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Friday, March 04, 2011

Pay 'em

The Daily Show
Tags: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Jon Stewart makes some excellent points here. Another point that deserves emphasis: The Wall Streeters received perverse compensation for benefiting from offering failed financial products. They were allowed to bet on the failure of loans, which is why they encouraged making loans to Subprime borrowers. They encouraged the sales of rotten, sure-to-fail financial instruments based on those loans. They found ways to make hundreds of millions of dollars from schemes designed to ruin their own companies, and the economy as a whole.

The average person simply cannot get his head around these facts, because Wall Street operates according to non-intuitive rules. The teabaggers can thus get away with framing banker compensation in terms of an honest day's pay for an honest day's work, when in fact there was nothing honest about anything they did. The system encouraged corruption.

I'm going to take the liberty of reprinting a good chunk of Bryan Gould's piece in the latest Lobster. (The entire publication is avaiable for free download, but only for a short time.)
Contrary to the expectations of many of us that the global financial crisis would be seen as a conclusive judgement on the failures of neo-liberal doctrine, it is the Right that seems to have emerged, for the time being at least, unscathed and emboldened by the failure of their policies. It is worth reminding ourselves of the precise lessons that the global financial crisis should, and briefly appeared to, have taught us...

Markets are not self-correcting.

This simple and obvious proposition, so strongly confirmed by the failure of many of the world’s financial institutions, had been conveniently overlooked and even flatly denied by neoliberal theorists. They chose to believe that operators in a market are perfectly informed and enjoy a parity of bargaining power and that market outcomes are therefore the best available and should not be second-guessed. We now know that this is self-serving nonsense, and that the natural tendency of the unregulated market is to lead to excess, irresponsibility, inefficiency and eventually collapse.
The ‘trickle down’ theory was often used to support the proposition that, if the rich got proportionately richer, the rest of us would benefit in absolute even if not comparative terms from the lift in economic activity that the increased wealth of the rich would produce through increased investment and employment. This theory has been discredited in the absence of any credible evidence to support it, and in the face of evidence to the contrary that shows that in countries where inequality has widened the most, the living standards of the poor have actually declined.
Contrary to the constantly repeated mantra that the best thing that government can do is to ‘get off our backs’, the global crisis shows that in the end it is only governments that have the resources, will and legitimacy to underpin a failed banking system and therefore the currency and the economy more generally.
Wasn't the S&L debacle the result of Ronald Reagan deregulation? Didn't anybody learn from that?

How is it that we forgot the reason for strict anti-trust, and financial institution legislation 40 years after FDR?

Or did we forget?

Could it be that a group of 'on the take' congress members and their Wall Street masters knew exactly what they were going to do and that they would make a boat load of money doing it?

I'm beginning to think that Jimmy Hoffa was wacked because the republicans didn't want any competition. And by republican I mean Barry Obama too.
Inside job did quite a decent job of getting across some of the absurdities of what went on. But they missed several key points. The two critical points are the interplay between total banking system leverage, banker compensation and economic growth.

So back when I was young and the banks were beginning their successful power grab, most securities firms were partnerships, and also heavily regulated. There was limited access to derivatives which by their nature embed massive leverage. This naturally limited the extent to which securities firms could make money. So they lobbied to do two things. One was to accept outside capital - share capital - so that they could expand. They used the argument that if foreign banks/securities firms moved first they would not be able to compete.

However once you start taking outside capital a) you become more powerful. b) you can bet with other peoples money. All sorts of games become attractive cos if you win, you make money personally and if you lose, your banks shareholders take the pain. Or ultimately the government cos the bank is now "too big to fail".

The other key development was "deregulation". Deregulation is a silly term because it is framed from a bankers perspective. Better to call it, leverage expansion. That was the goal. Regulation always limited leverage but increasing leverage always increases bank income. So by lobbying for increased leverage then banks can make more money.

Its simple really; equityxleverage=balance sheet. The bigger the balance sheet the more money they make. However by using more leverage the more risk they take as well.

But if your loses are socialised but your profits are yours, then you arent really taking any risk. The tax payer takes the risk and you take the profit.

I think people get this now, but they banks can argue that if you make us reverse this process now, we will not be able to lend and the securities markets will fall. This will put the economy in a tailspin.

Its true. The banks/securities firms have taken the economy hostage.

So fiscal policies designed to stimulate the real economy - like infrastructure spending wouldnt go directly to the banks. But low interest rates are a direct subsidy to the banks.

It all stinks. You need root and branch reform. I am sure that the bankster cheerleaders like Geitner will eventually insist on bigger equity issues by the banks but that wont really solve the problem.

All these people should nt be allowed to take public capital. They should all become partnerships again. Sorry about the length of this comment; Edit it or just delete it. I just felt compelled to get this point across cos I thought the movie missed it.

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