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.

The "Driver Ed" Response to the Financial Crisis

Geithner: 'Increase Financial Literacy'

I wish it were from The Onion, but unfortunately, it's not:

While Americans from Wall Street to Main Street focus on much-needed financial reforms that will set and enforce clear rules across the financial marketplace, we also need to recognize that most Americans don't have the knowledge and skills they need to make the right financial decisions for themselves and their families.

--"Using Education to Cope With a Complex Economy"; The Huffington Post (4/27/10)

Imagine just witnessing -- OK, living through -- the biggest (financial) freeway crack-up in almost 80 years.

The proximate causes (in order)?

No speed limits; defective cars; and no highway patrol (although if they're no speed limits, exactly what are they enforcing?).

The solution(s) to the foregoing would obviously be: going 55 mph (vs. 200 mph-plus); well-designed cars; and cops.

So, is that what Timothy Geithner (Treasury Secretary), Arne Duncan (Education Secretary), and Valerie Jarrett (Senior Obama Advisor) -- co-authors of the piece quoted above -- are calling for?

Not exactly.

They think the solution is for average Americans to become more financially literate.

In other words, prevent another financial crash by focusing on . . . better driver ed.

China, cont.

"Geithner Says China Has Faith in U.S."
--headline, The New York Times (6/3/09)

[Editor's Note: Sorry, I'm on a China kick -- just one more in that vein. And yes, it does bear on real estate. In fact, whether China keeps buying U.S. debt -- and therefore whether mortgage rates stay low -- is probably the single biggest variable affecting U.S. housing prices right now.]

Just two thoughts on the above headline:

One. Wouldn't it be more reassuring if it read, "China says China Has Faith in U.S."??

Two. Actions speak louder than words.

Some of the most flattering things you'll ever hear about a publicly-traded company are analysts and major stockholders praising it as they seek cover to dump their shares (or recommend same). Or buy credit derivatives that appreciate as company shares tank, which is effectively the same thing.

You'd think that the Securities and Exchange Commission ("SEC) would police that (and a lot of other things), but there's plenty of evidence that they don't.

"Over a Barrel"

So here's what you're left with: don't listen to what Chinese leaders say, watch what they do.

Of late, they've been pushing to have their own currency, the renminbi, included in a basket of world currencies to serve as a meta "reserve currency." That's significant because it would supplant the U.S. dollar as the de facto world reserve currency.

Why does that matter?

A key difference between, say, Albania, and the U.S., is that the latter's debts are denominated in its own currency. If the U.S. debt becomes unmanageably large -- one of the big concerns at the moment -- it always has the option of printing more money. For now, at least.

One last quote regarding China, which already owns a trillion-plus in U.S. debt: 'if you owe your bank $1,000, they've got you over a barrel; if you owe them a couple trillion, you've got them over a barrel.'

Unfortunately, there's a crucial difference between dumping what you already have -- and buying more.

Thumbs Down?

Pundits Weigh in on Geithner Plan

Thanks to the FDIC’s loan guarantee, there is a big upside if the assets do well. That upside is there to lure the rich guys in. That is why the big funds were happy; that is why the stock market went up. For the high rollers, this casino could be very attractive.

. . . If the subprime securities are truly trash, most of the big banks are troubled and some are insolvent. The FDIC should put them through receivership, get clean audits, install new management, and begin the necessary shrinkage of the banking system with the big guys, not the small ones. It should not encumber the banking system we need with failed institutions. And it should not be giving CPR to a market for toxic mortgages that never should have been issued, and certainly never securitized, in the first place.

--James K. Galbraith, "The Geithner Plan Won't Work"; The Daily Beast (3/25/09)

The ink is barely dry on the latest bank bailout plan, but judging from the online commentary, the verdict is already in: thumbs down (unfortunately).

At best, the bailout -- with non-recourse loans from the FDIC as the linchpin -- is viewed as a proactive, interim step that may improve psychology. In turn, improved psychology will hopefully spur increased economic activity.

At worst -- and Galbraith's comments are representative -- Geithner's plan is seen as dangling even bigger carrots in front of dubious actors to get them to clean up a mess they made. In other words, more "heads they win, tails we (taxpayers) lose" consequences.

China: Keep Your Dollars

Is the U.S. Dollar a "Legacy Currency"?

"China Urges New Money Reserve to Replace the Dollar"
--The New York Times (3/24/09)

Legacy: of, relating to, or being a previous or outdated computer system.

Here's a tip: when someone refers to something as a "legacy [blank]," it's not a compliment (or a good omen).

So it's unnerving -- at least to me -- to see Treasury Secretary Tim Geithner refer to the toxic assets at the heart of the most recent bailout plan as "legacy loans" and "legacy securities."

Oh . . and the Chinese, holders of more than $1 trillion in U.S. currency, are increasingly nervous (as well they should be).

Just two weeks after the Russians broached the idea of launching a new, international reserve currency, the Chinese are joining the chorus.

It won't happen overnight; think of switching from U.S. dollars as analogous to supplanting English as the world's predominant language. (A brand, new synthetic currency would then be the equivalent of Esperanto).

But it's a potent signal when this country's biggest creditor essentially utters a "no confidence" vote in our currency.

That's especially so when you consider that China holds so many dollars, it can't really sell them without destabilizing the market, leaving its holdings worth even less.