The Banks Are Not Alright
By PAUL KRUGMAN
NY Times Op-Ed: October 18, 2009
It was the best of times, it was the worst of times. O.K., maybe not
literally the worst, but definitely bad. And the contrast between the
immense good fortune of a few and the continuing suffering of all too many
boded ill for the future.
I'm talking, of course, about the state of the banks.
The lucky few garnered most of the headlines, as many reacted with fury to
the spectacle of Goldman Sachs making record profits and paying huge bonuses
even as the rest of America, the victim of a slump made on Wall Street,
continues to bleed jobs.
But it's not a simple case of flourishing banks versus ailing workers: banks
that are actually in the business of lending, as opposed to trading, are
still in trouble. Most notably, Citigroup and Bank of America, which
silenced talk of nationalization earlier this year by claiming that they had
returned to profitability, are now - you guessed it - back to reporting
losses.
Ask the people at Goldman, and they'll tell you that it's nobody's business
but their own how much they earn. But as one critic recently put it: "There
is no financial institution that exists today that is not the direct or
indirect beneficiary of trillions of dollars of taxpayer support for the
financial system." Indeed: Goldman has made a lot of money in its trading
operations, but it was only able to stay in that game thanks to policies
that put vast amounts of public money at risk, from the bailout of A.I.G. to
the guarantees extended to many of Goldman's bonds.
So who was this thundering bank critic? None other than Lawrence Summers,
the Obama administration's chief economist - and one of the architects of
the administration's bank policy, which up until now has been to go easy on
financial institutions and hope that they mend themselves.
Why the change in tone? Administration officials are furious at the way the
financial industry, just months after receiving a gigantic taxpayer bailout,
is lobbying fiercely against serious reform. But you have to wonder what
they expected to happen. They followed a softly, softly policy, providing
aid with few strings, back when all of Wall Street was on the ropes; this
left them with very little leverage over firms like Goldman that are now,
once again, making a lot of money.
But there's an even bigger problem: while the wheeler-dealer side of the
financial industry, a k a trading operations, is highly profitable again,
the part of banking that really matters - lending, which fuels investment
and job creation - is not. Key banks remain financially weak, and their
weakness is hurting the economy as a whole.
You may recall that earlier this year there was a big debate about how to
get the banks lending again. Some analysts, myself included, argued that at
least some major banks needed a large injection of capital from taxpayers,
and that the only way to do this was to temporarily nationalize the most
troubled banks. The debate faded out, however, after Citigroup and Bank of
America, the banking system's weakest links, announced surprise profits. All
was well, we were told, now that the banks were profitable again.
But a funny thing happened on the way back to a sound banking system: last
week both Citi and BofA announced losses in the third quarter. What
happened?
Part of the answer is that those earlier profits were in part a figment of
the accountants' imaginations. More broadly, however, we're looking at
payback from the real economy. In the first phase of the crisis, Main Street
was punished for Wall Street's misdeeds; now broad economic distress,
especially persistent high unemployment, is leading to big losses on
mortgage loans and credit cards.
And here's the thing: The continuing weakness of many banks is helping to
perpetuate that economic distress. Banks remain reluctant to lend, and tight
credit, especially for small businesses, stands in the way of the strong
recovery we need.
So now what? Mr. Summers still insists that the administration did the right
thing: more government provision of capital, he says, would not "have been
an availing strategy for solving problems." Whatever. In any case, as a
political matter the moment for radical action on banks has clearly passed.
The main thing for the time being is probably to do as much as possible to
support job growth. With luck, this will produce a virtuous circle in which
an improving economy strengthens the banks, which then become more willing
to lend.
Beyond that, we desperately need to pass effective financial reform. For if
we don't, bankers will soon be taking even bigger risks than they did in the
run-up to this crisis. After all, the lesson from the last few months has
been very clear: When bankers gamble with other people's money, it's heads
they win, tails the rest of us lose.
***
http://www.truthout.org/1025097
Why Wall Street Reform Is Stuck in Reverse
by: Robert Reich
Robert Reich's Blog: 21 October 2009
At a conference in London, a Goldman Sachs international adviser, Brian
Griffiths, praised inequality. As his company was putting aside $16.7
billion for compensation and benefits in the first nine months of 2009, up
46 percent from a year earlier, Griffiths told us not to worry. "We have to
tolerate the inequality as a way to achieve greater prosperity and
opportunity for all," he said.
Eight months ago it looked as if Wall Street was in store for strong
financial regulation -- oversight of derivative trading, pay linked to
long-term performance, much higher capital requirements, an end to conflicts
of interest (i.e. credit rating agencies being paid by the very companies
whose securities they're rating), and even resurrection of the
Glass-Steagall Act separating commercial from investment banking.
Today, Congress is struggling to produce the tiniest shards of
regulation that would at least give the appearance of doing something to
rein in the Street.
What happened in the intervening months? Two things. First, America's
attention wandered. We're now focusing on health care, Letterman's frolics,
and little boys who hide in attics rather than balloons. And, hey, the Dow
is up again. The politicians who put off Wall Street regulation for ten
months knew that the public would probably lose interest by now.
Second, the banks keep paying off Congress. The big guns on Wall Street
increased their political donations last month after increasing their
lobbying muscle. Morgan Stanley's Political Action Committee donated
$110,000 in September, for example, of which Democrats got $43,000.
Official Wall Street PAC donations are piddling compared to the tens of
millions of dollars that Wall Street executives dole out to candidates on
their own (or with a gentle nudge from their firms). Remember -- the Street
is where the money is. Executives and traders on the Street have become the
single biggest sources of money for Democrats as well as Republicans. And
with mid-term elections looming next year, you can bet every member of
Congress has a glint in his or her eye directed at the Street.
That's why the President went to Wall Street to raise money Tuesday
night, gleaning about $2 million for the effort. He politely asked the crowd
to cooperate with reform -- "If there are members of the financial industry
in the audience today, I would ask that you join us in passing necessary
reforms" -- but those were hardly fighting words. It's hard to fight people
you're trying to squeeze money out of.
Which is the essential problem.
Ken Feinberg, the President's "pay czar" came down hard on executive
pay yesterday, for those banks still collecting money under TARP, as well he
should. But Feinberg isn't trying to pass new financial reform legislation,
and TARP no longer covers several of the biggest banks with the highest pay
and bonuses -- although they're still getting subsidized by the government
with low-interest loans.
Wall Street and the Treasury want us to believe that the TARP money
will be repaid to taxpayers, but Neil Barofsky, the special inspector
general keeping watch over TARP, said yesterday that just 17 percent of the
TARP money has been repaid, and "[i]t's extremely unlikely that taxpayers
will see a full return on their investment." Later he told a reporter that
it's unlikely "we'll get a lot of our money back at all."
Brian Griffiths, the Goldman international adviser who told us
inequality is good for us, doesn't know what he's talking about. America is
lurching toward inequality once again, led by the financial industry. The
Street is back to where it was in 2007, but most of the rest of us are
poorer than we were then -- largely due to the meltdown that occurred
because Wall Street overreached. The oddity is that we bailed out the
Street, including Griffiths and his colleagues, but apparently won't even be
repaid.
And now that Griffiths et al knows his firm and the other big ones on
the Street are too big to fail, he and his colleagues will make even bigger
gambles in the future with our money.
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