I spent hours last night venting my frustrations about the riches raining down on Wall Street lately. I thought I'd share my reply to a spate of emails (forgive the few vague references):
Begin forwarded message:
I never meant to imply that the bailout was a mistake. It would have been suicidal, as your friend notes, to let the economy tank out of vengeance toward those on Wall Street.
I supported the bailout then. I support the idea of it even now - with the following two major caveats:
1) The big banks blackmailed us; we fell for the Chicken Little argument hook, line and sinker.
Just before the worst of the collapse (shortly after Lehman's end), Ben Bernanke and Timothy Geithner convinced the Obama administration and Congress that all hell was going to break loose without a major cash infusion into the banking system. Certainly Wall Street would be razed. Without a monumental bailout package, nearly every major financial firm would have been insolvent within days. How this implosion would have affected Main Street is really a moot point. We'll never know. But I think it's safe to say that our economy would have suffered major damage, at least temporarily. So I support the bailout.
Nevertheless, it's important to appreciate what the collapse of Wall Street looks like to people like Henry Paulson, Geithner and Bernanke. It looks like the end of the world. These guys either made their fortunes on Wall Street, spent their intellectual lives studying it, staked their personal reputations on overseeing it, or did all three in some combination. I don't mean to impugn their character. I'm not trying to be cynical. But we should put their advice in context. Of course these guys were gunning for a comprehensive salvation of every Wall Street institution, directors included (many of whom are close friends of the three). They themselves, even Bernanke the academic, were personally, heavily invested in the success of Wall Street as they knew it. Were Wall Street to change radically, they'd cease being experts - they'd have lost their jobs, and to some degree their identities.
Next, the big banks' activity supported the sky-is-falling argument. I could point out different pieces of evidence here, but my favorite one is the most glaring: the day the Republicans balked at accepting Obama's bailout package, the market tumbled over 400 points. Traders on Wall Street were sending a very clear message: we need this bailout package. Again, I don't mean to be cynical. If I were the head of a major firm, and I knew my firm needed bailout money to survive, you bet I'd start selling like mad to scare the hell out of market-watchers. It's common sense. Perhaps it really was their last, best move.
Now that the big banks have been saved, we've heard a lot about how some were more solvent than others. Technically, this is true. (How could it not be?) But it's misleading, as it implies that some banks needed to be bailed out and some didn't. The reason why Obama forced all the big banks to take part in the bailout wasn't just to avoid singling out the desperate ones. He forced them to take part because he knew what they knew: that if half of them failed, the other half would fail, too. Our major financial institutions, and more specifically their debt structures, were far too interdependent to allow any one (more) to collapse. That's what Lehman's failure proved - and it frightened everyone.
So, every bank was desperate for a Wall Street-wide bailout (even Goldman Sachs). The future of the financial industry depended on one. How could they have possibly blackmailed the government in such a weak state? Since their collapse threatened our economy as a whole, they used their position as a bargaining chip. Again, not a cynical argument. This is what anyone should have expected from the titans of Wall Street: hard bargaining. The big banks (and their friends in Washington) convinced Obama - and here the blame lies with him alone - they convinced Obama that they really needed the money with no strings attached, and besides there was no time for meddling. The banks insisted on getting all that money with pretty much no oversight whatsoever. And they threatened Obama - and by extension us - with the collapse of the American economy if they didn't get their way.
Obama should have stood up to them. He should have forced them, for example, to commit a percentage of their reserves to lending, especially to small businesses. This was a major theory as to why cash was needed: because lending had basically frozen, which can devastate an economy. But the banks didn't use the money for lending, by and large, and still haven't (potentially hampering our recovery). Obama also should have forced them to pay their bonuses using stock options and not cash. Which brings me to my second point...
2) Using taxpayer dollars, we rescued every major firm on Wall Street. We not only have a right to regulate compensation at these banks - it's our duty.
I don't need to go on about this because it's too obvious. Nobody is claiming that pay on Wall Street should be regulated indefinitely. No one wants to limit the compensation of bankers generally (ignoring the fringe). Frankly, your friend's nod to bread lines in the Soviet Union is a sentimental plea - and if his arguments were convincing he wouldn't need to resort to that kind of Fox News scare tactic.
Without the bailout, nobody on Wall Street would have a job right now. (This may be the case for Main Street as well, but it is definitely the case for Wall Street.) In the last year banks have generated tremendous profits only because we gave them a boatload of money to play around with (and the Troubled Asset Relief Program isn't even the half of it, so saying it's all paid back is disingenuous). It's quite simple, really: humility and gratitude are in order. If we were all in this thing together when the economy was tanking (i.e., if the banks needed us then), then they shouldn't be able to walk away with all the profits. It's wrong for these punks to be paying themselves enormous bonuses. And curbing their pay is not impractical or threatening to the fabric of society.
This is not to say that I blame the bankers (I just think less of them than ever). Again I blame Obama. This has been, and I'm afraid it will be, his biggest mistake, political and moral. He should not have allowed Wall Street to get away with these bonuses while the rest of us continue to hurt. And just to be clear, I'm not saying these bonuses are wrong because they look bad, because they highlight our vast disparity of wealth (though they do). Skyrocketing unemployment and skyrocketing bonuses shouldn't go hand-in-hand, but that's really a question of taste. The crime here is that this bonus money comes directly from our pockets. The source is easy to trace, and obviously average Americans are tracing it: our billions plus lenient market policy = windfall profits. (It doesn't take the genius of Goldman Sachs to make money when borrowing is practically free.) Obama gave Wall Street permission to play with our money. This wasn't necessarily a bad idea. But with that permission should have come some responsibility, some understanding that the banks would do more than usual to help small businesses and/or individuals survive this recession.
Lloyd Blankfein's recently announced $100M bonus is a case in point: a shameless, provocative slap in the face to the Americans - over 10% of whom are now unemployed - who quite literally helped him make all that money by paying their taxes for 2008. News like this will undermine Obama's moral authority, and it should. There may not be laws on the books, as Matt Taibbi suggests, but what's going on here is absolutely a crime.
Finally, the argument that we should defer to the expertise of Wall Street at this very moment is a pathetic, self-loathing stance. What is Democracy if not the faith in the wisdom of the common man? Just because folks on Main Street don't understand derivatives, credit default swaps or mortgage-backed securities doesn't mean you give up on oversight and defer to the experts. That's why the Secretary of Defense has to be a civilian, and that's why Obama should have had fewer Wall Street insiders in his Treasury. We got into this mess because of a lack of oversight. I don't disagree that we can't expect the general public to "firmly grasp macro-economics and the complexity of the global financial system." But isn't it TERRIBLY OBVIOUS that we can't expect the titans of Wall Street to grasp the same? Because if they could grasp the complexity of our financial system, this would have never happened! The average American may not understand collateralized debt obligations, but he can tell when he's getting screwed by a bunch of smug, corrupt bankers. This is a good thing.
William Buckley, the famous conservative, said it best: "I'd rather trust the government of United States to the first 400 people in the Boston phone directory than to the faculty of Harvard University."