The Reasoned Review

It’s about time.

Sen. Bernard Sanders (I-Vt.) is pushing an amendment to the financial overhaul bill before the Senate that would broaden the Government Accountability Office’s power to audit the Fed and compel the central bank to disclose details about the firms that received emergency federal aid during the financial crisis.

Of course, the Obama White House is looking to kill the amendment. Surprise!

Hats off to ProPublica for their phenomenal follow-ups to the SEC case against Goldman Sachs, and for revealing that what might have been a genuine move against corruption now merely seems like a politically motivated slap on the wrist, a show-trial, essentially, where big bad Goldman Sachs gets forced to pay a pittance of a fine and the rest of their compatriots who indulged in the exact same practices go off scot-free. Let’s not forget that they paid only 1% of their 2009 profits in taxes, so whatever restitution the SEC squeezes out of them won’t begin to cover their debt to the US Government.

For those of you who haven’t been following the byzantine hearings regarding the Goldman case, with their alphabet soup of acronyms and stern avocations from our media that these are “complex financial instruments” we’re dealing with – well, who can blame you? But the gist of the case is relatively easy to follow, and while Goldman may have been a particularly egregious offender, almost every investment bank bigger than a mom-and-pop outfit traded in Collateralized Debt Obligations (CDOs), the “complex instruments” that lie at the center of this case. Earlier this month ProPublica ran an extensive look at Magnetar, a hedge fund that traded exclusively in CDOs, and just a few days ago it revealed that Merril Lynch engaged in identical practices to the ones that got Goldman Sachs sued by the Securities and Exchange Commission.

CDOs are basically a bet that a given asset will perform well or perform poorly. In the Goldman Sachs case, Goldman put together securities (assets) that it knew would fail (the SEC hopes to show that a Goldman trader specifically picked the components of the securities for their especial toxicity), sold those securities to gullible investors, then secretly took out a collateralized debt obligation against that same security, betting, in essence, that its value would go to zero, which of course they knew would happen because they picked it specifically to do so. When, sure enough, the security did become worthless, Goldman hit paydirt.

This is called fraud, and it’s a pretty grievous sin in the world of finance (at least it was, once upon a time). So on one hand, it’s absolutely just for Goldman Sachs to come under the SEC’s gun, get its reputation tarnished a bit, and, with luck, get a few of its executives fired, where they can live the rest of their days in their Park Avenue penthouses, counting their ill-gotten gains. But on the other hand, what is the use of this symbolic prosecution if it doesn’t engender a shift in practices from the financial community?

The case of John Paulson and Goldman Sachs identified in the SEC indictment was neither the biggest nor the most blatant case of securities fraud during the run-up to the crisis. For the SEC to suddenly regain its regulatory muscle, and for them to focus on this one case to the exclusion of all else stinks of politics. President Obama’s approval ratings are dropping fast, and prior to this there had been no prosecutions of financial fraud at all. I could easily see President Obama instructing the SEC to move forward on the Goldman case so he could have something to show by November, especially since Goldman is the most visible and most reviled of all the Wall Street slimeball firms.

Finally, this case brings to light just how important the financial reform being discussed in the Senate is to prevent future such fraud. Currently most of the discussion seems to center around the politically popular “consumer protection”, but while overdraft fees and adjustable rate mortgages were pernicious side effects of the crisis, the real engine behind the financial meltdown was the widespread sale of over-the-counter (unregulated) derivatives like the CDOs mentioned in this case.

“Financial Reform” means nothing if not the outright ban of derivatives trading – or failing that, the erection of a structured derivatives exchange where fraudulent trades like the Goldman Sachs deal would be visible to the public and to investors. Without that, we’re literally back where we started.

(Via Felix Salmon)

I’ve written negatively about Senator Blanche Lincoln in the past for her vote in favor of the Iraq War, her frightening views on indefinite detention and torture, her support of warrentless surveillance, and a host of other sins, but I think she deserves major credit for introducing a bill earlier this week that would ban over the counter derivatives:

“Speculators will not be exempted and all trades will be reported to regulators and the public,” Mrs. Lincoln wrote. In addition, any agency that is used for the trading of swaps contracts, including those dealing with energy commodities, will be required to register with the C.F.T.C.

This is exactly the kind of transparency and oversight that could have prevented the crisis, or at least made it softer. I want to stress that the layers upon layers of new regulation that Timothy Geithner intends to add (and which I discussed in the post immediately before this one), will not do anything for public transparency.

Blanche, you’ve voted for some pretty bad things in the past, but this is a bill I can get behind.

(c/o Ezra)

David Min over at Center for American Progress has one of the clearest and most concise explanations of our current banking system I’ve seen so far. And he’s honest enough to mention that the only true solution to our “too big to fails” is to nationalize them and break them up. This is a must-read article:

To address this problem, we first need to define “too big too fail” and how the problem can implode our financial system. “Too big to fail” is best understood as a bank panic problem, and has arisen as the result of two developments in the global financial markets over the past several decades. The first development was the tremendous growth of a “shadow banking system” operating outside of the rules that have governed depository banking since the Great Depression. This shadow banking system essentially performed the same functions as banking—attracting short-term investments and using them to finance long-term loans—but did so through the use of entities that were not depository banks, and the use of financing instruments (such as mortgage-backed securities, commercial paper, or short-term repurchase agreements) that were not deposits. Because of this nonbank, nondepository structure, the shadow banking system, which grew to an estimated $10 trillion in size, fell outside the rules and protections of the regulated banking system.

The second development was the concentration of risk within the shadow banking system, such that a small number of financial firms were and are responsible for the vast majority of its liabilities. Before the 2008 crash, the five major U.S. investment banks had a combined balance sheet size of approximately $4 trillion, and this may have understated the true level of liabilities they were holding. Witness the recent revelations about failed Wall Street investment bank Lehman Brothers, which raises questions about the extent to which shadow banks offloaded balance sheet risk through the use of dodgy transactions.

Good stuff.

The Times has the latest in a string of articles accusing China of “using global trade rules to its advantage” today. With their angry, disapproving tone and several vague references to trade imbalances, one gets the distinct impression that America (and the Times by extension) has a hard time swallowing its own medicine.

Just look at what China is being accused of:

China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.

And:

Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions.

Horrific! Tell me, when was the last time China invaded a country for not selling its main resource in its own currency?

As for the Times’ description of the I.M.F – well, it must be read to be believed:

The International Monetary Fund acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.

Astonishing. The IMF’s true role is that of an economic enforcer on behalf of the United States. It compels “poor” countries to take IMF loans, and when they can’t pay them back, forces the debtors to enact “structural” changes to their economy, changes usually geared towards a neo-liberal agenda. This has happened in Russia, Poland, Argentina, Chile, South Africa, Pakistan, Eastern Europe, and a raft of other countries. The IMF is not so much a “watchdog” as a “police dog”, on behalf of the United States and its “Washington Consensus” economic policies.

Then they accuse China’s “beggar-thy-neighbor” policies as being of the same sort that caused the Great Depression:

Two closely related scourges played a central role in the collapse of world trade in the 1930s: protectionism and beggar-thy-neighbor currency devaluations. World leaders set up two institutions after World War II, now known as the W.T.O. and the I.M.F., to reduce the risk of another Great Depression.

But they neglect to mention the role of US banks and the Smoot-Hawley Tariff, which the US congress enacted in 1930 and began the worldwide trend of “protectionism” during the Great Depression. I mean, this is high school level history here.

Now, there can be no doubt by this point that China is, indeed, keeping its currency devalued in order to boost its export sector. This is common knowledge. But for the Times to blame this whole situation on China belies a real bias on their part.

Remember, it would be impossible for China to keep its currency artificially devalued if the US had not run historic deficits in pursuit of tax cuts and murder in the Middle East. A very weak showing from our “newspaper of record”.

The London Telegraph has the scoop:

Mr Dimon told investors at the Wall Street bank’s annual meeting that “there could be contagion” if a state the size of California, the biggest of the United States, had problems making debt repayments. “Greece itself would not be an issue for this company, nor would any other country,” said Mr Dimon. “We don’t really foresee the European Union coming apart.” The senior banker said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged.

California however poses more of a risk, given the state’s $20bn (£13.1bn) budget deficit, which Governor Arnold Schwarzenegger is desperately trying to reduce.

“We’ve got strong financial institutions . . . Our markets are the envy of the world. They’re resilient, they’re…innovative, they’re flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong.”

- Hank Paulson, Treasury Secretary, March 16, 2008

“We must [enact a program quickly] in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses, both small and large, and the very health of our economy,”

- Hank Paulson, Treasury Secretary, September 23, 2008

Alan Greenspan:

“I really didn’t get it until very late in 2005 and 2006.”

Reuters (13 September 2007), “Greenspan says didn’t see subprime storm brewing“

Thanks, Alan. Now back to your regularly scheduled programming.

Mortgage Calculator has an excellent interview with financial blogger Steve Waldman which I suggest you all read.

Waldman:

I think that the moral thing for most borrowers to do, under present circumstances, is to default on loans when it is in their financial interest to do so.

But it’s crucial to remember that “what is moral” is something we collectively decide, and not without constraints. A social order that routinely demands heroic sacrifice of people in the name of virtue will fail. Clever hypocrites will be rewarded while naive saints pay, and the overall tenor of society will not be virtuous. The most we can demand of fuzzy constructs like morality and social norms is what Arnold Kling calls “soft rule utilitarianism”, under which people accept modest personal costs on the theory that if everybody does so, we’ll all better off. But emphasis on the word “modest”, and expectations of reciprocity. Economic and legal scaffolding has to sit beneath informal social constraints so that in general it makes sense to be good. It is like the relationship between flesh and bone: You could not build anything as beautiful as a smile out of bone, but the smile will not survive if the jaw beneath is fractured and misshapen. We regulate the “bone structure” of our society explicitly via legal arrangements, and more subtly, via social and reputational incentives. There’s a kind of hygiene we have to attend to, in order to ensure that doing well and being good are not terribly inconsistent. Over the past few decades we’ve failed to attend to that hygiene, in large part I think because we let simplistic economic ideas persuade us that we didn’t have to, and that the pursuit of wealth yields virtue automatically and dirty is the new clean.

Much of my thinking on economic and social issues comes back to T.S. Elliot’s proposition, “It is impossible to design a system so perfect that no one needs to be good.” Once upon a time, I chose to disagree. I thought it was the challenge of our day, and the grand project of modern economics, to build a system in which people pursuing their own self-interest would provide all social goods, in which the benevolent invisible hand would rule all and we’d have no need to rely upon ideas as shifty and manipulable as “virtue”. I have done a full 180 on this question. Economic self-interest and formal legal frameworks are simply insufficient to regulate a decent society. Elliot was right.

Hat Tip to The Big Picture:

“Isn’t it funny when you walk into a investment firm, and you see all of the financial advisors watching CNBC — that gives me the same feeling of confidence I would have if I walked into the Mayo-clinic or Sloan Kettering and all the medical doctors were watching General Hospital…”

-Senior portfolio manager, UBS

I mentioned this before, but I really want to stress that “financial reform” is completely meaningless without reinstating the Glass-Stegall Act. Enacted in 1933 and foolishly repealed in 1999, Glass-Stegall drew a firm line between commercial and investment banks and prohibited the “securitization” that lay at the heart of this crisis. Previously, “commercial” banks – ones in which you deposit your paycheck and which might later loan you money for a house or car – were completely separate entities from “investment” banks – ones that invest your money in whatever way they see fit. Commercial banks were low risk, low rate-of-return, while investment banks carried a higher risk, but with more earning potential. When current Economic Council Director Larry Summers chose to repeal Glass-Stegall back in 1999, he abolished the distinction between commercial and investment banks, allowing erstwhile “safe” organizations to make wildly irresponsible bets and grow so intertwined that they eventually brought the whole system down. Repealing Glass-Stegall created the “Too Big to Fail” banks.

The famous Elizabeth Warren, Paul Vlocker, and even John McCain (whose chief adviser’s name is on the G-S repeal) have come out in favor of reinstating Glass-Stegall. All the “too big to fail” banks are now even bigger, and this is largely because legislation which was traditionally used to keep them from conglomerating was idiotically repealed. This is the biggest one thing Congress can do right now to prevent the need of a future bailout. It would be so easy – they could do it tomorrow! The legislation is already written; all they have to do is sign it.

Sens. John McCain and Maria Cantwell have done a great service by recently proposing a Glass-Stegall reinstatement in the senate last month, but the bill doesn’t seem to have much support. This is totally baffling to me. The only reason I can think why the Senate wouldn’t do this right now is the massive donations they would have to sacrifice. Predictably, all the financial institutions, from Bank of America to Goldman Sachs, are vehemently against Glass-Stegall, as it would require them to break up, and likely diminish their ludicrous profits. Hence in the Bloomberg article you can hear Senators conceding that the bill “makes a lot of sense”, but “[they] don’t know if it’ll ever happen.” Uh…

The toll-free numbers for the Congressional switchboard are: 1-877-851-6437, 1-800-828-0498, or 1-800-614-2803. I think this is one issue where calling your congressman could conceivably sway them. Congress bows to the financial industry only insofar as its money can help them get elected. Public outcry can influence our legislators on legislation as specific as this. Remember, the TARP bailout originally failed in the House because their switchboards lit up with calls from angry voters.

The Financial Times has a list of 14 reasons why US bankers should be taxed for their outsize bonuses. Both Britain and France have begun to do this.

1. People on Main Street are furious about Wall Street bonuses.

2. This anger is justified because the bonuses are based in large part on windfall profits. These profits derive from taxpayer-backed interventions that stabilised the financial system, paving the way for a  recovery in financial markets and collapse of risk spreads.

3. All banks benefited from this bailout – not just the ones that took or still have Tarp funds. Even the strong gained hugely from Fed liquidity and government actions to ensure none of their weaker counterparties failed (including but by no means limited to the AIG case).

4. In an ideal world, these interventions would have been structured up front in a way that ensured the value created did not leak out to banks and bankers. But they were not.

Yet more evidence that our friends across the Atlantic have a firmer grasp on democracy than we do: Britain is set to levy a major one-time tax on those scurrilous “bonuses” the banks are handing out with taxpayer money.

The UK government will hit the bankers with a 50% tax on any bonuses greater than $40,000, this year only. In doing so, they will make up a good portion of their budget shortfalls and send a clear message to the financial industry that the taxpayer bailouts are not a gift to the few.

Can such a thing happen here? In the words of the Brookings Institution: not likely.

“I think it is very unlikely that you would see this kind of tax on bonuses here in the U.S.,” Douglas J. Elliott at the Brookings Institution in Washington said. But, he added, “There are going to be big bonuses this season. There will be high levels of public anger. Therefore there will be some bills introduced. I just don’t think they are going to make it through.”

Why? Because unlike in Britain, our entire legislative process has been bought by the major financial institutions, part and parcel.

As Finance Minister Alistair Darling said:

“If they insist on paying substantial rewards, I am determined to claw money back for the taxpayer.”

Can one even imagine such words coming from our own Bailout Chiefs?

The Daily Beast has an excellent report on our banking sector’s new financial practices, which – surprise! – are inscrutable to the inquiring journalist. That the late financial crisis bears remarkable resemblance to the Enron scandal 9 years ago has apparently occurred to few, though it should be obvious. Nomi Prins traces the same shadow accounting in three major banks that brought Enron down.

As she says:

While Washington ponders what to do, or not do, about reforming Wall Street, the nation’s biggest banks, plumped up on government capital and risk-infused trading profits, have been moving stuff around their balance sheets like a multi-billion dollar musical chairs game.I was trying to answer the simple question that you’d think regulators should want to know: how much of each bank’s revenue is derived from trading (taking risk) vs. other businesses? And how can you compare it across the industry—so you can contain all that systemic risk? Only, there’s no uniformity across books. And, given the complexity of these mega-merged firms, those questions aren’t easy to answer.

While we continue to argue over whether or not our banks deserve regulation, their accounting practices are transforming beyond all recognition. Whoever we hire to audit our banks – if, indeed, we ever do so – will face an impenetrable morass.

The Times ran a fantastic article last week which I think deserves a careful look, as it presents in uncharacteristically sharp terms the economic situation before us.

They begin with some fun facts:

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

$700 Billion, as many must recall, was the magical “really big number” Bush and Paulson sold us last September, promising that we likely shouldn’t spend it all, and will probably “see a return on our investment”. I remember the awe with which we once held the TARP program: “$700 Billion, have they lost their minds?” None of us (certainly not I) could have fathomed such a large sum being spent at one time. It is a testament, then, to our infinite ability to adapt that $700 Billion no longer seems so very great, and we can swallow easily the prospect of such an annual payment.

The Times is somewhat disingenuous in claiming $500 billion a year to be “greater than the combined federal budgets for… Iraq and Afghanistan”. As The Times are surely aware, President Obama recently signed a $680 Billion war bill in October, with (according to The Times), “$550 billion for the Pentagon’s base budget in fiscal 2010 and $130 billion more for the wars in Iraq and Afghanistan.”  But I digress.

Much of this new debt, as The Times is kind enough to report, has to do with the massive dumping of cash onto the open market via the Federal Reserve. Euphemistically, the article states:

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

“Teaser rates” of course, means lending at 0% interest, essentially lending for free. This is the policy our Fed has chosen over the past year. It, combined with the trillions of untraceable dollars injected into our five major banks, have expanded the Treasury beyond anything previously imaginable. As the article claims:

On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.

What this all means, what the Times doesn’t see fit to mention, is that the US government is bankrupt. That’s it. Our liabilities overshadow our assets, our debts are greater than our ability to pay them; we are underwater, over our heads, sunk.

And we aren’t the only ones:

The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.

It looks like the US and Europe will be coming to terms with some hard realizations next decade.

The Huffington Post has got the scoop on the recent protests that erupted outside the American Banker’s Association in Chicago yesterday. Unlike the “9/12 Tea Party” protests last month, however, these outraged citizens saw very little mainstream coverage. CNN merely reprinted a Reuters dispatch which quoted none of the protesters but plenty of the meeting’s attendees, all of whom professed their unequivocal innocence. Fox News, unsurprisingly, had very little to say on the matter. Even the New York Times could not be bothered to toss the story a brief. In all, the mainstream reaction to these demonstrations stands in pitiful contrast to the 24-hour live feed which blared into millions of homes on September 12th.

When one gets a sense of who these protesters are and what drove them into the street, the reason for a lack of discussion becomes clear. This demonstration did not occur within controlled paramters; its organizer, National People’s Action, has made no direct campaign contributions, and their stated aims, in contrast to the Fox News 9/12 Movement, are antithetical to the aims of our corporate industry.

Instead of agitating against a health-care public option (opposition to which has benefited our insurance industry enormously), this group seeks strong regulation of the financial instruments which threw them into poverty – CDOs, CDSs, etc. The current proposal to achieve this end creates a “Consumer Finance Protection Agency” (or CPFA) in a highly-contentious bill which is now on the senate floor and is being vigorously opposed by the financial establishment.

As Esther Kaplan reports in The Nation:

“‘We had this image of big bankers sipping martinis and saying, ‘Did we really get away with this?’” said lead organizer George Goehl, director of National People’s Action. “Then two months ago we found out the American Bankers Association was having its annual meeting here in Chicago.” The ABA, not so incidentally, has fiercely fought against new regulations on the banking industry, and is lobbying hard now against the CFPA.

This is something to watch for, much more so than the protests last month, as yesterday’s demonstration reflects, so far as one can tell, a genuine outrage over the status quo. Yesterday’s protest was small (estimates of just under 1,000 people), but one would like to think a small demonstration against a real grievance would carry more weight than a large, manufactured demonstration over a non-existent one. It will be interesting to see whether similar demonstrations crop up, or, starved for lack of media attention, this CPFA movement dies down. We know which option our bankers prefer!

The Wall Street Journal reports in today’s issue that our financial apparatus stands poised to dispense the largest package of executive bonuses ever. All told, more than $140 Billion will be dispersed among those wizards of finance. They recieve their multi-million dollar paychecks at a time of extreme economic privation for the rest of the US. Unemployment still surges upward to an astonishing 18% of the working-age population, while median incomes have remained stagnant for the past fifteen years.

According to The Economist, the top 1% of earners in America receive almost 25% of the total income generated. This puts income inequality at a level not seen since 1928. But in the midst of such a wide gap between rich and not-so, it is impossible to have any reaction but gaping awe to the figures quoted above. For what does it truly mean that 1% of the population can amass more than a quarter of the country’s wealth?

What it means, unfortunately, is that the consequences of the stock market meltdown have been completely lost on those who perpetrated it. Members of our financial industry haven’t found themselves thrown on the street from foreclosure. A few have heard those bitter words:  “I’m sorry, but we’re going to have to let you go,” but they weren’t exactly living paycheck-to-paycheck before, and most handily found new jobs in a matter of weeks. They have not seen their paychecks shrink – indeed, most of their checks have expanded, if The Journal can be taken at its word. In short, then, the crisis represents to its architects little more than an abstract concept: a set of numbers and figures on charts or a grim human-interest piece on the nightly news. The actual effects of their malfeasance (economic privation, anxiety, fear, hopelessness) are as far away to Wall Street as the moon.

All this is dismal news for those of us who would like to avoid a repeat of last September’s performance. Indeed, these reports – for instance, of JP Morgan Chase’s record profit this year – belie the essential divestment between Wall Street and the rest of the economy. Not only do they make money when times are good, they also make it when times are rough, the people be damned. Given that the reckless lending and casino-like practices of these firms caused the economic devastation we see today, these bonuses represent the ultimate “moral hazard”. Financial executives and their employees now have literally zero incentive to act in the interests of the greater economy. They make money either way.

The Huffington Post gives us a nice preview of an insider report in the upcoming issue of Vanity Fair, detailing the secret meetings between Goldman Sachs and the US Treasury at the height of last year’s stock market crash.

Here is a nice little Q&A with the author, Andy Sorkin, to get you warmed up. Look out for this article.

From the FDIC:

From the FDIC, this week’s bank failures:

The New Republic has often drawn my ire for its steadfast support of the status quo, its corporatism, its hostility to the consumer, and, at times, its open agitation for war. I therefore take all the more pleasure in directing you to this informative piece on the Federal Reserve and its bungling of our current crisis. One would hardly expect such clear analysis from a publication whose role is to manufacture consent for the Fed’s policies, and one hopes such criticism portends a more vigorous phase in the magazine’s long and illustrious career.

After a short outline of the Fed’s birth and original purpose, TNR focuses on the organization’s role in the various booms and busts of the past 30 years. Startlingly, TNR asserts the Fed’s centrality to the boom-bust cycle, overturning the conventional wisdom that our central bank is merely an observer, able to lend a push in one direction or a pull in another, but largely helpless to shape the overall landscape. In their words:

The decisions he made during the recent crisis weren’t necessarily the wrong decisions; indeed, they were, in many respects, the decisions he had to make. But these decisions, however necessary in the moment, are almost guaranteed to hurt our economy in the long run–which, in turn, means that more necessary but harmful measures will be needed in the future. It is a debilitating, vicious cycle. And at the center of this cycle is the Fed.

Strong words; and a few even stronger:

Enabled by the Fed, our system’s tolerance for risk is out of control. This is an increasingly dangerous system. It is only a matter of time until it collapses again.

The New Republic attributes this risk to the age-old complaint: bankers and CEOs are simply not punished for poor performance – on the contrary, they are rewarded with dollar amounts we mere mortals can hardly fathom. For evidence they cite Citigroup’s $100 million CEO pay packages to Robert Rubin and Chuck Prince – some of the main architects of our current boondoggle.

When discussing solutions, unfortunately, TNR once again displays its establishment colors. The recommendations it puts forth are mostly watered down, and appear limp when compared to the magnitude of the problems they address.

“Reasonable personal liability” for failing CEOs sounds nice, but will inevitably translate to a small slap on the wrist. Contrary to popular belief, there is not a large difference between a $200 million annual paycheck and a $100 million paycheck. What seems like “reasonable liability” to most CEOs still leaves them unconscionably rich. We must truly divorce ourselves from the idea that as a financial leader you can bankrupt thousands of people and still walk away rich as a Midas. If this means the CEO goes bankrupt with his shareholders – well, so be it. Nobody said banking was a safe business.

Likewise with their reccomendations regarding conflicts of interest. The New Republic advises a “cooling off” period for public servants who enter a regulatory position after making their fortune in the private sector (for example Hank Paulson, who retained his Goldman Sachs holdings while serving as Treasury Secretary).

This is not enough. If our crisis has taught us anything (something which remains to be seen), it is that financial ties run deep, and are often not erased by time. It is ludicrous to appoint to a regulatory position anyone who has ever had anything to do with the financial industry. Such conflicts of interest are inherent – “cooling off period” or no.

A weak finish to an otherwise outstanding article.

The banker from the previous post also commented upon China Question (i.e. “is it a good idea to borrow so much money from China?) His answer repeated almost verbatim the answer I previously received from several of his industrial colleagues.

Without the US (runs the standard interpretation), China would have no market for its goods, and thus, for China to prosper, the US must also prosper.

He continued to remark that no other country has the raw purchasing power of America. Our GDP outstrips the next largest by a factor of three. Only the combined European Union has a larger economic output than ours.

(A graph, to illustrate. The Y-axis is in millions of US dollars.)

Poor China!

It’s clear that no other country has the power to fuel China’s growth. If they wish to rise their people from the depths of poverty they must do so through us. Who else can they sell to? Therefore, my friend triumphantly concluded, China will do nothing to sabotage our economy.

Tellingly, however, he made the statement: “We need them and they need us – maybe they need us a little less, but the fact remains.”

He winced when I noted that these figures are based on dollar-centric monetary system. There was a possibility, he conceded, that China may wish to supplant the dollar as global currency with another, or even its own.

But this was “at least five years down the line”, he declared.

For comparison, here are the top ten corporations who donated to the McCain presidential campaign. Notice any similarities?

1 Merrill Lynch: $381,995
2 Citigroup Inc: $331,051
3 Morgan Stanley: $274,452
4 Goldman Sachs: $259,345
5 JPMorgan Chase: $240,357
6 AT&T Inc: $220,438
7 US Government: $208,604
8 UBS AG: $196,593
9 Wachovia Corp: $196,313
10 Credit Suisse Group: $185,453

The banks that donated to both campaigns are highlighted in bold. No matter which candidate won, their interests were secure from the start.

Opensecrets.org is an excellent resource to find out where our elected officials get their money. From their website:

University of California: $1,591,395
Goldman Sachs: $994,795
Harvard University: $854,747
Microsoft Corp: $833,617
Google Inc: $803,436
Citigroup Inc: $701,290
JPMorgan Chase & Co: $695,132
Time Warner: $590,084
Sidley Austin LLP: $588,598
Stanford University: $586,557
National Amusements Inc: $551,683
UBS AG: $543,219
Wilmerhale Llp: $542,618
Skadden, Arps et al: $530,839
IBM Corp $528,822
Columbia University $528,302
Morgan Stanley $514,881
General Electric $499,130
US Government $494,820
Latham & Watkins $493,835

Financial sector firms are in bold, while law firms are italicized.  All together, corporate donations comprise an overwhelming proportion of the money given to the “Obama for America” presidential campaign.

Now ask yourself why President Obama was so keen on bailing out the financial sector.