Don't Cry for Wall Street
New York Times
By PAUL KRUGMAN
April 23, 2010
...What's the matter with finance? Start with the fact that the modern financial industry generates huge profits and paychecks, yet delivers few tangible benefits...
...In his Thursday speech, by the way, Mr. Obama insisted -- twice -- that financial reform won't stifle innovation. Too bad.
And here's the thing: after taking a big hit in the immediate aftermath of the crisis, financial-industry profits are soaring again. It seems all too likely that the industry will soon go back to playing the same games that got us into this mess in the first place.
Krugman continues elaborating upon a basic theme: "We also need to cut finance down to size."
...An intriguing proposal is about to be unveiled from, of all places, the International Monetary Fund. In a leaked paper prepared for a meeting this weekend, the fund calls for a Financial Activity Tax -- yes, FAT -- levied on financial-industry profits and remuneration.
Now, the I.M.F. proposal is actually quite mild. Nonetheless, if it moves toward reality, Wall Street will howl...
Here's more on the IMF's proposed FAT Tax from London's Times Online...
IMF's FAT Tax Offers Banks Scarce Room For Protest
UK Times Online
April 21, 2010
If the art of taxation is to pluck the maximum number of feathers with the minimum of hissing, then the International Monetary Fund's plan for a brace of new charges on financial institutions has been well targeted.
The world's banks have neither the appetite nor the moral standing to protest too loudly in public. Even the reaction from insurers and hedge funds, which the IMF would like to clobber, too, has been relatively mild.
Yet the sums envisaged are large. Credit Suisse estimated yesterday that the two charges -- a Financial Stability Contribution (FSC) and Financial Activity Tax (FAT) -- could wipe 20 per cent from annual pre-tax profits of the typical bank.
...the majority of G20 finance ministers and central bankers in Washington tomorrow seem likely to give the proposals a warm hearing. One exception is Canada, which is agin, and will have clout as host of the next G20 summit in June.
Securing international agreement will be tough. "If they can't make up their minds on climate change, how will they make their minds up about an international banking tax?" asked Professor Paul Palmer, of Cass Business School.
After eight years of mismanagement by the Bush administration, we now live in an environment that former Goldman Sachs Managing Director and author Nomi Prins discussed last week on Alternet...
Speculating Banks Still Rule -- Ten Ways Dems and Dodd Are Failing on Financial Reform
AlterNet / By Nomi Prins
April 14, 2010
....Banks -- shockingly -- aren't helping. They posted their lowest lending rates since 1942; despite all the subsidies and cheap money they received from, well, us, including exceedingly low Federal Reserve loan rates (zero to 0.25 percent interest).
That brings us to Bubble Lesson 101, Greenspan and Bernanke edition:
Cheap Money + Intensified Trading = Disaster Waiting to Happen.
Banks are incentivized not to lend. When the Emergency Economic Stabilization Act (which included TARP) was passed in October 2008, it included some fine print allowing the Fed to pay banks interest on reserves (money, or capital, banks are obligated to park with the Fed to back their businesses), and on extra reserves (money they aren't obligated to park). In September 2008, the top banks were required to keep $43 billion dollars in reserve at the Fed, and placed $59 billion in extra reserves. Today, banks are required to keep $63 billion in reserves, but parked an extra $1.2 trillion at the Fed.
Meanwhile, banks are using other federal funds to bolster speculative operations. The biggest banks, such as Bank of America, J.P. Morgan Chase and Wells Fargo, are on a dangerous cycle of higher trading profits and mounting losses in their consumer businesses. In other words, banking businesses that are tied to the real economy are dying, but raw gambling disguised as finance is doing fine. Wall Street is making money by rolling the dice - again. All this risky activity seems to be going unnoticed in Washington. Without major reforms, the next crisis is going to be worse than the last. Because if you pump enough money into anything, it'll look good temporarily, and that seems to be all politicians in either party really care about. But without major reforms, the next crisis is going to be worse than the last.
Today's juvenile partisan antics guarantee no meaningful reform bill will be produced, and mock our own history of bipartisan bank reform. In 1932, Senate investigations into the behavior of banks that precipitated the 1929 stock market crash were commissioned by a Republican Congress under Republican President Herbert Hoover. They continued under Democrat President Franklin Delano Roosevelt and substantive reform was passed, including the Glass-Steagall Act that decisively separated speculative from consumer oriented banks. Equivalent investigations this year are a joke.
While all of this occurred, Prins reminded us what happened on Wall Street last year...
--The top 25 hedge fund managers made a whopping $25.3 billion dollars in 2009. That's a billion dollars per manager!
And, adding insult to injury, in case you haven't been following U.S. tax law, most hedge fund managers are taxed at the 15% capital gains tax rate, not at normal rates of taxation.
Additionally, as Prins notes..
--The average compensation for Wall Street bankers increased by 27% in 2009.
Meanwhile, back on Main Street...
--2.8 million properties went into foreclosure in 2009; that's 21% higher than 2008.
--4.5 million properties are projected to be foreclosed upon in 2010.
--Bankruptcies rising 35 percent in 2009 rose 35% in 2009 over 2008 numbers.
As Prins also notes, Federal mortgage modification programs aren't cutting it. Reports over the past few days, including this from the NY Times, demonstrate that banks are vehemently resisting the administration's plans to reduce mortgage balances.
It's being reported in the MSM, that the administration's gloves are coming off. But, even now, they really can't (and, IMHO, aren't) drive this; the rubber hits the road on Capitol Hill, not at 1600 Pennsylvania Avenue; and, the legislative branch of our government offers little more than bloviations; yet, it's up to them to get the job done.
Given the state of regulatory capture on Capitol Hill, what do you think?
As far as I'm concerned, the IMF's proposed FAT Tax is long overdue.
It's one thing to "grab a mop." It's another thing to sit back while Wall Street actually puts forth the concept that they shouldn't pay for the societal mess that their unbridled greed has created.
Krugman's spot-on this morning. Like him, I say: To hell with that!