Bankers robbed the banks

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.

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The real bailout prescription

Banks Only

It seems like I am in a statistical state-of-mind lately.
If you were to go to the IRS website you will find the total number of Individual Income Tax Returns for the year 2008 is: 156,297,000 (Source: http://www.irs.gov/taxstats/ –>Filing Season Statistics –>Filing Season Weekly Reports –> Report for filing year 2008 –> End of Year End Report.)

Let’s take the top 25% of tax payers out and we are left with 117 million individuals.
Next, let’s take the $3.8 Trillion (anticipated government spending across current and pending stimulus and bailouts including Bush bailout) and distribute it evenly to the 117M individuals that filed taxes.

You will arrive at the astounding number of $32,478!

That’s what we all could have gotten (except for the top 25% of earners who shouldn’t need it) instead of the current morass of bailouts and stimulus.

Let’s play this hypothetical scenario out a little further:
Imagine how fast our economy would have recovered if we were given this money, income tax free in a special account, to spend within two years within United States including purchase of airline tickets to fly out of United States (money spent abroad will not count). For any one with credit card loan or mortgage default, there would be additional stipulation that they pay off the loans/mortgage first. I am sure IRS can think of many other stipulations (and that would be fine). At the end of each of the two years we all would have to submit receipts to ensure we complied with the stipulations.

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Is this why Obama went to Canada?

The likes of Mr. Rich, the New York Times columnist, are scratching their heads trying to figure out what they would do to stop the meltdown of the financial system. And of course since they can’t figure out a solution they believe President Obama must be in an equal bind. To quote from Mr. Rich’s recent article, The Ecstasy and the Agony, “Therein lies the Catch-22 that could bring the recovery down. As Obama said, we can’t move forward without a functioning financial system. But voters of both parties will demand that their congressmen reject another costly rescue of it. Americans still don’t understand why many Wall Street malefactors remain in place or why the administration’s dithering banking policy lacks the boldness and clarity of Obama’s rhetoric.”

Given Mr. Obama’s moves to fundamentally restructure the American social and economic landscape, I believe a more likely solution to the banking problems of America is what Theresa Tedasco hints at in her article the “The Great Solvent North.” She points out that the World Economic Forum ranked the Canadian Banking System at # 1 in terms of stability. The Canadian Banking system, in short, is five large banks that are very carefully regulated by the Government and prevented them from taking huge risks and securitizing their loans.  And because it was only five banks it was easy for the regulators to regulate.

I think President Obama, more than to shake Mr. Harper’s hand, went to Canada to learn from the Federal Regulators how to manage banks and save them from themselves. President Obama and Mr. Volcker, former chairman of the Federal Reserve, both have talked up the virtues of the Canadian system.

If President Obama is seriously considering the Canadian model, the interesting part will be of course the journey — the transition from thousands of banks in the US to only five to ten consolidated banks. I watch the next year with baited breath.