(For 25 related, earlier blog entries, see bottom of this entry)
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President-elect Obama is going to tell us about his near-$1 trillion "stimulus package" today. All of us who care about our country's future and who have been following the news will be hanging on the details -- as a result of which our attention may be successfully diverted from "step one."
And what is "step one"?
My father used to tell the story of a Kansas farmer, a neighbor he knew, whose child asked him for some money, to which the farmer replied, "What did you do with the last nickel I gave you?"
In our case we as taxpayers have handed over far more than a nickel -- and we don't even know how much. We've heard about the $700 billion we've given to the guys who stole their way into our present financial disaster. But ten times that amount of our money seems to have slipped through Bernanke's fingers to the same guys: $7.7 trillion.
Now we're being asked for another trillion dollars.
As citizens of a nation with well north of $60 trillion in unfunded mandates and debt, that's the equivalent of a $200,000 credit card debt for every man, woman and child in the country.
Before we add another trillion to our national debt shouldn't we ask, "What did you do with the last trillion we gave you?"
Ron Chernow, author of The House of Morgan and Alexander Hamilton, thinks so. Ron Chernow, "Where Is Our Ferdinand Pecora?" New York Times, January 5, 2009.
And who was Ferdinand Pecora? Here are some excerpts from Chernow's op ed column:
Barack Obama has assigned a top priority to financial reform when the new Congress assembles today. If history is any guide, legislators can perform a signal service by moving beyond the myriad details of the rescue plans to provide a coherent account of the origins of the current crisis. The moment calls for nothing less than a sweeping inquest into the twin housing and stock market crashes to create both the intellectual context and the political constituency for change.And if that committee chief counsel needs a summary of where she might start the search for witnesses I'd recommend Michael Lewis and David Einhorn, "The End of the Financial World as We Know It," New York Times, January 4, 2009.
For inspiration, Congress should turn to the electrifying hearings of the Senate Banking and Currency Committee, held in the waning months of the Hoover presidency and the early days of the New Deal. In historical shorthand, these hearings have taken their name from the committee counsel, Ferdinand Pecora, a former assistant district attorney from New York who, starting in January 1933, was chief counsel for the investigation. Under Pecora’s expert and often withering questioning, the Senate committee unearthed a secret financial history of the 1920s, demystifying the assorted frauds, scams and abuses that culminated in the 1929 crash.
. . .
Whatever their failings, the Pecora hearings laid the groundwork for financial reform legislation. By the time they ended in May 1934, they had generated 12,000 printed pages of testimony, collected in several thick volumes. These documents have served generations of historians. Our national narrative of stock market mayhem in the 1920s is largely composed of characters and anecdotes gleaned from their pages.
Pecora not only documented a litany of abuses, but also paved the way for remedial legislation. The Securities Act of 1933, the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934 — all addressed abuses exposed by Pecora. It was only poetic justice when Roosevelt tapped him as a commissioner of the newborn Securities and Exchange Commission.
Our current stock market slump and housing bust can seem like natural calamities without identifiable culprits, creating free-floating anger in the land. A public deeply disenchanted with our financial leadership is desperately searching for answers. The new Congress has a chance to lead the nation, step by step, through all the machinations that led to the present debacle and to shape wise legislation to prevent a recurrence.
Lewis and Einhorn name names, times and offenses. Here (without those details) is an excerpt that gives a sense of the tone:
Our financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.There are those, including Obama, who urge that "finger pointing" is not useful. Strongly of this view are those toward whom the fingers would be pointed -- and who are numbered among the most generous contributors to senators, representatives, and presidential candidates.
The credit-rating agencies, for instance. . . .
These oligopolies [Moody’s and Standard & Poor’s], which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.
This is a subject that might be profitably explored in Washington. . . .
It's not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.
The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street. . . .
Say what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers. . . .
In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.
It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones.
By contrast, I agree with Ron Chernow, Michael Lewis and David Einhorn. I think more than a little finger pointing is exactly what we need, for the reasons they outline. I think the American people are entitled to know how this happened -- step by step, greedy offender by greedy offender. I think we're entitled to know what the laws were, who violated them, and to watch their trials and their walk into prison.
And I damn sure think we're entitled to know what Federal Reserve Board Chair Ben Bernanke refuses to tell us (and Bloomberg, which is suing to find out under the Freedom of Information Act, seeks to find out) regarding the $7.7 trillion of our money he's given to his friends, who they were, how much he gave each, what he got in return, how much that was worth, and what are the likely dimensions of the ultimate losses to the American people as a result of his generosity.
I'm not alleging anything about President-elect Obama's motives. How could I possibly know everything he's feeling and thinking? But the effect of his "no finger pointing," and professed urgency behind another trillion-dollar giveaway, could very well end up being the same as if it was his purpose to divert attention on those whose greed, and whose failure to regulate, brought this disaster upon us.
And that would indeed be a dual disaster -- politically for him, and economically for all of us along with most of the world's developed nations.
Nicholas Johnson, "Who's The Reason?" September 5, 2008
Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008
Nicholas Johnson, "Taxpayer Rescue," September 15, 2008
Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008
Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008
Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008
Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008
Nicholas Johnson, "It's the Economy," November 7, 2008
Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008
Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008
Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008
Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008
Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")
Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008
Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008
Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008
Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008
Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008
Nicholas Johnson, "A Car in Every Garage," December 16, 2008
Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008
Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008
Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008
Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008
Nicholas Johnson, "Revolting Developments," December 23, 2008
Nicholas Johnson, "First Things First," January 8, 2009
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself.
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