would have been real reform. The same appears to be the case for Ron Paul’s bill to audit the Federal Reserve. We know that Stephen Friedman, then-chairman of the New York Federal Reserve’s board of directors and GS board member, was engaged in substantial stock trading right around the time Goldman was converting to a bank holding company regulated by the Fed. Since it led to his resignation GS probably has skeletons in that closet as well. Fed chairman Ben Bernanke opposes it too, which may be suggestive. GS does not appear to have come down firmly against it, but as Paul’s bill goes down to the wire it looks like GS will lobby hard against it. Which means, real reform.
Despite the somewhat flippant tone, my main point is completely sincere: As Congress looks at various proposals, the opposition of GS may be as accurate a barometer as the average citizen will have for deciding just how substantive the various proposals, bills and amendments really are. Goldman Sachs is a nearly perfect example of the modern Wall Street ethos, and it has become the inverse of Charles Erwin Wilson’s vision of GM: What’s good for it is bad for America.
9 Comments
Great summation and dead on conclusion. Let’s get this meme out there: “What good for Goldman Sachs is bad for America”.
And why is the U of California the number # contributor to Obama at $1,591,395?
Harvard is #3 and Microsoft #4.
Thanks montanamaven. I thought the donor list mad for some interesting reading too.
Goldman Sachs’ only function is institutionalized fraud. It has no reason beyond this to exist. My own barometer for reform is re-imposition of Glass-Steagall. But the current discussions in Congress over reform including the CFPA and regulating derivatives markets is a sham. They are laughably bad.
The complex derivatives were conjured up by the smartest people in the room and the next smartest in the room could not understand them. There is no way that government can attract the best talent capable of understanding what Wall Street’s whiz kids, given the massive profits which drain the productive sector of the economy of talent.
One solution is for government to tax Wall Street financial salaries at 125% and use that money to pay the smartest kids in the room to work for the government AT WALL STREET WAGES + 25% to regulate Wall Street. Spending a few billion dollars doing this would stabilize the economic system and save trillions, not to mention billions of lives from being put through the meat grinder when it all explodes.
The revolving door would need to be closed, but that could be done by taxing the wages of those who regulate but move to the private sector at 200%.
This is an excellent idea. How do we make this happen?
Suggest that the government hire former officers from Lehman Brothers or Bears and Sterns who got SCREWED by Goldman to be the new regulators. They will have two reasons to do a good job. 1) They will be able to prove that they ARE the smartest men in the room, they just didn’t have the political clout.
2) They want REVENGE. The government should look for the people hurt the most by Sachs. They will be class traitors.
Another point. The Government needs to hire some first class pr and marketing people to SELL the successes of these groups.
There are a lot of people who would really be happy to know that the people at Goldmen are getting busted. But the press is afraid to run the stories because they are afraid that the public will come to their house and kill them. But you can point to Bernie Madoff. He wasn’t killed and now he is safely in jail. It was an interesting story.
This could be a new commission or a TV SHOW!!!
Great idea by the way. I like this post.
There is a rule of thumb. That rule states that the almighty dollar rules all.
WE have become a Country of the dollar, for the dollar and by the dollar.
The fore fathers probably didn’t put that in the Constitution, because they didn’t want the people to catch on before it was to late.
It’s to late now, because we see that the people who make many of those dollars rule the Country, control our Government, and must be supported even with our dollars.
WE see that the dollar buys our laws, our officials, and yes even our very lives.
WE are the servants to the people with the most dollars, soon we will not only support them, but find ourselves praying to them for our survival.
The Wall Street crowd has learned nothing from the popping of the bubbles and is doubling down for more. To the BRIC (Brazil, India, Russia and China) and the EU, the US now appears as an economic mafiosi, demanding protection money as the US dollar is the lingua franca of global economics. Unless the US is capable of making offers that BRIC and the EU can no longer refuse, their preference for capitalism with guard rails, well maintained roads and speed limits is becoming clear–they’re probably just as inclined to take their capitalism by bullet train as drive.
Should the US financial sector continue down the same road, it is not unlikely that BRIC and the EU, not to mention Latin America, will begin to disengage from the US finance economy and erect firewalls as an act of self preservation once their domestic economies begin to recover from the damage inflicted on them by Wall Street and Washington. Since BRIC and EU were never hit as bad as the US was, since they had stimulus in place as safety net, and since they are adopting sane economic responses to both handling the crash and future regulation, it is quite probable that they will recover economically faster than the US which is either doing none of that or the opposite because of acute corruption.
Under that scenario, it is likely that higher returns from economic activity in those regions will drain capital from “safe haven” US debt which supports the dollar in lieu of foreign exchange earned by exporting manufactured goods, as if. The Fed and Treasury are going through contortions and gymnastics to maintain support under debt purchases and the dollar.
The auctions appear to be well attended, but the fundamentals do not justify that appeal. In order to attract capital to US debt instruments, the Fed and Treasury will need to raise interest rates, which will send both the economy and housing prices tumbling, throwing more people out of work and under water. At any time, the tools used to kill Bear Stearns and Lehman Brothers can be deployed against the dollar in a final piranha like feeding frenzy.
As the dollar becomes less stable and the fundamentals of the US economy lose the ability to support the kind of confidence required to serve as the world’s reserve currency–essentially US futures contracts–then we will no longer be able to import goods at favorable terms by just selling debt or printing C notes.
At that point, these people who use dollars to purchase the government might find that the dollar is the rope that these capitalists sold their executioner.
A men, You see there are people who see what’s going wrong, just not enough of them.
Without political mobilization to make any difference, its all just whistling dixie past the graveyard…