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.'

"The Plot Against America" Redux

Schwarzman's "Nazi's" Comparison

We have met the enemy, and he is . . . us.

--Pogo

Stephen Schwarzman, a Wall Street honcho, made headlines last month for comparing President Obama's proposal to raise (the absurdly low) tax rates on hedge fund compensation -- called "carried interest" -- to Hitler's invasion of Poland.

Funny, I had another Hitler reference in mind.

Specifically, Philip Roth's provocative and very unsettling "The Plot Against America."

No George Bailey's

The book's central premise is that a politically weakened FDR is defeated by Charles Lindbergh, a Nazi sympathizer. Once elected President, Lindbergh first appeases, then cooperates with Hitler in what is effectively a bloodless takeover of America (sorry, Lindbergh relatives).

In my economic version of Roth's nightmare, I imagine what The Great Depression and the following decades would have looked like if there'd been no FDR, no New Deal, no Securities Act of 1933, no Glass-Steagall, etc.

Instead of reform and recovery, Wall Street uses its financial and political muscle to lay claim to the (remaining) public resources it hasn't yet appropriated.

And the result would have been what?

Potterville, writ large?

Unfortunately, as you read today's headlines discussing Too Big to Fail financial institutions, (still) obscene Wall Street pay, devastated savers, etc., this alternative, nightmare scenario hardly seems imaginary at all.

Re-read your Pogo, Mr. Schwarzman.

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.

Sacrificing the Body (Politic)??

Lincoln et al on Wall Street

"Often limb must be amputated to save a life; but life is never given to save a limb."

--Abraham Lincoln

In sustaining Wall Street while adulterating everything else about America, are we violating Lincoln's dictum?

What we should be doing now is isolating, minimizing, and ultimately replacing Wall Street and our current, dysfunctional financial system.

In the functioning, non-financial world, that's what happened after the 35W bridge collapsed in Minneapolis three years ago.

Instead, we're seemingly diverting all our (remaining) resources -- and then some! -- to saving our financial "limb."

As if there weren't enough bodies and debris already in the water?!?

Lincoln would have known better.

So would Theodore Roosevelt, FDR, et al.

"The Biggest Loser"

Revisionist History

As historians know full well, Presidential reputations sometimes take decades to settle out, experiencing ups and downs in the meantime.

For example, Harry Truman left office in 1953 quite unpopular.

Over time, though, his stock gradually rose as society came to appreciate -- after the fact -- his straight-talking populism, common sense, and decency.

It also helped that, unlike contemporaries, later generations were less inclined to see him in FDR's (enormous) shadow.

Ironically, Truman's successor, Dwight D. Eisenhower, was another politician who left office under appreciated.

Viewed through the prism of the tumultuous '60's and turbulent '70's, the relatively placid '50's that Eisenhower presided over could easily inspire nostalgia a generation later. The nation's top general in World War II, his prescient valedictory warning about the "military-industrial complex" has also endeared him to posterity.

Finally, later generations, who only caught glimpses of JFK's charisma on movie reels, were more inclined to focus on JFK's substance and record (promising but incomplete) rather than his style (dazzling).

Today's Crop of Leaders

So, roughly two years into what appears to be shaping up as The Great Recession, how do today's leaders and recent-leaders fare?

Using a scale of minus-100 (-100) to plus-100 (+100), here's my take on the shifts to date:

Paul Volcker. Then: 50; Now: 100. Net gain: +50. Steered the country through the last comparable mess in the early '80's. Never worked for Goldman Sachs -- or aspired to. None of this would have happened on his watch. Tall Paul, indeed.

Alan Greenspan: Then: 90; Now: -75. Net loss: -165 (sets "the Biggest Loser" bar for a long time). "The maestro" now "the charlatan." Every one of his major tenets and policies have now been discredited if not repudiated, i.e., : 1) markets are self-regulating; 2) the Fed's job is to mitigate the damage from bubbles, not identify and prevent them; 3) financial actors pursue self-preservation above all other goals (wrong! they chase short-term profits and maximum compensation); and 4) excessively accommodative monetary policies don't risk liquidity traps (wrong! they do -- and we're clearly in one now).

Bill Clinton: Then: 40. Now: 10. Net loss: -30. The "Party Hearty" President from Arkansas (by way of Yale and Oxford). If the 1990's were the 1920's redux, that makes Clinton this era's Coolidge -- a feel good, go-with-the-flow leader whose lieutenants (Rubin, Summers, et al) did everything they could to keep the party going.

Ronald Reagan: Then: 60. Now: 40. Net loss: -20. Yeah, he gets splattered by this, too. Conservatives' darling, he pushed the pendulum rightward at a time when there was a strong case for it (sorry, liberals, but the Great Society overshot, and Carter never measured up). Unfortunately, the pendulum . . . kept going.

On the other hand, Reagan's resolve and optimism were a welcome tonic after Carter's malaise. He also gets much credit for the demise of the Soviet Union ("a good thing," as Martha Stewart would say).

Bonus question: if Reagan had been President 20 years later, would he have recognized the financial excesses, and shifted course? (He did finally fire Don Regan, formerly head of Merrill Lynch, but mostly because he was a jerk, not over policy disagreements).

Herbert Hoover: Then: -90. Now: -40. Net gain: +50. OK, he screwed it up. But it was harder to get right than we thought. At least his Treasury Secretary did what he thought was best for the country, not his own pocket or Goldman Sachs'.

FDR: Then: +70. Now: +90. Net gain: +20. Another beneficiary of "it was harder to get right than we thought." They were lucky to have him (and where's ours??)

George W. Bush: Who?

1930's vs. 1990's

Fascinating Juxtaposition

The two photos above, from today's New York Times, present a fascinating juxtaposition.

The photo on the left shows FDR signing legislation -- known as The Glass-Steagall Act -- separating the nation's investment banks from its commercial banks. It was the latter that held ordinary Americans' savings deposits, and it was the former's plundering of same that played a big role in causing The Great Depression.

The photo on the right shows Bill Clinton signing legislation in 1999 dismantling Glass-Steagall.

Study in Contrasts

But for the fact that the people in the two photos are exclusively older, white males, the contrasts couldn't be more startling.

The Congressmen and senior government officials surrounding FDR look sombre, if not grim. Their demeanor suggests that they had just witnessed a horrific financial accident (if not crime) -- one which they are determined not to ever let happen again.

Of couse, they had, and they (mostly) did. To their credit, their efforts to safeguard the nation's financial system succeeded for more than three-quarters of a century.

By contrast, Bill Clinton and the officials around him -- luminaries such as Fed Chairman Alan Greenspan, SEC Chairman Arthur Levitt, Texas Senator Phil Gramm, and Treasury Secretary Robert Rubin -- look like they're re-filling the punch bowl at an especially raucous party.

Which of course, they were.

Less than 2 years later, the stock market cratered.

Less than a decade later, a lethal combination of investment bank risk and leverage -- just like in The Great Depression -- created the greatest financial crisis since the 1930's.

FDR, Obama & the Cost of Consensus

The Age of Regulatory Capture

Millions of Americans lose their homes and jobs, Wall Street devours trillions in government bailouts while its leaders pay themselves billions . . . and there's still no discussion of meaningful financial reform?

Incredible.

Here's a quote from one of the best Op-Ed piece I've seen this Summer, contrasting the style and attitude of FDR then and Obama now:

The principal legislative innovations of the 1930s were enacted over the vigorous opposition of a deeply entrenched minority. Majority rule, as Roosevelt saw it, did not require his opponents’ permission.

When Roosevelt asked Congress to establish the Tennessee Valley Authority to provide cheap electric power for the impoverished South, he did not consult with utility giants like Commonwealth and Southern. When he asked for the creation of a Securities and Exchange Commission to curb the excesses of Wall Street, he did not request the cooperation of those about to be regulated. When Congress passed the Glass-Steagall Act divesting investment houses of their commercial banking functions, the Democrats did not need the approval of J. P. Morgan, Goldman Sachs or Lehman Brothers.

--Jean Edward Smith, "Roosevelt: The Great Divider"; The New York Times (9/3/09)

Too many details?

How about, "you can't make an omelette without breaking some eggs."

"Washington as a Ghost Town" -- Really

Closer to Constituents, Further From Lobbyists

What if Washington Were a Ghost Town?

--Headline, Peggy Noonan Op-Ed piece; The Wall Street Journal (8/1/09)

My thoughts exactly . . . almost 16 years ago.

In fact, that was the thrust of my own 1993(!) Op-Ed piece:

Here's an excerpt:

In an era of jet travel, teleconferencing, and faxes, why not bring Washington to the people? Specifically, let members of Congress work out of their home districts, under their constituents' watchful eye. Such an approach would have several benefits, and surprisingly few drawbacks.

First, it would make members of Congress less accessible to lobbyists and special interests. Lobbying Congress now is like shooting fish in a barrel: All you need is a Washington branch office staffed by a few employees, and a well-heeled political action committee ("PAC") . .

Conversely, locally-based members of Congress would be more accessible to constituents. The most successful businesses are the ones that "get closest" to their "customers." Politicians' "customers," the voters, are scattered across the United States, not based in Washington.

--Ross Kaplan, "Congress Come Home: Faxes Can Do the Talking on Capitol Hill"; Star Tribune (9/27/1993)

Little did I anticipate that in the intervening almost two(!) decades, advancing technology would make the aforementioned proposal even more feasible -- and Washington-Wall Street dysfunction make it even more necessary.

Nor did I anticipate that the presumed reason for bringing legislators together -- that proximity would promote comity, consensus, etc. -- would have even less sway.

So, is that what Peggy Noonan is championing?

Unfortunately, no.

The headline of her piece has to do with imagined advice that FDR and Richard Nixon would give President Obama dealing with today's myriad policy "challenges."

Roosevelt-Lite

"Making Bankers Mad"

The Obama plan is little more than an attempt to stick some new regulatory fingers into a very leaky financial dam rather than rebuild the dam itself . . . Firms will have to put up a little more capital, and deal with a little more oversight, but once the financial crisis is over, it will, in all likelihood, be back to business as usual.

--Joe Nocera, "Only a Hint of Roosevelt in Financial Overhaul"; The New York Times (6/17/09)

"Back to business as usual" is not a ringing endorsement, if you believe, as I do, that today's economic crisis actually has some culprits (besides Bernie Madoff). So, it's disappointing to see the early reviews on Obama's proposed financial reforms come in "thumbs down."

Nocera saved the best line(s) of his piece for last:

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 to make some bankers mad.

For now, it's everyone else who's mad -- or should be.

"Strategic Food Reserve"

Creative Responses to the Financial Crisis

I suppose it's just another a sign of our warped, contemporary values that we have a Strategic Petroleum Reserve ("SPR") -- heaven forbid our SUV's become idled -- but nothing equivalent for food.

Clearly, the ongoing financial crisis is going to be with us for awhile longer. In the meantime, wouldn't everyday Americans find it reassuring to know that the country has an emergency stockpile of food at the ready?

The implicit message would be that, come what may, society's basic needs are going to be met: no one's going to be allowed to starve. (Need an over-sized soup Kitchen? What better use for our mostly idle sports palaces -- subsidized if not paid for with public funds -- than to feed the hungry. I've even got a suggested name: 'Katrina Kitchens.'')

"Katrina Kitchens"

Once Americans feel that their basic, daily needs are provided for, they might actually relax a little bit. Once they're more relaxed, they're likely to . . stop panicking!

As FDR knew, step #1 in fighting a systemic economic collapse is addressing people's collective state of mind (curiously, a challenge made both easier and more difficult by the advent of the Internet).

While soothing words are definitely an important ingredient, so is concrete action.

Directing hundreds of (borrowed) billions towards insolvent, irresponsible banks fans people's anxieties. Taking obvious steps to safeguard the public's safety and welfare would do wonders to calm them.

"10 . . 9 . . 8 . . 7 . . "

George Bush's Role in
Today's Economic Car Crash

Everyday Americans -- if not historians -- are likely to remember George W. Bush as the President who crashed the family car (the economy).

However, it would be too easy to simply lay it all on #43 and move on (or try to -- right now we're all sort of waiting for Triple A -- Obama and team -- to show up with the tow truck).

If we're honest about it -- and there will never be a better time than Inauguration Day -- we have to allow that there were other, contributing factors. Such as:

--The car Bush got the keys to had major flaws and defects, at least a few of which were non-obvious (at least to people other than Warren Buffett). The role of credit derivatives, the shadow banking system, the (far too) interdependent global banking system and the consequently high risk of financial contagion -- all these phenomena are only now clearly being understood and dealt with.

--The family "car" wasn't in such good repair. In fact, its chassis and fundamental design date back to The Great Depression. As economic systems go, that's the equivalent of a car with 200,000 miles on it. The economy Bush inherited had none of the latest, technologically advanced safety equipment (like air bags, electronic sensors, etc.), and the basic ones it did have -- like brakes -- were old and poorly maintained.

(In fact, there's ample evidence that, in what can only be called an act of economic sabotage, the brakes were intentionally disabled by the very mechanics hired to fix them.)

--The car crashed not just because the driver was inept -- although that's clear -- but because of poor weather and road conditions. Specifically, visibility was poor, the road was slick, and safety features such as guard rails and proper lighting were sorely lacking.

--Unfortunately, we let the insurance premiums partially lapse. The reason people buy insurance is to make them whole in the unlikely event of a catastrophe. We're now in the position of owning a totaled car, without all the money needed to replace it.

What Would Lincoln Do?

So what do we do now?

The first step is to attend to those passengers and innocent bystanders most severely harmed (financially) by the current crack-up. That includes, but is not limited to, people who've lost their homes, their savings, and their jobs. Over time, we must also attend to those who've lost less tangible but no less real things: their faith, their trust, and their hope.

The next step is to make sure that the current driver is the best possible person for the job. On that score, thank God for -- and God bless -- Barack Obama.

Once those two pieces are in place, the last step is to set about re-designing a brand new car.

As Lincoln understood at Gettysburg, the best (and only way) to honor an otherwise unfathomable sacrifice is for the survivors to rededicate themselves to the completion and perfection of the cause at the heart of that sacrifice.

In this case, that means designing a better, market-based, capitalist economy -- one that's fairer, more productive and even more durable than the one FDR bequeathed us (and LBJ and Reagan adjusted).

FDR Redux?

The Financial Crisis So Far

The country -- and world's -- biggest financial crisis since the 1930's has reopened a long dormant debate regarding 1930's economic policy.

Democrats today subscribe to the notion that FDR did too little during The Great Depression, unnecessarily prolonging it. Had he used even more fiscal stimulus (public works, capital spending, etc.), they believe, the economy would have recovered faster.

Republicans today subscribe to the notion that FDR did too much during The Great Depression, unnecessarily prolonging it. According to them, government overreacted to the 1929 Stock Market Crash and subsequent downturn, greatly exacerbating it.

In retrospect, about the only thing that everyone agrees on is that FDR didn't end the Great Depression -- World War II did.

That said, it seems unassailable that FDR was a beloved figure to many, many Americans. If voters thought he was doing a poor job, their actions belie it: they re-elected him a record three times (of course, future generations may wonder how George W. got elected twice!)

Fast forward to today.

Given an incoming Democratic President and continued deterioration in the banking system and broader economy, you'd certainly bet on more intervention -- and more aggressive intervention -- rather than less. As Americans, we can only hope (and pray) that whatever course of action President Obama chooses is effective.

To paraphrase what Santayana (not to mention Nietzsche) would say of our current predicament: those who disagree about history's big lessons . . . get to repeat them.

Obama's Forebears

Obama's Forebears: FDR, Lincoln . . . Gorbachev??

Talk about anticipation: political pundits are already engaged in a spirited debate about which historical leader faced circumstances most closely paralleling the financial crisis now confronting President-elect Obama.

The most obvious candidate is FDR, and the broken economy he inherited in early 1933.

Now like then, the economy is dealing with the aftermath of an enormous asset bubble caused by easy (if not promiscuous) credit and exacerbated by excessive leverage. The carnage includes millions of foreclosed homeowners; a tanking stock market; catastrophic banking and insurance failures; impoverished savers and investors; and the specter of rising unemployment.

Lincoln comes to mind because he also saved the nation from a mortal threat, albeit a political, not economic one.

Through leadership, moral clarity, and sheer resolve, Lincoln prevented the Union from being ripped apart by slavery. Lincoln also appears to be a personal hero of Obama's, who seems to be emulating Lincoln's "team of rivals" leadership style. Of course, as the nation's first Black President, it would hardly be surprising if Obama felt a special affinity for, and kinship with, the Great Emancipator.

But there's a third, more contemporary leader whose situation and challenges at least superficially evoke Obama's: Mikhail Gorbachev.

"Change Agents"

Gorbachev's policies of Glasnost (openness and freedom) and Perestroika (economic restructuring) correctly perceived that the old, Soviet-style command-and-control system required radical reform. Like Obama, Gorbachev was also a figure of great personal appeal, and evident political and intellectual gifts.

Unfortunately (at least for Gorbachev), the changes he initiated spiraled out of his control and ultimately swept away the system he was trying to save (the old U.S.S.R.).

Like Gorbachev, President Obama must preside over a very tricky transition.

His task is to repair and reform a strained system that has already left millions of Americans without homes, without jobs, and with little or no retirement savings. Even before the current financial crisis, tens of millions lacked access to decent health care. As 2009 begins, there are signs that conditions may in fact be deteriorating.

While Obama enters office with a huge store of goodwill amongst everyday Americans -- and especially African Americans -- he must surely be aware that economic desperation and patience don't easily coexist.

It's one thing to campaign on a platform of "change you can believe in." Delivering the right change-- and the right amount of change -- is entirely another.