In his defining analysis of the five key decisions that brought about our current economic crisis, "
Capitalist Fools," Nobel laureate and Columbia University economics professor Joseph Stiglitz listed the reasons for our current economic mess as follows:
1.) The Reagan administration's decision to replace Federal Reserve Board Chair Paul Volcker with Alan Greenspan (1987);
2.) The veritable repeal of the Glass-Steagall Act, due to the passage of the Gramm-Leach-Bliley Act (1999);
3.) George W. Bush' tax cuts (2001, 2003), along with various other "leeches," such as the Iraq War, and the country's dependence upon foreign oil--two key factors that have sucked trillions of dollars out of our economy over the past three decades--in other words, very little was done to actually stimulate the economy, instead a focus upon economic bubbles was the rule of the day;
4.) The epic fail of the ratings agencies (with Standard & Poor's, Moody's, and Fitch being the three largest), along with a Wall Street ethos that amplified Michael Douglass' "Wall Street" character's (Gordon Gecko's) mantra: "Greed is good," to the point where all that mattered was performance in the current quarter (1993-present); essentially, this tacitly brings the credit default swaps/derivatives issues onto Stiglitz' list, since it's widely acknowledged that derivatives trading is among the most lucrative of sectors on Wall Street, with various sources telling us that upwards of 40% of Goldman-Sachs net profits are derived (pun intended) from that business sub-vertical, alone;
5.) The passage of the current Wall Street bailout package (October 3, 2008).
Working in reverse order, starting with today's Paul Krugman Op-Ed in the NY Times, "Out of the Shadows," it is becoming quite clear that a consensus of reviews is emerging from the left with regard to the content of the Obama administration's proposed overhaul of our nation's finance sector. And, to that I would also add that it's being perceived on two levels: from a 32,000-foot view, and down on the ground.
PROPOSED REGULATORY REFORM OF WALL STREET FROM 32,000 FEET
From the air (the 32,000-foot view), the basic issue from the left with the administration's proposed financial sector reforms is that the White House provides little more than guidance, with the actual substance of the various pieces of legislation remaining to be worked out between the current regulators, the folks on Capitol Hill, and the folks that own the folks on Capitol Hill--the financial services' sector lobbyists.
PROPOSED REGULATORY REFORM OF WALL STREET FROM GROUND LEVEL
As Krugman frames it today:
Out of the Shadows
By Paul Krugman
NY Times Op-Ed
Published: June 18, 2009 In Print: June 19, 2009
...Tellingly, the administration's executive summary of its proposals highlights "compensation practices" as a key cause of the crisis, but then fails to say anything about addressing those practices. The long-form version says more, but what it says -- "Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value" -- is a description of what should happen, rather than a plan to make it happen.
Furthermore, the plan says very little of substance about reforming the rating agencies, whose willingness to give a seal of approval to dubious securities played an important role in creating the mess we're in.
In short, Mr. Obama has a clear vision of what went wrong, but aside from regulating shadow banking -- no small thing, to be sure -- his plan basically punts on the question of how to keep it from happening all over again, pushing the hard decisions off to future regulators...
Krugman continues to tell us he is aware of the political realities of the situation--getting reform through the legislative branch of our government is, inherently, a herculean task. But, he advises that the administration must put its muscle behind its words concerning two matters, in particular: a.) team Obama needs to come down hard on the ratings firms; and, b.) a realignment must occur concerning the inherent compensation culture on the Street , today, where a more healthy approach must supplant it--one that focuses upon longer-term performance, as opposed to just taking the money and running with a firm's bonus based upon one's performance in any given 90-day period.
As Krugman notes, and as I concur, "...the Obama plan would be a lot better than nothing." But, it's definitely not a situation where 'we're letting the perfect get in the way of the good,' so to speak, as some would have us believe. It's more along the lines of: "Is that all you've got?"
NY Times business reporter Joe Nocera took this train of thought a few steps deeper in his piece, yesterday: "Only a Hint of Roosevelt in Financial Overhaul."
Only a Hint of Roosevelt in Financial Overhaul
By JOE NOCERA
Published: June 17, 2009 In Print: June 18, 2009
...But it's what the plan doesn't do that is most notable.
Take, for instance, the handful of banks that are "too big to fail"...
...Many experts, even at the Federal Reserve, think that the country should not allow banks to become too big to fail. Some of them suggest specific economic disincentives to prevent growing too big and requirements that would break them up before reaching that point.
Yet the Obama plan accepts the notion of "too big to fail" -- in the plan those institutions are labeled "Tier 1 Financial Holding Companies" -- and proposes to regulate them more "robustly." The idea of creating either market incentives or regulation that would effectively make banking safe and boring -- and push risk-taking to institutions that are not too big to fail -- isn't even broached.
Or take derivatives. The Obama plan calls for plain vanilla derivatives to be traded on an exchange. But standard, plain vanilla derivatives are not what caused so much trouble for the world's financial system. Rather it was the so-called bespoke derivatives -- customized, one-of-a-kind products that generated enormous profits for institutions like A.I.G. that created them, and, in the end, generated enormous damage to the financial system. For these derivatives, the Treasury Department merely wants to set up a clearinghouse so that their price and trading activity can be more readily seen. But it doesn't attempt to diminish the use of these bespoke derivatives.
"Derivatives should have to trade on an exchange in order to have lower capital requirements," said Ari Bergmann, a managing principal with Penso Capital Markets. Mr. Bergmann also thought that another way to restrict the bespoke derivatives would be to strip them of their exemption from the antigambling statutes. In a recent article in The Financial Times, George Soros, the financier, wrote that "regulators ought to insist that derivatives be homogeneous, standardized and transparent." Under the Obama plan, however, customized derivatives will remain an important part of the financial system.
Last of all, Nocera tells us that, "The plan places enormous trust in the judgment of the Federal Reserve..."
In Nocera's words, this means "business as usual."
So, let's look back at Stiglitz' list of causes for our current economic mess in "Capitalist Fools," which I excerpted at the top of this diary:
1.) The Reagan administration's decision to replace Federal Reserve Board Chair Paul Volcker with Alan Greenspan (1987); is not Alan Greenspan's very history at the helm of the Fed the number one argument as to why we can never allow that office to gain even greater control of our nation's financial system?
2.) The veritable repeal of the Glass-Steagall Act, due to the passage of the Gramm-Leach-Bliley Act (1999); folks, are my eyes deceiving me, or are the very folks--the Rubinists--that fought so hard to repeal Glass-Steagall in 1999 running the economics show in the Obama administration right now?
3.) George W. Bush' tax cuts (2001, 2003), along with various other "leeches," such as the Iraq War, and the country's dependence upon foreign oil--two key factors that have sucked trillions of dollars out of our economy over the past three decades--in other words, very little was done to actually stimulate the economy, instead a focus upon economic bubbles was the rule of the day; so, what's really changing here?
4.) The epic fail of the ratings agencies (with Standard & Poor's, Moody's, and Fitch being the three largest), along with a Wall Street ethos... that tells us that derivatives are great! (It's widely acknowledged that derivatives trading is among the most lucrative of sectors on Wall Street, with various sources telling us that upwards of 40% of Goldman-Sachs net profits are derived (pun intended) from that business sub-vertical, alone; as Krugman, Nocera and others have reminded us in the past 48 hours, little or nothing is being done with regard to putting a saddle on the ratings agencies and in terms of implementing significantly transparent trading initiatives within the derivatives markets.
5.) The passage of the current Wall Street bailout package (October 3, 2008); folks, again, are my eyes deceiving me, or are the very folks--the Rubinists--that fought so hard to pass the Wall Street bailout package last Fall the same ones running the economics show in the Obama administration right now?
To all of this, in closing, I want to say it's tough to criticize the President with Congress on a timetable--drafted by the President himself--which has an end-of-year deadline currently in place for Congress to present him with final financial reform legislation for his signature. There's nothing to criticize, because there's no legislation in place yet. But, that means we have more than six rough months ahead as far as industry lobbying is concerned; and, it may only be assumed (by me), that it is this sheer length of time which will wear down a public that's already too bored with this subject now.
Perhaps more importantly, our elected officials and the Wall Street lobbyists know this last reality is the practical truth of the matter.
Then again, as Joe Nocera told us yesterday:
If Mr. Obama hopes to create a regulatory environment that stands for another six decades, he is going to have to do what Roosevelt did once upon a time. He is going to have make some bankers mad.
The jury's out, but I'm no longer "cautiously optimistic." It sure looks like it's just another status quo charade; but as Krugman reminds us, it's better than nothing. But, "better than nothing" is a long, long way from "...the good being the enemy of the perfect." In other words, we've got many miles to go before we even get to just "the good." And, we may never get there, at all.