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« Reason

The sound of fundamentals

By Tyler S. Clark (Contact)


Published September 15, 2008

The 1999 deregulation of banking passed by Bill Clinton and a Republican Congress brought on a massive wave of mergers and acquisitions, purchased by $300 million in lobbying to both parties. It's no wonder Phil Gramm called us all "whiners:" he himself, as Senate Banking Committee chairman, received $1.5 million from banks, the securities industry, and the insurance industry.

Like my second-grader's building-block towers, as they grow too tall, they get precariously unsteady. When the tower's foundation is built on a sea of risk, it begins to sink—and quickly—as we saw today. Monday saw Wall Street's worst single-day drop since 9/11/2001.

Nevertheless, McCain insists "the fundamentals of our economy are strong," despite a 500-point drop in the Dow Jones Industrial Average. Obama predictably called him out for this nonsense, "Senator McCain, what economy are you talking about?" Biden, campaigning in Detroit, went one better, "Ladies and gentlemen, I could walk from here to Lansing, and I wouldn't run into a single person who thought our economy was doing well, unless I ran into John McCain."

A lot of bluster from both sides and some enjoyable one-liners, but the bottom line is that there's too much corporate money in politics that led to this situation. Both parties bear responsibility, and this is a moment to step back and take a look at the role the government plays in regulation. Does the government have a role to play in regulation?

The Guardian has an in-depth preview of what today's events may mean for the future of banking. Ironically, the Glass-Steagall Act that was repealed in 1999 had been on the books since the 1930s and was instituted in response to the Great Depression. And today's remarkable events were assessed by former Federal Reserve chairman Alan Greenspan as a "probably once-in-a-century type of event."

"New regulation of the US financial sector seems likely once the dust settles… Glass-Steagall was part of a package of banking reforms put in place by president Franklin D Roosevelt to restore trust in the banking system.

"After the Great Crash of 1929, Wall Street was vilified for misleading the masses. Congress introduced legislation that diluted the power of big financial institutions, splitting up commercial and investment banking into separate functions. According to the act, commercial banks were not allowed to use depositors' money to finance profit-making investments other than loans.

"Left to their own devices, several have managed to ruin themselves and create havoc in the international financial system. Wall Street bankers may be wishing that regulators had kept them on a tighter leash, not least because fewer of them would be out of a job today."

 


Comments

1ytownoptimist(86 comments)posted 5 years, 7 months ago

I agree that greater regulation needs to occur. Huge corporations, CEO's and board of directors have been riding a platinum wave for too long at the expense of stockholders (which includes 401K plans) and [now] taxpayers. A few checks and balances never hurt anyone for those who fear a little government regulation or oversight with bipartisanship and some private sector involvement. I hesitate to write private sector involvement because it is like asking you to police your brother. These CEO's and board of directors are full of rich white men that protect each other and help each other get onto another board or company if the present one falls apart.

Corporate money in politics can be anything from Political Action Committees (PACs) or "recommendations" to employees to donate to a candidate. There is a lot of talk about lobbyists and corporate money but as long as campaigns depend upon expensive TV time, they are going to need a lot of money. An overhaul in fundraising/FEC (federal election commission) regulations at the state and federal level must happen to curtail this type of involvement. But we can see how enthusiastically politicians want to embrace this type of reform (that cute word that is thrown out all over the place right now) or that the electorate wants to read or research about a candidate rather than sit in front of the tv & watch commercials. Yes, the electorate does share in some of the blame because we will focus on issues that scarcely make a difference in our lives like gay marriage (think election 2004 scare tactics) rather than the dollar and cents issues that directly affect us daily.

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2Crowe(20 comments)posted 5 years, 7 months ago

Three things:

1) McCain would seem to be the best candidate to respond to your charges, then, because a) he was co-sponsor of the McCain-Feingold Campaign Finance Reform Act which has already done so much to get corporate money out of politics; and b) he does not request porkbarrel spending -- the sort of "sweetheart" kickback corporations get from Congressmen and Senators for all their campaign cash.

2) Now-collapsed Lehman Brothers employed lots of people who donated lots of money to campaigns. John McCain was given $115,800 by Lehman employees (see: http://www.opensecrets.org/politician...), which is LESS THAN A THIRD of what Lehman employees gave to Obama -- $365,922 (see: http://www.opensecrets.org/politician...). So which of them has his hand deeper in that cookie jar?

3) McCain has defined what he means by "the fundamentals of our economy are strong" and that is the entrepreneurial spirit and hard-work ethic of our workforce. No nation has the economic might of our country, because no nation has the work ethic and can-do attitude of our workforce. No one has won a bet yet betting against our workforce -- Japan, Germany, USSR, Democrats, etc.

Also, McCain made very clear in a speech yesterday that our workforce has been disserved by those at the top -- corporate execs and Washington movers and shakers alike. And yes, McCain is one of those Washington movers and shakers, but he's universally recognized as a maverick. Obama, who has never broken with his party and possesses the most liberal voting record in the Senate, and Biden, who has been in Washington longer than McCain, are in no position to rail against the culture of Washington. McCain is the only one in this race who has already taken action against corporate money in Washington (McCain-Feingold) and has pledged actually to do something about it once President. He even brought a total Washington outsider onto his ticket in Governor Palin. Obama/Biden have no such record and they go back on their pledges (FISA, public financing) without much thought.

On the issue of the economy and corporate money in politics, McCain is head and shoulders above Obama.

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3Erplane(449 comments)posted 5 years, 7 months ago

Sorry Tyler I have to disagree with the whole premise of the Guardian article. It actually it is the abolishment of Glass-Steagal that will make the economy sounder when this is all said and done. Lehman Bros and to a lesser extent Merrill were pure-play investment banks - they had no commercial banking function (also Morgan Stanley and Goldman are the last two that are standing as pure-plays). The article loosely connects the dots with some vagueness about the moral hazard of buying and selling off securities with depositors monies. But look at the three banking giants in the US - JPMorgan (Chase), Citi, and Bank of America. While they certainly had losses associated with subprime and conventional mortgages, they so far are in pretty good shape. Enough shape that JPM picked up Bear Stearns and BofA picked up Merrill. It is the diversification of the revenue streams that does more to protect depositors than FDIC insurance does. And these firms, when times are bad, have a capital base to fall back on. Bear and Lehman did not.

And while it is sad for me to see this chaos happen (I work next door to Lehman's HQ and I know many a good people there that had to pack their boxes), this is better for the US economy long term. In Japan, the govt there tried to prevent financial instituations from failing after the bubble of the 1980s burst. As a result, the economy was muddled and stagnant for almost 15 years. The Fed and the Treasury, in allowing Lehman to fail, is saying its time for the blood letting to occurr. Credit will be tight for the next 18 months, but the American way of cleaning up the mess and starting anew is occurring. And yes, there will be new regs coming out, that will allow the benefits of trading and packaging assets to occur, but will prohibit the ability to make risky loans based on vapor. But thinking about segregating i-banking and commercial banking again should remain off the table.

Lobbyists and campaign contributors have too much influence, and that has to stop, but the problems we are in have more to do with cultural changes in America. The cultural shifting of America to fuel its growth by credit is a much larger issue than the tools that I-banks used to support that appetite. My mom and dad could afford to live in a small house, and that is what we lived in. They paid off their cars and drove them another 5 years after until the wheels fell off. The thought of going to a car dealership and taking out a loan for 140% of the value of the car b/c you have to wrap your existing car loan is absurd. Shame on banks for having such loan programs, but shame on consumers for taking them out.

We are going to return to a country that has to put 20% down for a house, and will buy a car we can afford. And banks and i-banks will have to operate under a different world. And it will.

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4Erplane(449 comments)posted 5 years, 7 months ago

One more quick thought. You quoted Greenspan's 'once-in-a-century' crisis. Its time for Mr. Greenspan to go fishing. In paraphrasing a good friend of mine, he was the one that continued to lower interest rates so much, to use it as a tool in leiu of monetary policy, and a result America got hooked on cheap credit (both consumers, corporates, and the govt). He is speaking alot partially b/c he is in legacy-preservation mode. I think history will judge Bernake in a much better light.

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5tylersclark(182 comments)posted 5 years, 7 months ago

@ytownoptimist Thanks for your insights

@Crowe McCain's naked backpedaling on his remarks Monday and attempt to reframe them as praise of the American worker don't hide the fact that he's clueless on the economy. It's also clear that in his attempt to get his party's nomination, he's had to relinquish his maverick credentials. I don't doubt that he was once a maverick, but he's flip-flopped on the principles he once had. I supported him as an Arizona senator while I was a Tucson resident. Since about 2003, when it was clear he was lock-step with Bush, that all changed. And the Palin-as-reformer myth is no different. She was for all those earmarks until she wasn't.

@Erplane You seem to know much more about this than I do, so I'll defer to your expertise on this one. Thanks for weighing in.

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6Erplane(449 comments)posted 5 years, 7 months ago

Tyler - thanks for giving us a forum! And I wish I understood a fraction of the complexity of it all!

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7Crowe(20 comments)posted 5 years, 7 months ago

Tyler -- "Naked backpedaling"? I'd hardly call defining a term "naked backpedaling." He even used the term again yesterday at the rally at the airport so he's hardly tossing it aside. People focused on his use of the term "fundamentals of the economy," a vague term, so he explained what he meant by it. Seems reasonable. Rather than allow those who are criticizing him to define what he means by a term he is using, he defined it himself.

Also, I'm curious if you have specifics on "lock-step with Bush" and specifics on having "flip-flopped on the principles he once had." It's a line Obama has repeated a lot lately, but they haven't explained in what ways he would be "four more years of Bush."

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8Crowe(20 comments)posted 5 years, 7 months ago

One other thing, on your final line, the one about Palin.

The fact remains that Palin is now against earmarks and has demonstrated as governor that she is against them. In other words, she has a record of acting in a certain way that is consistent with the views she espouses. A change of position and governing accordingly is not a myth.

Obama, OTOH, talks about "change" all the time, but has a voting record, a record of requesting earmarks (including a rather large one for the hospital that had just given his wife a raise) and a record of double speak that makes him a run of the mill politician in every way, in every case. And he chose as his running mate a man who has never repudiated earmarks, as Palin has repudiated them.

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9Crowe(20 comments)posted 5 years, 7 months ago

Far from being "clueless" on the economy, it turns out that John McCain actually foresaw the subprime motgage crisis and tried to prevent it back in 2005, but his and Republicans' efforts to do so were stymied by Democrats. What's more, it appears that the practice of "predatory" lending, which caused the crisis in large part, was spurred by Clinton-era policies.

http://www.redstate.com/diaries/ken_t...

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10Erplane(449 comments)posted 5 years, 7 months ago

Crowe- I have to say that McCain needs some good education about what is going on (and I am a McCain supporter). I can't believe that he can't get a strong economist on his campaign staff that can walk him through the practicalities of what is happening here. He wiffed on Today Monday when he said he wouldnt support a bailout of AIG. Biden said the same thing. McCain could have said "I am philosophocally opposed to bailouts, however given that a failure of AIG could bring down the whole financial system globally, and that AIG's state is not entirelly due to a risk-taking culture at the firm, gov't intervention would be appropriate." But he didnt say that. There is a part of the economy that is fundamentally strong, but he needs to quit the soundbites and explain himself better.

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11Crowe(20 comments)posted 5 years, 7 months ago

Erplane-- Agreed, mostly. But remember that on Monday the extreme danger AIG was in was not known. That didn't become apparent until some time Tuesday. Until that was known, there was no call or reason to consider a bailout of AIG, and the Fed had made clear that they were not about to do anymore bailouts -- they let Lehman Bros die without a thought. The fact that a bailout became an option, let alone darn-near necessary, didn't emerge until pretty much the time it happened on Tuesday evening. I wouldn't call McCain's statement on Monday "wiffing" because at the time support for a bailout of AIG would not have made sense to anyone interested in letting the free-market work itself out (with checks and safeguards of the sort we later learned AIG required).

That said, McCain has said, and meant, that the economy is not his strong suit.* One thing about "what is happening here" is that no one is quite sure what is happening here, so even if McCain had a great economist on his staff he wouldn't have all the answers. Yes, the complete failure of AIG would clearly have been cataclysmic -- any economist knew that once the facts of the matter emerged -- but what is the best solution or what will happen tomorrow are both anyone's guess at this point.

* This does NOT automatically transmute to "he is clueless." One can have a clue and some understanding, but not consider something to be a strong suit. Also, since those who would pin the "clueless" label here would likely be Obama supporters, your guy ain't any better on this. His own majority leader came out and said "No one knows what to do" after Obama pronounced six things he would do to fix it all (none of which actually shows knowledge of what's going on, but all of which amount to "we'll repaint, reinforce, and refurbish the deck chairs before shuffling them."

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12Erplane(449 comments)posted 5 years, 7 months ago

Crowe - Thanks for your response. AIG - it was known Monday, it was known over the weekend. The business model of AIG is public and most people related to the finance industry would have known to advise McCain the right way, and would have known that Lehman and AIG are fundamentally different enough to warrant intervention in one and not in the other. He just doesnt have anyone in that close of a circle - and that is mind-boggling for me.

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13tylersclark(182 comments)posted 5 years, 7 months ago

@Crowe McCain knows he can get away with spinning it as he wants given how the press covers the election as a horse race. However, McCain has made his "fundamentals are strong" statement many times and always means the same thing: he feels the economy's essential indicators of exporting and importing--and all the other fundamentals that one looks at when evaluating a country's economy--are on the right track, and there's no need to panic. Except that he said it one too many times, while the financial markets were panicking around him.

So McCain's campaign decided to pretend he was saying something completely different. It's the oldest Orwellian trick in the book. If you want to take it at face value, that's your prerogative. I choose to be a bit more skeptical and, I feel, realistic.

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14apollo(1227 comments)posted 5 years, 7 months ago

If one company's failing, AIG, can be cataclysmic for the economy what does that say about the strength of the American economy?

The real truth is that these bailouts are nothing more than handouts for the wealthy and politically connected.

AIG failing would be painful but mostly for the rich folks. Sure, some of their stock is owned by individuals and pension funds, but hopefully nobody has their entire portfolio there.

Just because Hank Paulson and the Bush team of NEOCONS says something is cataclysmic (Iraq come to mind) doesn't make it so. There are plenty of expert economist who think that some failures are actually good for the system.

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15Erplane(449 comments)posted 5 years, 7 months ago

Apollo - Sorry to be so blunt, but your way off the mark. Read the following story from the New York Post: http://www.nypost.com/seven/09212008/.... This speaks more about the near-collapse of the money market system, not AIG per se, but it is indicative of how a breakdown in the system was stopped by Paulson, and how this prevented real people from losing their jobs. AIG created products that helped banks manage their risk. If AIG went away, the same type of reaction would have occurred as this story commented on. REAL Americans, not Wall Streeters, would have lost their jobs real fast.

Further, tell me where Hank Paulson is a stated neo-con? If your going to make such an assertion, show me the facts. Hank Paulson was brought in to Treasury because his main job was to get China to revalue the RMB, something that Rep Ryan and Democrats in Congress were screaming for. And guess what, the RMB has strengthened since Paulson has been in office. Its not 100% directly because of him, but he certainly helped.

We're d*mn lucky that Paulson and Bernake are smart men doing their jobs well while all politicians, Republicans and Democrats, have been asleep at the wheel.

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