Wasn’t it only in October ’08 that we all were told to believe that the whole financial system had collapsed/was on the verge of collapse and that we need to shell out $780 billion of tax payers money to the exact same bankers has cost us upwards of $5 trillion to-date (per President Obama on the Letterman Show)?
So what happened?
Goldman Sachs (GS) reported $3.4B in profits for the 2Q09. GS plans to pay $18B in total compensation to employees averaging a staggering $600K/employee.
However, Unemployment is still at 16.5% (including semi-employed and people who have given up looking for a job).
That’s what happened.
People are so worked up about the Health Care reform when what we are talking about is A) keeping people alive/healthy which will “actually” benefit the economy B) saving the long term “social” model (yes, social) of Medicare, Medicaid and VA that will not survive unless we control cost and C) most importantly, making it affordable to buy insurance for individuals.
That to me is completely misplaced anger. We all have reason to be angry, reason to feel disoriented, reason to feel like we’ve been had and reason to lose trust. But directing it at Health Care reform is not only wrong it is a disservice to the country. It is much better to focus on reforming our Financial Industry and I contend, the only way to do that by reforming our election campaign finance – remember that issue that was hot before the 2008 elections and oh yes, also before the 2004 elections? Though, I must admit right on the outset that I am not very hopeful that either can happen.
However are some plausible ways to make a dent:
1. Make Banking boring – Banks should, asPaul Krugman points out, return to being “boring” and provide money at reasonable, conservative rates to support the rest of the society to invest, innovate and develop “real products” not consider credit default swaps as a product….ever! In effect, behave like a Utility Company….like they use to back in the 50s and 60s.
2. Regulate Banking — Bring back a degree of regulations to strike some balance. FDR had put in place regulations after the great depression, especially separating the investment arm from the lending arm that Reagan, Sr. Bush, Clinton and Jr. Bush all peeled off the system. Talking of FDR, a quote from him after the 1929 crash: “We always knew that absolute greed was morally bad but now we know that it is also bad economics.”
3. Change from a Consumer Based Economy to Production Based Economy — That is, of course, easier said than done. There are three big challenges facing this objective:
3.a. Internal- People — We have all been having a debt driven free ride (consumption and housing especially), for about 2-3 decades now. That has serious deleterious effects on the society beyond the obvious — the obvious being damaging enough. The Society and its industries are all geared towards non-producing, hype based industries — loads of consumer goods, financial schemers, mortgage and real-estate industries, and entertainment (I am including advertising and marketing in this, I am sure, to some people’s chagrin) are the largest employers. In fact, US consumer spending is greater than the combined GDP of China, India, Russia and Canada! So how do we turn our people back to producing goods and innovating? It requires people to focus seriously on studying and developing Engineering, Sciences and manufacturing related talent.
3.b. Internal – Political Culture — A lot of scary rhetoric is used that ironically accelerates our descent towards the abyss. All the talk about Capitalism vs. Socialism, how regulations are bad and how being American means making money is good is too superficial and nothing but dangerous rhetoric. Yes, of course regulations can be bad. And yes of course making money is good. The question really is if an industry is so deregulated that it is the wild-wild west while simultaneously being too important for the country that we all sink or swim with it? If so, instead of it causing us $5 trillion in losses wouldn’t it be better to regulate it so we stop fooling ourselves about the virtues of free market and spirit of independence since that is simply empty talk while reality is that every such “free” experiment leaves the US treasury and US citizens holding the bag? But our Political culture is such that money itself is what is driving it. So how can the purveyors of power wield it to do right when doing right simply means going against the same people who funded their campaigns? It doesn’t happen. So I believe, Electoral financial reform is an absolute essential is at the core of our problems.
3.c. External — China has kept a lid of its currency and undervalued it so that manufacturing goods in China remain cheap despite it becoming the third largest economy (which should have meant that it is no longer cheap since wealth created would imply wealth to spend hence driving up prices in China but that is not happening). However, China cannot increase its savings by the US and Europe buying from it since US and Europe have burst their debt bubble (thank god for small mercies!). So it is quite possible that not just US and Europe but soon enough China also doesn’t grow at the clip that it was growing at. Which, BTW, is not all that bad — it slows down the depletion and possibly the exhaustion of natural resources and prevent catastrophe. But more on that in another post.
Coming full circles to the theme of this post: I am sure there is no law in the land that can get Goldman Sachs or the executives that run it for this obvious take out of billions from people. Mr. Krugman, in his Opinion article of Sept 21st, “Reform or Bust” is trying, bravely, to correct an incorrigible situation. The money-politics nexus is so deep and the problems of building a “true (i.e. bubble free)” economics so complex, that most Presidents and politicians do not want to disturb the balance since it will one of two things: they do not get money in their coffers to get re-elected OR (worse) the bubble is not allowed to grow during their term and hence fake growth doesn’t take place during their reign and hence, again, they don’t get re-elected.
So, I am not too optimistic that true financial industry reform will take place or banker compensation caps will be implemented. More importantly, I think we have built a world that is unsustainable in its current shape since sustenance of it requires quarter over quarter growth and that, as is apparent by now, has been achieved via a series of bubbles in the last few decades with real growth being nil to minimal. Also, the natural resources cannot continue to be consumed in an ever growing manner.