"Quantitative Easing??" Try, "Printing More Idiots"

Is the Fed Repeating
Wall Street's Sins?

Joe Nocera: At a certain point, Wall Street ran out of clients to sell [securitized debt] to. So the only way it could keep the machine going was to buy it themselves.

Jon Stewart: So, they infected themselves. At the end, they themselves became vampires.

[Which suggests] a new theory on the financial crisis: it occurred because of an idiot shortage. If I'm the Fed, I just print more idiots.

--Bethany McLean and Joe Nocera Interview; The Daily Show (11/16/2010)

That's it!

Instead of calling the Fed's current monetary policy something arcane like "quantitative easing," how about calling it "printing more idiots?"

At least, that's how I understand it.

Just like Wall Street ran out of "idiots" to sell securitized debt to, the U.S. Treasury has started to run out of investors to buy (more) U.S. debt.

China already stuffed to the gills with U.S. bonds?

Ditto for Japan, Singapore, South Korea, Saudi Arabia and all our trading partners on the other side of our yawning trade deficit?

No problem -- we'll buy the bills and bonds ourselves!

Two years, five years, ten years . . . you name it.

In fact, we -- the Fed -- will buy so much, we'll actually drive interest rates down.

Which is quite an accomplishment, given that long term interest rates have already collapsed, and short term rates are effectively zero.

Nothing could possibly go wrong with such a scheme . . . . right??

No (Financial) Cure Without Proper Diagnosis

"We ALL Caused This Mess??" Hardly.

Put me in the camp that says, without an accurate diagnosis, it's not possible to cure our current economic mess.

So, here are two competing narratives explaining how we got to this juncture, both courtesy of Les Leopold (thanks to Ned Krahl for forwarding the Leopold piece):

Narrative #1: 'We Are All to Blame'

"We Americans sank ourselves in debt. We consumed more than we produced. We bought homes we couldn't afford and used them as ATMs. Of course Wall Street did its part by offering us mortgages they knew we couldn't really afford. The government also contributed mightily by pushing Fannie Mae and Freddie Mac to underwrite "politically correct" loans to low-income residents who shouldn't have been buying homes at all. In short, we all are to blame.

--Les Leopold, "Why the Big Lie About the Job Crisis?"; Huffington Post (9/3/2010)

If the foregoing is correct, here's what logically needs to happen next:

The era of excess is over. We need to cut back on spending and borrowing. We need to reduce government debt by raising the Social Security retirement age and cutting social programs. We've got to streamline our public sector by laying off public employees and cutting back their lavish pensions. And all workers will have to adjust to an era of intense foreign competition: We've got to reduce our wage and benefit demands if our companies are going to compete globally. We have to live within our means.

In short, we gorged ourselves until the economy crashed. Now we've got to tighten our belts and accept less to get it going again.

--Les Leopold

Contrast that with Narrative #2, "An untethered Wall Street crashed the financial system (and broader economy) while engorging itself."

Starting in the late 1970s . . . the financial sector was liberated from its New Deal-era shackles. Freed from any limits on constructing complex new financial products, hedge funds and too-big-to-fail banks and investment houses created an alphabet soup of new securities with the sky-high yields. The rating agencies abetted the crime by blessing these flimsy products with AA and AAA ratings.

Wall Street built this flim-flam of finance out of junk debt -- like sub-prime mortgages -- which it could pool, slice, and resell for enormous profits. In fact, selling these bogus securities was the most profitable enterprise in the history of Wall Street. Wall Street wrapped credit default swaps and collateralized debt obligations into pretty packages so that they could literally sell the same underlying junk assets again and again.

The whole scheme worked just fine as long as the underlying collateral (our homes) appreciated year after year. But as soon as housing prices peaked, it was game over. The upside-down pyramid of debt and junk financial instruments came crashing down. The entire credit system froze, tearing a gaping hole in the real economy.

--Les Leopold

Guess which narrative I find more accurate?

Prescribing Cures

Only once the disease has been diagnosed, can a cure be promulgated.

Here is Leopold's:

Through steep progressive taxes on the super-wealthy, fair income taxes on hedge funds and transaction fees on Wall Street's proprietary trading, we can keep that bubble from reinflating -- and in the process raise the money we need to put America back to work. With the revenue we collect, we can hire millions of people to weatherize homes and buildings and rebuild our infrastructure. Instead of laying off teachers we can hire more, and provide them with better training and support. We can expand universities and colleges too, and allow people to go to college for free, which will improve our peoples' skills -- and keep young people off the unemployment rolls.

--Les Leopold

The only step Leopold omits is holding Wall Street accountable -- through appropriate civil and criminal remedies -- for its transgressions.

Michael Lewis Deconstructs Goldman Sachs

SEC vs. Goldman Sachs

Confused about why the SEC sued Goldman Sachs for fraud, and what it means?

Here's about as succinct a summary as I've seen, from the inimitable Michael Lewis:

Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done.

That just changed.

--Michael Lewis, "Bond Market Will Never Be the Same After Goldman"; Bloomberg (4/22/10)

Brilliant -- and exactly right!

Goldman Sachs, Briber Par Excellence

A Cut for Everyone But the Taxpayer

"Bribe" (verb): to induce or influence by or as if by bribery.

"Bribe" (noun): money or favor given or promised in order to influence the judgment or conduct of a person in a position of trust.

--Webster's Dictionary

Of course, the whole thing is that "no laws were broken." And there's the rub.

But what else do you call showering money on legislators, credit rating agencies, and your own employees (past, present, and -- in the case of many government officials -- future), all toward the end of crafting a financial system to your liking?

Just consider all the ways that Goldman Sachs' lucre and ingenuity have rotted out the foundations of the American system of governance:

Rating Agencies. No, Wall Street couldn't have sold trillions in mortgage-backed securities all by itself -- it needed the credit rating agencies' seal of approval.

Which was simple enough: Wall Street was the client!

Moody's & Standard & Poor's didn't just rake in billions for giving Triple A ratings to dreck.

Thanks to the magic of the stock market, which values companies based on P/E ratio's, every incremental dollar the credit raters earned from Wall Street created as much as a 20x jump in their market cap's.

Financial Alchemy

What's the significance of that?

It translated into tens and sometimes hundreds of millions(!) in extra compensation for company exec's, whose pay included huge slugs of stock.

Politicians. President Obama's biggest corporate campaign contributor? Goldman Sachs. Ditto for practically every senior Democratic member of Congress (and many junior ones).

The really sad part is how cheaply Congress can be bought: a couple hundred million in campaign contributions, tops.

The return?

If the upside includes your company's stock market capitalization (see, above), tens of billions in annual compensation, and double that in profit . . . trillions.

Return on investment?

I don't know -- infinite??

Regulators.

Once upon a time, the Securities and Exchange Commission, conceived during the last financial upheaval during The Great Depression, protected investors' interests.

Now, it does those same investors a double disservice: 1) by not doing its job (see, Madoff, Bernie and many, many other examples); and 2) by giving at least some investors the mistaken notion that their interests are being protected, thereby creating a false sense of security.

What might explain regulators who don't regulate?

A lot of these folks aspire to "graduate" from Washington to Wall Street. An aggressive stance towards your future employer is not a good career move.

Diagnosis & Prescription

If you're keeping track, that's two out of three branches of government thoroughly compromised by Wall Street money (call it 3-for-3 -- a hat trick! -- if you consider Congress' role selecting and confirming judges).

Which suggests the solution.

Take the money away from them.

Step #1: break up Goldman Sachs.

CALPERS vs. Floyd Abrams

Unadulterated Securities? No, Chutzpah

Although the ink on CALPERS' lawsuit against the credit rating agencies is barely dry, already the legal strategies being marshaled by both sides are coming into focus.

In fact, S&P has already telegraphed its strategy by hiring Floyd Abrams, the subject of an interview in today's New York Times. Abrams, the country's foremost First Amendment attorney, is set to argue that S&P and Moody's "Triple-A" ratings on trillions in toxic, securitized debt is protected "free speech."

Yup, that's right: no different than this blog post, or the TV weatherman's prediction of tomorrow's weather.

You'd certainly hope that any truth-loving court eviscerates this argument, using the following logic:

There is little chance that a meteorologist has a financial stake in saying, “It’s going to be sunny.” The rating agencies, on the other hand, essentially get paid by the people who need a prediction of clear skies, and the customers can always ask a different forecaster if they don’t hear what they like. And all sorts of financial institutions are required by law to rely on ratings. (For instance, there are plenty of money market funds that can’t buy bonds unless rated triple-A.) That elevates the commercial importance of those ratings, which gives them a different legal status than, say, a weather report.

--David Segal, "A Matter of Opinion"; The New York Times (7/19/09)

As best I can tell, the only thing unadulterated coming out of the rating agencies these days is chutzpah.

Here's my "forecast": S&P's legal arguments don't hold water.