Wall Street's Credibility Problem

Monday saw a very interesting and telling moment as the newest iteration of Treasury Secretary Timothy Geithner's banking recovery was met on Wall Street by a jump in the Dow Jones of almost 500 points, a gain of fully seven percent. The big gains on Wall Street occurred amidst several days of bad press and attacks on the banking recovery plan, the AIG bonuses and Secretary Geithner in general from across the political and media spectrum. Progressive economists such as Paul Krugman attacked the plan as being insufficient and essentially the same as the original Bush/Paulson "cash for trash" plan, while conservative Congressman Eric Cantor (R-VA) referred to Geithner's plan as a "shell game."

The vastly different reactions to the plan reveal the growing disconnect between the finance sector and the rest of the economy and the ongoing need to focus on the latter when seeking to solve our most pressing economic challenges. While the rally on Wall Street is not bad news, it would be foolish, at this time, to see this as anything more than a one time event that may have been caused by Geithner's plan, but will be extremely unlikely to lead to significant job creation, reduction of mortgage defaults or revitalized industry in the US.

During the eight years of the Bush administration, and to a lesser, but still real extent, the eight years preceding that, we saw rising fortunes on Wall Street obscure, rather than alleviate, real problems in the economy. Now is not the time to repeat that mistake. Reading too much into the rally on Wall Street only strengthens the increasingly flawed, and more importantly decreasingly relevant, notion that what is good for the finance sector is for America. The disconnect in economic, political and psychological terms between Wall Street and Main Street has grown substantially in recent years and may now be close to being beyond repair.

One of the core lessons of this economic downturn is that beyond the Bernie Madoff's, AIG bonuses, misused or misplaced TARP money and private jets which make such potent media sound bites, there are bigger, more structural problems with our finance sector. Financial media coverage that is little more than financial cheerleading, rising real estate and stock prices that are the outgrowths of real estate bubbles and sub-prime lending and the increasing absence of anything approaching serious regulations have contributed to a finance sector that does little for anybody outside the sector and has little connection to the financial concerns of real Americans, particularly now that they see that the promise of a rising stock market that would boost their retirement savings was not as rock solid as they were told.

This realization is a driving force of the anger towards Wall Street that seems to be growing every day, confounding and frightening some politicians on both sides of the aisle as well as analysts and CNBC and other business news agencies. The heart of the problem is that for many in the political and financial elite, it is absolutely axiomatic beyond any possible doubt that a strong financial sector is the key to a strong and vibrant economy, but the rest of the country is increasingly looking around at the economic train wreck that is Wall Street and coming to a very different conclusion.

Access to credit for businesses, entrepreneurs, consumers and homeowners is, of course, central to the functioning of a modern economy; and Wall Street is the mechanism for making much of this possible. Without this key sector of our economy, families would not be able to borrow money to buy their homes and businesses would be stymied in their efforts to grow, develop and create jobs because of an inability to raise capital. However, these important functions have been substantially overshadowed as much of Wall Street has devolved into get rich schemes and a kind of post-modern investment ethos where speculation and increasing the number of investors, rather than sound economic or business practices, have become the engines of profits on Wall Street.

Thus, the financial and political elite may be right in their analysis about the centrality of the finance sector, but they have no remaining credibility on this issue. Efforts to persuade America why it is important to support a class of people who are increasingly viewed as hucksters and goniffs, whether coming from CNBC, Secretary Geithner, President Obama, economists or other experts will fall on deaf ears until this connection is made more clearly and the stench of corruption, self-dealing and incompetence in the finance sector is confronted.

Comments

[fscuttle]

I cant even watch CNBC without getting sick.Its evident that thier job is to keep the novice investor confident so the specialists can feed off them.The stories on thier websight often contradict stories from a day or even hours earlier.Th­ey spent a large segment of time today discussing how the new proposed hedge fund regulations would undermine thier ability to make money.They defend the AIG employees getting bonuses with taxpayer funds because they had nothing to do with the credit default swaps.But some poor guy making 45,000 a year who gets laid off because his company isnt doing well {through no fault of his own} is a loser because he couldnt pay his mortgage?! In the words of John Stewart "**** YOU!!"

[PhilipTaylor]

THEN WORK AROUND CORRUPT WALL STREET!

PROBLEM: Main Street has LOST its Lifeblood of Progress, CREDIT FLOWS! Consumers/Small Businesses are unable to get “FAIR Loans” to continue making Progress, thus Starving Main Street’s Economy!

Big Wall Street Banks are loaning only at High Interest Rates, 30+% on credit cards, and shutting down millions of credit lines.

GEITHNER/SUMMERS SOLUTION: Medicine that made us sick, Fund Corrupted WS Banks! WS Banks charged Massive Fees, Hidden Fees, Commissions, and other Charges that should have made them profitable as OIL Companies. But Executives­’/Managers­’ Greed skimmed those Massive Fees into their Pockets, leaving Banks an empty Shell. Helping WSBanks simply furthers enriches the same individuals who Schemed/skimmed Profits.

ANALYSIS: Credit Flows must be built around WS’s "Serious Cancer" to America’s Main Street. Carrying on the medical parallel we should do "Bypass Surgery" to open up new Blood/Money Flows to the patient/Main Street.

SOLUTION:

1. Short Term (Quick): OBAMA uses $1/2 Trillion to fund Fannie/Freddie as a Government Bank providing Main Street Loans at Current Low Rates/Fees to restore PROGRESS.

2. Long Term: Use Obama’s belief in “Internet Technology” to provide automated Virtual Banking Services directly from F/F using Internet, ATMs, Debit/Credit Cards. Packaged Software could quickly be modified and installed serving Millions on Main Street.

Final Note: Restoring Credit Lifeblood and Progress to Main Street is the Immediate GOAL! “Trickle Down Loans” from WS Banks is both Risky/Expensive chocking off Progress.

[Bladernr1001]

What about government's cred?

[JoanE]

Obama needs to bring in Spitzer. Before he was caught with the hooker, he was prosecuting Wall Street corruption. But the Republicans kept Vitter after his name showed up in a hooker's little black book. Spitzer is probably gone because Wall Street wanted him gone-- which is all the more reason that Obama needs his knowledge and skills.

[kesmarn]

Spitzer is smart and not afraid to go after the big boys. He's got the goods on AIG's payments to Goldman Sachs-- and THAT dirty money (we're talking billions) makes the AIG bonus scandal look like peanuts.

[All4Democrazy]

"Access to credit for businesses, entrepreneurs, consumers and homeowners is, of course, central to the functioning of a modern economy"

-- One quick question..­..how did we ever survive without the bulls$it that these monkeys have pressed on us? I mean, homes were bought, businesses started, credit cards issued...a­ll before this mess exploded..­.right? So can't we just go back to sometime before this crap started, and if it's all a paper loss, just "erase" it? Like a ctrl+alt+del - reboot?

Also - whatever happened to not buying something without having the money to back it up? Common sense dictates to me...40K a year is not enough to pay for a 300K house, right?

I believe the correct answer here is to just keep voting all the a-holes out of office; buy local and American; and start keeping your 401K under your Sealy.

[Bladernr1001]

Injecting all this money into the economy will do nothing but cause inflation. This is the wrong prescription. Mark my words.

[AN2009]

"[...] the stench of corruption, self-dealing and incompetence in the finance sector is confronted­."

Wall Street executives are completely out of touch with reality. They complain about the populist anger directed at them but fail to understand that their poor management of the financial system led to this recession. They demand enormous pay even when their companies are not profitable. They have their companies purchase new corporate jets and plan expensive corporate junkets to faraway places with taxpayer bailout money. They have absolutely no shame whatsoever.

[citizen625]

"there are bigger, more structural problems with our finance sector. " There sure are. Namely, no meaningful ethics among MBAs and leading financial lights. Nothing will change unless there develop meaningful consequences to looting and uniformly self-dealing behavior. The Wall Streeters, their families and friends who provide greedy acceptance of their money are as guilty as the direct perpetrators.
Imagine where the standards of behavior are centered around how long the business has been profitable or how many people are employed or total employee satisfaction or customer satisfaction.
The quaint notion of the profit maximizing level in the short run is outmoded in a world that requires depth, resolve and strategic actions. I try to patronize nice businesses as much as possible.

[cheesymacaroni]

"a finance sector that does little for anybody outside the sector"

Bingo. Why are these guys, set for life, the first to be loaded in the government provided life boats? If they won't make sound investments because they've got so many unsound ones on their books, open up shop next door and do it yourself. Don't use taxpayer dollars to take their bad assets off their books. If every average American were to be handed their share of this kind of aid, they would stimulate the economy just fine, pay down loans, pay off credit cards, buy new stuff. Trickle down does not work. Why are we investing in it?

[Transcendentobserver]

An insignificant clause in this otherwise incisive blog while accurate is misleading: ",,,Wall Street is the mechanism for making much of this possible. [capital formation]" Since the passage of the Garn-St. Germain Act in 1981, Wall Street has degenerated into a speculative center depending to an ever increasing degree on speculation on the viability of exo-enterprise generated wealth from entrepreneurial equity by individuals and/or and main street financial institutions. When banks were enabled by Garn-St. Germain to compete in business with their natural clients, and banks so enhanced became national and even international, the financial boom lasted for nearly a generation. However, Wall Street stock brokerages, though now self described "investment banks" where stunted in their plans by a decades' old law on their lending and need to create more sustaining paper wealth which could then be brokered as '"securities". Wall Street solution: Eliminate that law: (Glass-Steagall Act} 2000 : Mission Accomplished. For the last 9 years Wall Street has defined its capital underpinnings in terms of "troubled ;assets" which it created itself in the unregulated recesses of its banking brokerages. The amount of real wealth created by the Wall Street stock brokerages today is relatively small and declining.

[stevendedalus3]

"Now, everyone could make blind loans and sell them. Credit default swaps "insured" the CDOs"
This is mind-boggling. Why do investors get sucked in like this? It's tantamount to selling the Brooklyn Bridge. I guess we never learn or as Barnum says...

[stevendedalus3]

Wall Street by definition symbolizes greed and instant gratification. It has little to do with growing an economy for the long haul. Most trader blowhards and investors appearing on CNBC are interested in the same old nonsense such as fast food chains, beer, oil, and Disney—the original Mickey Mouse Club.

[apduncan1]

When you have Richard Grasso, Chairman of the New York Exchange, meeting with Reyes and Marulanda, FARC commanders in the jungle in Colombia in 1999, you have to ask yourself a couple of questions:

1. Why?
2. How big is the investment portfolio of the FARC at the New York Exchange?
3. Is the investment portfolio the proceeds of drug trade or kidnappings?
4. Was Mr. Grasso making sure US investments in Colombia were safe should the FARC toppled Pastrana's government?

Wall Street investment houses are corrupt and none would pass the smell test ... it is time to change.

[outnow]

Deferred compensation arrangements based on futures trading and off-balance sheet derivatives with no reserves is a peerless incentive device for profits despite risks.

This is the "moral of the story."

Securitization and financialization of the economy lies at the heart of the problem. Worse yet would be the continuation of the house of cards that is unsustainable. The system is unsustainable environmentally. We all depend on our environment. When man overpopulates and does not live in harmony with nature, then we will shorten our stay here. We lease, we do not own. Therein lies the rub.

[NWNHNM]

Last night our President said that although he is angry too, but we cannot condemn every entrepreneur on Wall Street.

This false dichotomy is disappointing: either you're irrationally angry at everyone or you must just shut up as taxpayers' money is spent without transparency.

We are not condemning "every entrepreneur" on Wall Street. We the People are angry at AIG and others engaging in fraud, selling CDSs that AIG could not pay off and taxpayer bailout of gamblers on both sides of these CDSs.

Today's NYT published an AIGFP executive's resignation letter, saying he is donating his after tax "bonus" of $749,000 to charity. He was "paid" $1 in 2008, with promise of a bonus of over a million dollars. Without our money, AIG would have filed for bankruptcy in September; this gentleman would not have received $1.

The most interesting statement in his letter is that Liddy of AIG ("our guy") never asked to modify these bonus contracts. This is the heart of the matter.

Paulson's response to AIG's threat of meltdown was "How much money do you want?". Geithner's response is exactly the same. We have given AIG $170 billion; but our ownership of AIG is still just 80 percent, which we got with the first 80 billion dollars. Transparency is missing.

The bank bailout will give another Trillion dollars to unregulated hedge funds, with no more thought than Hank Paulson spent last September.

President Obama promised audacity of hope; we're still waiting for hope's fulfillment.

[Stevealmi]

I am with "mergina" as the stock market has been the tool for the most successful transfer of wealth from the middle class to the upper class. But then all you have to do is have the President wave a flag and tell you a lie and they will go back to watch their realty shows and forget it happened.