Fixing Wall Street: "So, What Do You Do NOW?"

Looking for the New Volcker's

Regular readers of this blog know that I could hardly be a harsher critic of modern-day Wall Street: its practices; its obscene pay for little or no economic contribution ("Wall Street is Worthless"); and its corrupting influence on our government and society generally.

And I've got plenty of company.

As the fog lifts on the cause(s) of The Crash of '08, more and more people -- dare I say a consensus -- now share that viewpoint.

But as the "Wall Street-as-culprit" narrative gains traction, it logically begs the (entirely fair) question: "So, what do you do now?"

Next Steps

My answer is to go back to the airplane metaphor in "Wall Street's Uncontained Failure."

When trying to save a hijacked plane, however badly disabled, the first order of business is always to . . . replace the pilots.

Only once that's done, do you turn your attention to the altimeter, air speed, flap settings, etc.

And only once the plane has been stabilized do you turn your attention to longer term tasks like redesigning the defective engine(s) that just exploded.

Volcker 2.0

So, my starting point would be to look for the next Paul Volcker -- ideally, lots of them.

That is, people who are very bright (but by no means brilliant), honest, public-spirited, etc.

Plus two more things: 1) they're not tied to Wall Street ("Bye, bye, Tim Geithner, et al"); and 2) they're financially sophisticated -- but not too.

Fidelity Magellan guru Peter Lynch famously advised investors to put their money in businesses that "any idiot can run -- because sooner or later, any idiot is probably going to run them."

The next generation of Paul Volcker's will intuitively understand the government equivalent, and oversee financial reforms simple enough that they can be implemented and enforced without Wall Street "expertise."

And exactly who will find and appoint these new, enlightened financial stewards?

Try, elected officials whose campaign money didn't come from Wall Street.

P.S.: One more example of how some problems don't yield to direct solutions, especially when they're symptoms of a bigger problem: my notoriously unreliable garage overhead light -- a real headache when it gets dark before 5 p.m., as it does in Minnesota this time of year.

Over the last few years, I have experimented with every type of bulb there is, including "industrial" bulbs that have more durable filaments.

Result? A little extra use, perhaps, but no long term solution.

Then, this Fall, my garage door opener finally breathed its last, and needed replacing.

The new one is whisper-quiet and vibration-free -- and doesn't eat light bulbs.

Obama & Wall Street: 'Moderation in the Pursuit of Justice'

The Limits of Triangulating

Now that Congress has passed financial reform legislation, aren't people upset about past Wall Street abuses just being scolds and cranks?

Shouldn't they -- we -- just get over ourselves?

My answer is "no," because the abuses aren't past.

On the contrary, shockingly little has changed (never mind accountability for misdeeds).

Financial Reform Scorecard

To review, here is a litany of all the things that went wrong leading up to the crash:

Wall Street actively encouraged subprime lenders to lower their already low standards — and then bought those loans knowing they were likely to default, but not caring. Traders up and down Wall Street made millions in bonuses selling products that were “ticking time bombs.” Moody’s, one of the three big credit ratings agency, quadrupled its profits in seven years by handing out triple-A ratings like candy. Regulators ignored impassioned entreaties to investigate fraudulent lending practices and excessive leverage. These were not anomalies. This was standard operating procedure in the years before the crisis.

--Joe Nocera, "Still Stuck in Denial on Wall Street"; The New York Times (10/2/2010)

So all that's different now, right?

Not exactly.

The big banks aren’t being broken up, the way they were in the 1930s. Bankers aren’t being hauled off to jail. No serious effort has been made to rein in executive compensation — or even to claw back millions of dollars in bonuses that were based on what turned out to be illusory profits. Most of the financial practices and products that brought us to the brink remain legal under the new Dodd-Frank legislation — though they will, finally, be regulated.

--Joe Nocera, "Still Stuck in Denial on Wall Street"

Splitting the Difference

When confronted with knotty social issues -- gays in the military, abortion, immigration policy, etc. -- splitting the difference (dubbed "triangulating" in the Clinton years) is smart politics.

When confronted with overwhelming evidence of egregious lawbreaking and greed, the consequences of which have cost millions of people their jobs, homes, and savings -- triangulating is a terrible political strategy.

FDR understood that when he said, "“Wall Street is unanimous in its hate for me — and I welcome their hatred."

So did Barry Goldwater, that bleeding heart Socialist, who famously said: 'extremism in the defense of liberty is no vice. And moderation in the pursuit of justice is no virtue.'

Attacking Wall Street's Attackers

"But isn't that . . . 'Socialism'??"

He who frames the question wins the debate.

I've been struck in recent months, talking to various people about the economy, by two things:

One. The generally limited vocabulary people have when it comes to understanding all things financial -- even people who are otherwise very sophisticated, well-educated, etc.; and

Two. The tendency -- again, amongst otherwise sophisticated people -- to somehow equate outrage about Wall Street misconduct and calls for genuine, structural reform with a "fringe" political agenda.

The "S Word"

So, what do you call someone who thinks:

--Hedge fund managers should pay a higher tax rate than teachers or firemen? (They don't; thanks to an especially sleazy tax break, their compensation -- called "carried interest" -- is taxed at 15%).

--CEO's shouldn't make literally *400 times what the janitor makes -- up from the 30x-40x that prevailed for almost half a century (roughly from the '30's to the '80's).

--Having half a dozen monster financial institutions -- whose balance sheets can literally be measured as a % of U.S. GDP -- is bad for our economy and political system.

Apparently . . . . "a socialist."

Sorry, folks, but we already have a socialist economy.

Except that it's socialism at the very top . . . and capitalism for everyone else.

*The 400 times is merely an estimate; the truth is, no one really knows, because executive compensation disclosure rules are exceptionally murky and porous.

It's also the case that CEO compensation is not set by the market; it's determined by captive boards of directors -- which is to say, the CEO's themselves.

Obama, Lincoln, & Financial Reform

George McClellan Redux?

Politicos will recall that much was made of Barack Obama's admiration of Abraham Lincoln during and just after the 2008 Presidential campaign.

In particular, Obama was said to have been influenced by Doris Kearns Goodwin's book, "Team of Rivals," which studied Lincoln's management style.

Clearly, in picking former adversaries like Hillary Clinton for his Cabinet, Obama showed that he subscribes to a similar philosophy.

Ironies

Almost two years later, the parallels with Lincoln's administration look apposite, indeed.

Unfortunately for Obama, the historical figure he is starting to most resemble isn't Lincoln, but George B. McClellan, Lincoln's top general during the early stages of the Civil War.

Like Obama, McClellan was a hugely popular figure; also like Obama, he lacked the "go for the jugular" instinct needed to vanquish a mortal enemy (Lincoln famously said of McClellan, "if General McClellan does not want to use the army, I would like to borrow it for a time").

Of course, Obama's foe isn't the Confederacy.

Rather, it's Wall Street -- and the rigged, stupefyingly complex financial system it designed and (still) sits astride.

The turning point in the Civil War only arrived once Lincoln installed Ulysses S. Grant and William Tecumseh Sherman as his top generals (after running through a series of others).

It remains to be seen who will be the U.S. Grant and William Sherman of financial reform, circa 2010.

"I survived the 2:45 p.m. Crash"

"The Flash Crash"

Imagine a beef processor that was linked to an e.coli-tainted shipment that ultimately killed 100 people.

A week after the outbreak, the authorities were still trying to determine how e.coli got into the beef processor's facility.

In the meantime, the facility was operating "normally," and continuing to process and sell beef to all its usual customers.

Wall Street Dysfunction

Of course, in the real world, none of the above would have been tolerated.

Now compare that with what has happened on Wall Street after the major stock averages did a 10% bungee jump in the span of 5 minutes on May 6.

Nothing.

While the SEC and various stock exchanges look for a culprit, the exchanges continue to trade, "normally," with no change in their structure or business practices.

Just one more thing that's disturbing about modern day Wall Street . . .

P.S.: would it be bad form to point out that the "crash survivor" is missing something? Like his head??

Sen. Ted Kaufman: 'Break 'em Up!'

An Independent Voice on Financial Reform
(Hmm, I wonder why . . .?)

Senator Ted Kaufman, Joe Biden's replacement in the Senate, has rapidly emerged as perhaps the leading Congressional advocate for real financial reform (Chris Dodd's version doesn't come close).

Not a few people have noted that Kaufman's path to the Senate -- he was appointed -- insulated him from the soul-rotting temptations of Wall Street campaign cash.

Here's Kaufman's latest:

Letting giant institutions fall into bankruptcy is not the answer to "too big to fail." When Treasury Secretary Hank Paulson decided to let Lehman Brothers fail, the credit markets immediately froze and the worldwide financial system was on the brink of collapse. If we do nothing about these megabanks and wait for another crisis, future presidents—whether Republican or Democrat—will face the same choices as President Bush: whether to let spiraling, interconnected TBTF institutions, like AIG, Citigroup and others, collapse in a contagion, sending the economy into a depression, or step in ahead of bankruptcy and save them with taxpayer money.

The answer instead is to break up these megabanks. As even Alan Greenspan has realized about our current predicament: "If they're too big to fail, they're too big."

--Letter to Editor, The Wall Street Journal (4/14/2010)

And the arguments against this are??

The 91% Solution

The Quick & Simple Way to Fix Wall Street

[Editor's Note: in a post last week, "Financier, Heal Thyself? Don't Count On It," I promised a part 2. This is it. Heads up: if you read this blog purely for real estate content, or want a post with a little levity -- skip this one.]

Want to test your knowledge of political Americana?

Answer this puzzler:

Which U.S. Presidential candidate endorsed a 91% marginal tax rate on income?

A. George McGovern
B. Dennis Kucinich
C. FDR
D. Dwight Eisenhower

Answer: D.

In fact, the question is a bit of a curve ball: Eisenhower never campaigned on a platform of 91% marginal tax rates -- he didn't have to. That's because Eisenhower inherited a 91% marginal rate from the Truman administration -- and saw fit to leave it there during his eight years in office.

Dwight D. Eisenhower: West Point graduate. Supreme Allied Commander in World War II. President of Columbia University. Two-term Republican(!) U.S. President . . . wealth-redistributing, Commie radical!

Beaver Cleaver

If you don't remember the '50's -- and you won't unless you're at least 60 years old -- it wasn't exactly a Communist love-fest.

On the contrary, that era notably witnessed the Cold War, "duck-and-cover," and Joe McCarthy and his anti-Communist witch hunts ("are you now, or have you ever been . . .?").

Some other tidbits of '50's culture: Beaver Cleaver, "Father Knows Best," Bob Hope, Doris Day, and drive-in movies. (And to be sure, "colored-only" drinking fountains, restrooms, etc. in the South.)

Still, not exactly Haight-Ashbury in the '60's.

And yet.

And yet society and its lawmakers saw fit to levy a 91% marginal rate on annual income over $400,000 (equivalent to about $3 million today).

What were they thinking?!?

Values, Then & Now

A couple things, perhaps.

--That the country's social fabric was more important than the (very) well-being of its richest .05%.

--That the pursuit of ungodly sums of money was unhealthy -- even corrosive -- to one's self, and one's larger community.

--That the ability to make such ungodly sums of money was itself due to a peculiar historical confluence of built-up legal and political institutions; heretofore unimaginable gains in technology and productivity; and the sacrifices of many, many preceding generations.

Isaac Newton said that "if I have seen further, it's because I have stood on the shoulders of giants."

Today's CEO's are pygmies who think they are giants -- and that modern economic life began with them (obviously not true, but if we're not careful, it certainly may end with them).

It's hard to tell which trait best defines today's CEO's: hubris -- or greed.

Financial Reform, Circa 2010

Which brings us back to financial reform.

First, three stipulations:

One. The current financial system is so enormous and complicated, and has so many moving parts and interconnections, that few people understand half of it. Unfortunately, almost none of those people are elected officials in Washington.

Two. Even if FDR and his brain trust somehow sprang back to life with a divinely inspired blueprint for reform, they would be thwarted by today's political system. Too partisan, too balky, too corrupt.

Three. More limited, strategic reforms have either been ineffective -- or backfired spectacularly.

Case in point: legislation passed by Congress in 1993 to limit executive compensation -- considered excessive back then, even though it was a fraction of today's levels.

Barred from deducting executive salaries greater than $1 million, publicly traded corporations simply switched to awarding stock options and bonuses to CEO's.

More accurately, CEO's -- via their handpicked boards of directors -- started paying themselves in stock options and bonuses.

The 91% Solution, or, "I Like Ike"

Add the foregoing "stipulations" together and what do you get?

A broken, dysfunctional financial system that cannot be fixed.

Or can it?

To paraphrase Albert Einstein, the problem of Wall Street cannot be solved at the same level of thinking with which it was created.

So, go up a level.

What is Wall Street ultimately about, at least today?

Not service to one's fellow man ("God's work" -- the real kind); one's country (the definition of patriotism); or even just providing and efficiently allocating capital to the rest of the economy (Wall Street's putative purpose and raison d'être).

It's all about making money.

Obscene, unprecedented tidal waves of money.

To pick just one example, last year -- not a banner year for most, to put it mildly -- the top 25 hedge fund managers averaged $1 billion in compensation. That they paid 15% income tax on.

$30 Million a Year

Such a financial bonanza also suggests the solution: go back to Eisenhower-era marginal tax rates.

Hell, bump them up 10-fold, just to account for today's more expensive luxuries and toys (tycoons really couldn’t buy Lear Jets in 1955).

So, the John Paulson's and Lloyd Blankfein's of the world can make up to $30 million annually before coughing up the lion's share of it to Uncle Sam. Thirty million a year -- still not too shabby.

Such a remedy has the virtue of being simple, efficient, and laser-focused on the underlying problem plaguing today's financial system.

Oncologists now understand that the best way to kill an advanced or otherwise inoperable tumor (because of its proximity to vital organs) is to cut off its blood supply.

Raising marginal tax rates to 91% will have the same effect on the metastasizing cancer that modern-day Wall Street has become.

Financier, Heal Thyself? Don't Count on It

Cutting Wall Street's Gordian Knot

Call me a skeptic when it comes to financial reform.

If health care consumed a solid year of legislative maneuvering, how much time will it take to carefully consider the various and sundry proposals to rein in Wall Street, which is infinitely more complicated?

Which is kind of the point, actually.

Wall Street and modern-day finance are so mind-numbingly complex that you need to enlist Wall Street-types to oversee it.

So, that's how you get former Goldman Sachs and other financial executives in dozens of senior government positions, influencing -- and setting -- U.S. policy towards the financial industry.

Wall Street is also so complicated that you need Wall Street's expertise to help reform it.

Which is, as they say, "the rub."

Giving Wall Street insiders a seat at the financial reform table -- as it clearly now has -- virtually assures that any legislation that emerges from Congress will: a) be weak; and b) contain sufficient ambiguities and loopholes that it will effectively be "business as usual."

After the biggest financial crash since The Great Depression.

That result simply isn't acceptable.

My proposal?

Part 2: The 90% Solution

Senator Ted Kaufman on Wall Street Reform

"Hard Lines, Not Regulatory Discretion"

Senator Ted Kaufman (D-Del) has a SUPERB analysis, titled "Wall Street Reform That Will Prevent The Next Financial Crisis," detailing exactly what caused the financial system to melt down in 2008 -- and what should be done about it.

Even better: he actually has a say in deciding the latter.

Here's a quick summary of the highlights:

--"Too Big to Fail": too big to fail equals too big to exist. Period.

As Sen. Kaufman notes, dismantling trillion-dollar behemoths is difficult in the best of times -- and impossible in a crisis.

So much for relying on a to-be-created "resolution authority" to step into the breach the next time there is a systemic crisis.

--The "more and better regulation" myth: the financial system melted down not because regulators lacked power, but because they didn't use the power they had. Ergo, giving them more power, now, isn't the solution.

Here is Sen. Kaufman's especially damning indictment of regulators:

The regulators sat idly by as our financial institutions bulked up on short-term debt to finance large inventories of collateralized debt obligations backed by subprime loans and leveraged loans that financed speculative buyouts in the corporate sector.

They could have sounded the alarm bells and restricted this behavior, but they did not. They could have raised capital requirements, but instead farmed out this function to credit rating agencies and the banks themselves. They could have imposed consumer-related protections sooner and to a greater degree, but they did not. The sad reality is that regulators had substantial powers, but chose to abdicate their responsibilities.

What is more, regulators are almost completely dependent on the information, analysis and evidence as presented to them by those with whom they are charged with regulating. Last year, former Federal Reserve Chairman Alan Greenspan, once the paragon of laissez faire capitalism, stated that “it is clear that the levels of complexity to which market practitioners, at the height of their euphoria, carried risk management techniques and risk-product design were too much for even the most sophisticated market players to handle properly and prudently.”

I submit that if these institutions that employ such techniques are too complex to manage, then they are surely too complex to regulate.

--Sen. Ted Kaufman

Add Senator Kaufman to the (short) list of public officials -- led by Paul Volcker -- who "get it" when it comes to reforming Wall Street and the financial system.

"Perfectly Legal": AIG Redux

Goldman Sachs & the 4 Not-So-Little PIIG's

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal.

--"Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis"; The New York Times(2/14/2010)

We all know the basic story line by now.

Some systemically-important entity is left, hemorrhaging and in financial shock, on the side of the road, the victim of (yet another) financial hit-and-run.

Yesterday, it was AIG; now, it's Greece.

Tomorrow, it will be one or more of the other "PIIGS" (Portugal, Italy, Ireland, Spain).

The license plate of the well-appointed, luxury car just disappearing over the crest clearly reads "Goldman Sachs." The forensic evidence at the crime scene (make that "non-crime scene") further implicates it.

Yet when the cops pull over the speeding, inexplicably damaged vehicle, the driver explains, quite calmly and rationally, that "no laws were broken."

And the cops -- and the rest of us -- are left scratching our collective heads.

(Actually, that last part about the financial cops is wishful thinking -- it turns out that they work for Goldman Sachs, used to . . . or want to).

"Non-Crime Scene"

As always, Goldman Sachs' defense is a bit more subtle and multi-layered (see the "It's Not My Dog Defense.")

Appearances notwithstanding, Goldman Sachs was actually speeding to get help.

Oh, and the injured pedestrian was carelessly walking in the road.

Or they suddenly ran in front of the car, deer-like, and there wasn't time to stop.

Because, after all, driving conditions were terrible.

Which brings up the possibility (likelihood?) that other cars may have been involved.

Which doesn't really matter, anyways, because the patient, now lying near death, was already suffering from terminal cancer.

And even that doesn't matter, because Goldman Sachs had Greek law changed to make committing financial hit-and-run . . . perfectly legal (Oops! That would be U.S. law).

And so on.

A-r-g-g-h-h!! Enough already!!

Chapter 2: Different this Time?

What's different this time is that apparently it's up to ordinary Germans to decide whether to front Greece the money it foolishly promised to re-pay its Wall Street loan sharks, led by Goldman Sachs.

Of course, when the prey was AIG, Goldman Sachs merely had to pick up the phone (walk down the hall?) to make sure that it's predatory bets were made good by the U.S. government (and the taxpayers standing behind it).

But what sway does Goldman Sachs have over 80 million German taxpayers?

Perhaps more to the point, what leverage does Goldman Sachs have over the German government?

Here's a guess: its best instrument and lever is none other than the very same, bought-and-sold U.S. government that delivered Goldman Sachs -- rather amply -- from the fallout resulting from its disastrous AIG hit-and-run.

How much more of this does anyone possibly need before revoking Goldman Sachs' driver's license, for good??

How and whether to save the PIIG's remains to be seen.

This time, however, the entity that should be presented with the clean-up bill -- whether it's for the funeral or the hospital -- is Goldman Sachs.

The Trickle-Down Case for Indulging Wall Street

Colbert Interview with Eliot Spitzer

I'm not a Stephen Colbert regular, but I did catch his interview the other night with "disgraced former New York Governor Eliot Spitzer" (that's now Spitzer's official moniker, by the way).

Colbert's cut-to the chase question: even if Wall Street is full of inept crooks and greedheads, as most everyone outside of Wall Street now agrees, isn't short-circuiting their gaudy gravy train just a case of "cutting off our noses to spite our faces?"

In other words, Colbert asked, don't Wall Street-types spend their multi-million dollar bonuses on drivers, cooks, tailored clothes, second (and third, and fourth) homes, expensive restaurants, etc. ???

And if that spending vanished, wouldn't all those other individuals and businesses suffer?

I have a two-part answer to that.

First, to the extent that it's necessary to stimulate our economy (to offset the catastrophic financial damage Wall Street engineered), my preferred instruments for doing so . . . would hardly be the very same people who caused the catastrophe.

Not only does that offend any moral person's sense of justice, it literally encourages more of the very same behavior!

Personally, I would like to now spend a few years without the term "moral hazard" dominating the Op-Ed pages and blogosphere.

Give it to "the Bernie's!"

If the goal is simply to put money in the hands of people who will spend it, why not pluck Bernie Madoff, Bernie Ebbers (Worldcom), Jeff Skilling (Enron), and other scoundrels from their jail cells and bestow upon them the billions being showered on Wall Street?

To paraphrase Ben Stein's stump speech, let's instead lavish the money on the people who are the true backbone of this country: the servicemen and women serving abroad, and especially their families sacrificing back home.

And while we're at it, let's earmark a little of Wall Street's money to care for soldiers who've sustained life-altering combat injuries.

Second, it's far from clear that handing out financial "goodies" -- to anyone -- is advisable.

Just as there's no free lunch, there's no such thing as "free stimulus."

Basically, it's just added to our national credit card -- a credit card balance that already comes to something like $35,000 for every man, woman, and child in the U.S.

If open-ended, poorly targeted stimulus (deficit) spending worked, Japan's economy would be the world's most robust now.

Instead, Japan is entering its second (or third) "lost decade," depending on who's counting.

The bottom line?

Saddling our economy with crushing debt to enable -- and then mitigate the consequences of -- still more Wall Street greed and misbehavior is to compound one mistake with a second, equally big one.

How Peter Lynch Would Reform Wall Street

Too Big to Fail? Try, Too Complex to Reform

Banks are like the heart that pumps blood — credit — to our country’s corporate muscles. If that heart is malfunctioning, any recovery will be anemic. But heart surgery is a very complex thing. You wouldn’t want yours done by a plumber or a politician.

--Thomas L. Friedman, "When Economics Meets Politics"; The New York
Times (2/3/10)

Of all the canards Wall Street has sold to would-be reformers, regulators, and at least one NY Times columnist, the biggest (and most self-serving) is that it is . . . inherently complex --"a beating heart," if you will.

Because Wall Street finance is so complicated, you need a Wall Street financier to oversee it. Or lots of them.

Eventually, *Wall Street insiders (vs. public-spirited civil servants, in the Paul Volcker mold) are running the Treasury Department, policing the securities markets, and serving as senior advisors to the President.

Sound familiar?

"The Complexity Canard"

The solution to Wall Street excess only partially lies in making too-big-to-fail firms smaller.

The other piece is to make the financial system simpler ("boring," if you prefer Paul Krugman's term).

Famed investor Peter Lynch famously advised, "invest in a business that any idiot can run -- because sooner or later, any idiot probably is going to run it."

My corollary for reforming Wall Street would be:

"Design a financial system that any idiot can regulate -- because sooner or later, any idiot is probably going to regulate it."

*Of course, FDR appointed a quintessential Wall Street insider, Joseph Kennedy, to head the newly created Securities and Exchange Commission. But Kennedy wielded his power on behalf of investors, not Wall Street. Imagine that . . .

"Loss Transmitters and Accelerators"

Goldman-Speak for "Mug"

Too-big-to-fail firms have become loss transmitters and accelerators to the rest of the system.

--"An Ex-Goldman Partner Lets Loose on Wall Street"; Time (2/2/2010).

Hmm . . . "loss transmitter and accelerator??"

By the same logic, I suppose that the recent, devastating Haiti earthquake was "a focused diffusion of geologic energy."

Or the Hindenburg explosion was a "sudden metamorphosis of volatile gases."

The Pentagon spending $20 billion on an obsolete weapon is an example of "transmitting and accelerating losses to the rest of the system."

Saddling U.S. taxpayers with trillions in losses and debt to clean up the financial mess Wall Street just made is something much, much . . . grander -- and nefarious.

It's one thing not to hold Wall Street accountable for its actions.

It's entirely another to mislabel and minimize what it did, and is continuing to do.

At least the "accelerator" part is right: an accelerant is what arsonists use to quickly spread a fire.

Robins, Flamingos, and Penguins

What Does a "Bird" Look Like?

Before you pose the question, "What does a well-designed financial system look like?," first ponder the question, "what does a bird look like?" Seriously.

Robins, flamingos, and penguins bare little resemblance to one another.

Yet scientists classify each as birds, and each could be called an environmental "winner": endowed by evolution with a cluster of traits and survival strategies that make it well-adapted to its particular environment.

So it should be no surprise that there can be different models for successful banking systems.

Consider Paul Krugman's take on the Canadian model:

Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk.

More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

--Paul Krugman, "Good and Boring"; The New York Times (2/1/2010)

Krugman goes on to note that Canada's "boring" financial system has held up just fine even though, with just five, dominant banking groups, "essentially all the Canadian banks are too big too fail."

Sweden is another country that has accepted a highly concentrated -- albeit heavily regulated and "boring" -- banking industry.

Unfortunately, we in the U.S. have ended up with the worst of both worlds: dangerously -- recklessly -- big and inter-connected financial players on the one hand, and light to non-existent oversight on the other.

You might call such a combination a "Turkey" of a design.

Or a Dodo bird . . .

Paul Volcker: 'No Substitute for Structural Change'

Volcker's Clarion Call

Imagine being able to consult Albert Einstein about a physics conundrum, or FDR or Lincoln about an existential national emergency (like the one we're facing now, perhaps).

Having Paul Volcker, the 82 year-old former Fed Chairman, still on the scene and available to advise and guide is truly a stroke of good luck.

So what is he prescribing?

Basically, the same thing he's been saying for over two years, only now with a little more traction:

I am well aware that there are interested parties that long to return to “business as usual,” even while retaining the comfort of remaining within the confines of the official safety net. They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks.

In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly.

I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.

The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.

--Paul Volcker, "How to Reform Our Financial System"; The New York Times (1/30/2010)

Let's see . . . as a nation, we can heed the distilled wisdom of one of the country's wisest, most successful financial stewards and public servants . . . ever.

Or, we can do what Wall Street wants (basically, nothing -- but keep the government backstops and free money flowing, thanks very much).

Not much of a choice.

P.S.: If you read the entirety of Volcker's piece, you'll note that he demurs -- because of space limitations -- on a number of thorny issues, including revamping how U.S. home purchases are financed:

We also face a large challenge in rebuilding an efficient, competitive private mortgage market, an area in which commercial bank participation is needed. Those are matters for another day.

Let me translate the above: 'Fannie Mae and Freddie Mac are toast. Time to start over' (as even Barney Frank now admits).

Reform Shorthand: Where's Volcker Standing?

The Wall Street Journal's Take on Wall Street

President Barack Obama proposed new limits on the size and activities of the nation's largest banks, pushing a more muscular approach toward regulation that yanked down bank stocks and raised the stakes in his campaign to show he's tough on Wall Street.

--"New Bank Rules Sink Stocks"; The Wall Street Journal (1/22/2010)

So, government's iron fist is once again coming down (too) hard on private enterprise, imposing (more) bureaucratic red tape on businesses, and hurting job growth and the stock market.

Right?

Umm . . . well . . . not exactly.

If the Journal had asked me to re-write the lead, here's what I would have said instead:

President Obama belatedly announced the first, limited steps to address the root causes of today's economic melt-down: reckless Wall Street banks that have required trillions in taxpayer bailouts to deal with the consequences of their highly leveraged, bad bets -- bets that have caused millions of Americans to lose their jobs, savings and homes.

In other economic news yesterday, Goldman Sachs announced blowout earnings from . . . making more, reckless bets with taxpayers' money.

In my opinion, the only thing worse than 'governing-by-poll' is 'governing-by-Dow-Jones,' i.e., doing whatever makes the stock market go up, and refraining from whatever makes it go down -- at least in the short run.

With the market now down a couple hundred points in the wake of the newly announced bank "reforms," it will be interesting to see if Obama sticks to his guns.

P.S.: want a short-hand way to tell? Figure out how close (or far) Paul Volcker is standing from him (yesterday, he was standing at his side).

Real Estate . . . on the Road

Is Everyone in Wisconsin Fat?

If we can reduce the number of people deferring medical care -- or postponing it indefinitely -- while at the same time managing to not go broke, this time next year we can look back at 2010 with pride.

This post is from on the road, in the heart of "The Heartland."

In fact, it doesn't get more "heartland" than Janesville, WI, about 30 minutes Southeast of Madison and two hours short of Chicago. Hence, its appeal (or more specifically, the roadside Hampton Inn about 9 p.m. last night).

Southeast -- or Southeat?

This observation is not going to win me any local fans -- but hey, I'm licensed to sell real estate in Minnesota, not Wisconsin.

As best I can tell, everyone in Wisconsin is fat.

Or at least everyone eating at the McDonalds' where we stopped for dinner (parents, kids, grandparents -- you name it), everyone working at the McDonald's where we stopped for dinner, everyone getting gas and windshield wiper fluid at the gas station where we stopped, etc.

And no, no one's looking in any mirrors.

In all seriousness, I'd say it's progressed from something that's become a minor national embarrassment to something that's truly alarming.

When millions are obese, the solution isn't for everyone to enroll at Weight Watchers; it's for a change in the national culture, led from on-high (and dare I say by at least some of the corporations whose ox would be gored by a healthier America. I won't name names, but they rhyme with Schmepsi and Schmairy Queen, to cite a few).

If you're looking for a fundamental way to divide Americans these days, it's not White or Black, Blue or Red, Main Street or Wall Street, or even fat and thin (although that's my runner-up).

I submit, it's between people who are deferring some needed medical treatment, and those who aren't.

Put me in the latter category: on Monday, I'm upgrading glass prescriptions that I've now had 3 years.

Why the wait?

We maxed out our medical spending account in November, and it re-sets, full, on Jan. 1

Sacrifices, Minor (and Not)

As sacrifices and inconveniences go, that's trivial.

My wife, a physical therapist, routinely has patients go long intervals without seeing her.

And it's not because their cancer went away, or they miraculously recovered from that broken hip.

It's because they can't afford the co-pay. Or the babysitter. Or sometimes, even the parking in front of the hospital..

If we can prospectively manage to make the group deferring medical care -- or postponing it indefinitely -- a little smaller while at the same time managing to not go broke, this time next year we can look back at 2010 with pride.

Throw in punishing Wall Street (actually, I propose short-circuiting, or "routing around" it, in Internet parlance) and overhauling the U.S. financial system, and 2010 has the makings of a great year!

Needed: A "Financial" Rosa Parks

The Fog of Financial Misconduct

If the nation's most powerful men and women won't call Wall Street to account for its misdeeds -- who will?

Maybe its least powerful.

After all, it was Rosa Parks, a then-42 year old seamstress, who helped ignite the civil rights movement in 1955 when she refused to give up her bus seat riding to work in segregationist Montgomery, Alabama.

Maybe some beleaguered senior citizen, who's earning 0% interest on their retirement savings, and is "underwater" on the home they've lived in for 30 years, will do something to galvanize the nation's attention.

But what, exactly?

Therein lies the problem.

Unlike racial prejudice, financial misconduct -- even on the massive, grotesque scale just witnessed -- is conceptually fuzzy ("collateralized debt what???").

Joe and Jane Taxpayer know they've been ripped off, but exactly how -- and by whom -- is much murkier.

That's why there is such an outcry when Detroit CEO's take their private planes to testify before Congress, or AIG exec's spend hundreds of thousands on a deluxe corporate retreat days after being bailed out.

Those actions can be understood.

But funnel trillions to Wall Street, through all kinds of arcane bailouts, guaranties, and "cheap" (free, really) monetary policy?

"Pass the chips, please."