Monday, March 23, 2009

Punishment to Fit Financial Crimes

March 23, 2009, 8:20 a.m.

Punishing Thieves in Suits:
Piano Wire or Stocks?

(brought to you by*)

As I've repeatedly conceded, I don't claim expertise as an economist. On the other hand, I've also urged that our instincts and intuition are entitled to more weight than we're modestly inclined to accord them. Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008.

Clearly, Tim Geithner, Ben Bernanke and Larry Summers do know something about economics.

Equally clearly the New York Times staff of editorial writers and columnists are not necessarily among the nation's top economists -- although one did win the Nobel Prize in economics, which is not something those three can claim .

Nonetheless, it was reassuring in terms of my "trust your instincts" theory that so much of what appeared in the Times over the weekend echoed analyses and concerns I've expressed over the last six months in the blog entries linked below.

For example, while I'd prefer to let the market sort this out, rather than simply throw taxpayers' dollars at bankers, if we are going to bail out those who have brought us this disaster I'd rather it be used to purchase the banks ("nationalization") rather than their so-called "toxic assets."

On Saturday the Times editorialized:
This crisis is unlikely to turn around until President Obama and his aides come up with a plan for failing banks that does not arbitrarily reject the idea of nationalization.
Thursday morning [March 19] I wrote:
And if it makes no sense to try to revive the auto economy by giving billions to auto executives [when consumers would rather save their money than buy cars], it makes even less sense to try to revive an entire economy by transferring trillions of taxpayer dollars to bankers. Here again, the problem is not that businesses and consumers don't have the opportunity to run up even more debt. The problem is that they have the wisdom not to want to do so, especially at this time. ["What a Mess," March 19, 2009.]
Saturday's editorial continues:
On Wednesday [March 18], it [the Fed] announced that it would buy hundreds of billions of dollars more [of mortgage-backed securities] and as much as $300 billion of Treasury bonds. . . . Unfortunately, there is no guarantee that this will work. With unemployment rising, debt loads high and household wealth falling, consumers may be reluctant to resume spending anytime soon, no matter how low rates and prices go. And even if consumers and businesses want to borrow, banks — stung by their own losses — may not be willing to lend.
I have repeatedly noted that the multi-trillion-dollar transfer of taxpayers' money to the banking and financial community has emphasized only the benefits of a rational benefit-cost analysis. There are potential downsides of this approach as well -- most notably, inflation -- and that the Administration and Congress have, at a minimum, an obligation to evaluate, and then share with the American people, those costs and risks.

The Times editorial went on:
To buy up securities, the Fed creates money. To provide fiscal stimulus, Congress borrows money. The more money that is created and borrowed, the greater the risk of future inflation and higher interest rates. . . . [A] forthright acknowledgment of the risks is necessary to keep policy makers from venturing too far into dangerous territory.rates.
Editorial, "The Fed Does Battle, Again," New York Times, March 21, 2009.

By this morning [Monday, March 23] at least four, count 'em four, Times columnists, card-carrying members of the "liberal media," were expressing something far shy of enthusiasm for President Obama.

Paul Krugman (that Nobel Prize winner) writes of his "Financial Policy Despair":
If the reports [of the Administration's bank rescue plan] are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

I have expressed concern about the Administration and Fed secrecy regarding what the banks and AIG have done with the money we gave them. Krugman notes that,
the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.
From the outset I've expressed concern about the President's close ties to the financial community, that community's financial contributions to him and members of Congress, the role of Goldman Sachs and Geithner's selection of the firm's lobbyist, no less, as his chief of staff, and the seeming obliviousness of the lot of them to the public feelings about corporate excesses.

Krugman comments:
And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing. It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street.
In "What A Mess" I wrote:
[E]ven the world's best and most honorable bankers couldn't solve this problem with that much money. Trickle down doesn't work. In addition to common sense, intuition, and long history, we now have the lack of results from the most recent six months of trying.
Paul Krugman shares this conclusion:
But the real problem with this plan is that it won’t work. . . . And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.
Paul Krugman, "Financial Policy Despair," New York Times, March 23, 2009.

On Sunday [March 22] Tom Friedman bemoaned the consequences of what he called "politics worse than usual":
There don’t seem to be any adults at the top — nobody acting larger than the moment, nobody being impelled by anything deeper than the last news cycle. . . . Right now we have an absence of inspirational leadership. From business we hear about institutions too big to fail — no matter how reckless. From bankers we hear about contracts too sacred to break — no matter how inappropriate. And from our immature elected officials we hear about how it was all “the other guy’s fault.” . . . [Meanwhile,] our country, alas, is not too big to fail.

Thomas L. Friedman, "Are We Home Alone?" New York Times, March 22, 2009.

Maureen Dowd shares my concern about the consequences of the close ties between the Administration, AIG and Wall Street. She thinks "we need less smooth jazz and more martial brass" and, inspired by Michelle Obama's declaration that the President (and their daughters) are going to be pulling weeds in her new White House garden "whether they like it or not," believes "the wrong Obama is in the Oval."
[T]he fury directed at the robber barons by the robbed blind in America has been getting hotter, not cooler. And that’s because the president and his Treasury secretary have been coddling the Wall Street elite, fretting that if they curtail executives’ pay and perks too much, if they make the negotiations with those who siphoned our 401(k)’s too tough, the spoiled Sherman McCoys will run away, the rescue plan will fail and the markets will wither. . . .

The shafters of the universe have been treated with such kid gloves that they remain obnoxiously oblivious. Vikram “Pandit the Bandit” at Citigroup, which received $50 billion in bailout money, is . . . spending $10 million to renovate his Park Avenue offices . . .

Fannie Mae . . . brazenly intends to give $1 million apiece in retention bonuses to four top executives, even though the word retention in a depression is pure Ionesco. Freddie Mac . . . has yet to disclose its planned bonuses. . . .

Treasury Secretary Tim Geithner, who grew up as a Republican . . . sees things from the point of view of that wellspring of masters of the universe, Goldman Sachs. (His Treasury chief of staff was a Goldman lobbyist, who fought then-Senator Obama’s attempt to curb executive compensation — just as Geithner has done within the administration.) . . .

Virtually unnoticed amid the bonus imbroglio was A.I.G.’s grudging disclosure that it had funneled $93 billion — more than half its federal money to date — to its high-flying insurees, including Goldman Sachs . . .. Yet as Goldman sneers at the federal money at the front door, it’s taking delivery of billions in no-strings federal money through the back door. . . .

The issue is how much we must pay to preserve financial stability over all, not how much one company promised to pay. At this point, A.I.G. seems to be the only party paying face value on toxic derivatives.
Maureen Dowd, "Toxic R Us," New York Times, March 22, 2009.

Frank Rich used some very tough language to hit on a number of the issues that I have written about, many of which are identified above. He also mentions an issue (the legality of much of what was done) that I've often described in these words: "the problem is not just that corporations violate the law, the much more serious problem is that they are writing the law."
A charming visit with Jay Leno won’t fix it. A 90 percent tax on bankers’ bonuses won’t fix it. Firing Timothy Geithner won’t fix it. Unless and until Barack Obama addresses the full depth of Americans’ anger . . . his presidency and, worse, our economy will be paralyzed. . . .

The White House seemed utterly blindsided by the public’s revulsion at the moneyed insiders’ culture illuminated by [former Senator Tom] Daschle’s post-Senate career. Yet last week’s events suggest that the administration learned nothing from that brush with disaster.

Otherwise it never would have used Lawrence Summers, the chief economic adviser, as a messenger just as the A.I.G. rage was reaching a full boil last weekend. Summers is so tone-deaf that he makes Geithner seem like Bobby Kennedy. . . .

[AIG] has, in essence, been laundering its $170 billion in taxpayers’ money by paying off its reckless partners in gambling and greed, from Goldman Sachs and Citigroup on Wall Street to Société Générale and Deutsche Bank abroad.

Summers was even more highhanded in addressing the “retention bonuses” . . ..

[M]ost Americans don’t know how A.I.G. brought the world’s financial system to near-ruin or what credit-default swaps are. They may not even know what A.I.G. stands for. But Americans do make the connection between their fears about their own jobs and their broad understanding of the A.I.G. debacle.

They know that the corporate bosses who may yet lay them off have sometimes been as obscenely overcompensated for failure as Wall Street’s bonus babies. . . .

Since Americans get the big picture of this inequitable system, that grotesque reality dwarfs any fine print. That’s why it doesn’t matter that the disputed bonuses at A.I.G. amount to less than one-tenth of one percent of its bailout. . . .

What made Jon Stewart’s takedown of Jim Cramer resonate was less his specific brief against CNBC’s cheerleading for bad stocks than his larger indictment of the gaping economic inequality that defined the bubble . . . [the] “two markets”. . ..

No one is more commanding on this subject than our president. . . . But rhetoric won’t tamp down the anger out there, and neither will calculated displays of presidential “outrage.” . . .

Obama must do what he has repeatedly promised but not always done: make everything about his economic policies transparent and hold every player accountable . . . actually answering the questions that officials like Geithner and Summers routinely duck.

Inquiring Americans have the right to know why it took six months for us to learn (some of) what A.I.G. did with our money. . . . [W]hy Goldman, which declared that its potential losses with A.I.G. were “immaterial,” nonetheless got the largest-known A.I.G. handout of taxpayers’ cash ($12.9 billion) while also receiving a TARP bailout. We need to be told why retention bonuses went to some 50 bankers who not only were in the toxic A.I.G. unit but who left despite the “retention” jackpots. . . . And where are the M.R.I.’s from those “stress tests” the Treasury Department is giving those banks?

[I]t's hard to imagine taxpayers shelling out billions for a second bank bailout unless there’s a full accounting of every dime of the first, and true transparency for the new plan whose rollout is becoming the most attenuated striptease since the heyday of Gypsy Rose Lee. . . .

[W]hy . . . has there been . . . so much evasiveness so far? The answer, I fear, is that too many of the administration’s officials are too marinated in the insiders’ culture to police it, reform it or own up to their own past complicity with it. . . .

The “dirty little secret,” Obama told Leno on Thursday, is that “most of the stuff that got us into trouble was perfectly legal.” An even dirtier secret is that a prime mover in keeping that stuff legal was Summers [of whom his mentor, Robert Rubin] wrote in his 2003 memoir . . . underestimated how the risk of derivatives might multiply “under extraordinary circumstances.”

Given that Summers worked for a secretive hedge fund, D. E. Shaw, . . . you have to wonder how he can now sell the administration’s plan for buying up toxic assets with the help of hedge funds. It will look like another giveaway to his own insiders’ club. As for Geithner, people might take him more seriously if he gave a credible account of why, while at the New York Fed, he and the Goldman alumnus Hank Paulson let Lehman Brothers fail but saved the Goldman-trading ally A.I.G.

Frank Rich, "Has a 'Katrina Moment' Arrived?" New York Times, March 22, 2009.

To remove any possible question I want to repeat that with which I began. I suffer no illusion that anyone -- members of Congress, the Obama Administration, or New York Times' columnists -- are even reading this blog, let alone influenced by it. Nor do I believe that I've come up with insights over the past six months or so that had not occurred to others. Indeed, that's exactly my point.

If I, and thousands of other bloggers, can come up with these insights and analysis drawing on nothing much beyond intuition, why oh why cannot our elected and appointed officials do as well?

So what should we do with these folks who've brought the world to this economic disaster?

At dinner last evening talk turned to appropriate punishments for those who are coming to taxpayers for multi-trillion-dollar bailouts necessitated by a 40% (give or take) decline in home values and stock prices brought on by their own incompetence and greed.

Nicholas Night, who hails from Bisbee, Arizona ("the town too high to care" -- a response to Tombstone's claim to be "the town too tough to die"), made reference to AIG Ed Liddy's concern regarding threats he's received from those who believe piano wire should be put around the necks of the most guilty of AIG executives. Bisbee is something of a music town, and Nick observed that there are now so many electronic keyboards in use that there may well be a shortage of piano wire -- at least in Bisbee.

So what he next proposed is that they be put in stocks. No, not the kind they're already in, the stocks of profiteers; the stocks the Puritans put folks in, with criminals' heads, arms and legs sticking through and locked down. Guards would be provided to protect them, so that nothing more damaging than tomatoes and rotten eggs would be thrown.

After being freed from the stocks they, and indeed all white collar criminals in Nick's proposal, would then be required to pay back in full whatever losses they'd caused or thefts they'd pulled off. They would have to earn that money selling ice cream bars by driving a truck through neighborhoods primarily occupied by persons of a different color from themselves. And these customers could pick a 38-second excerpt from a song that the perps would have to listen to over-and-over, constantly, until the debt was paid.

It's possible you had to be there, but I think Night is on to something. If Obama is going to continue to refuse to prosecute and imprison them the least we can do is identify who they are and do some form or another of public shaming.

Related Blog Entries on Global Economy and Bailouts

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

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

Nicholas Johnson, "No More for Wall Street!" February 1, 2009

Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009

Nicholas Johnson, "Quick Fix: Support Jobless, Not Bankers," February 7, 2009

Nicholas Johnson, "Geithner's Same Old, Same Old," February 10, 2009

Nicholas Johnson, "Terrorist Bankers,"
February 13, 2009

Nicholas Johnson, "Financial Crises for Dummies," February 17, 2009

Nicholas Johnson, "They're Back!!" February 20, 2009

Nicholas Johnson, "The Burden We Ought to Bear," February 23, 2009

Nicholas Johnson, "Candid Conservatism," February 27, 2009

Nicholas Johnson, "Bankers as Arsonists," March 3, 2009

Nicholas Johnson, "Don't Buy Stuff," March 6, 2009

Nicholas Johnson, "The Story of Stuff," March 16, 2009

Nicholas Johnson, "What a Mess," March 19, 20, 2009

* 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. -- Nicholas Johnson

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1 comment:

uncle george said...

I can appreciate Nick's outrage and the irony of Nick lining up with Rich, Dowd, Friedman and Krugman. I want Nationalization and Stiglitz and even FED members want Nationalization - but you know what - after that's done - you'll end up with something very similiar to Geitners bailout. The only difference is you'll be getting a new round of staff - and there's a cost to that as well.

Maybe geitner is "shorting" the - artificially inflating the market - to finally take the garbage out.

from Scott & Uncle George