The Road To Bailout

In December I read Joseph Stiglitz’s account of the financial path that led us to our current situation. Here’s my short version of what he wrote.

At one of the problem’s roots is Alan Greenspan, appointed in 1987 by Reagan because Volker was not enough of a free market advocate. Well, he found his man in Greenspan, devotee of Ayn Rand and her elitist ideas. “The market will self-correct, no need to regulate.” That was the litany. He has since changed his mind.

Clinton, Republican in Democrats robes, helped seal the fall with the revocation of Glass-Steagall in 1999. Ushered through Congress by Phil Graham, another asshole from Texas---the list is quite long---the repeal helped bring about a cultural change by tearing down the wall between commercial banks and investment banks, the former lenders of money, the latter sellers of bonds and equities. When one organization became both animals, the stage for conflict of interest was magnified many fold. If the investment bankers screwed up, they could look within their own organization for relief. Guess who would get the additional needed capital?

Number faking exemplified by Enron and World Com then made it clear we had serious problems with our accounting system. The managers of Enron fudged the numbers unconscionably while their accounting firms, loathe to lose lucrative customers, failed in their auditing responsibilities. Sarbanes-Oxley, passed in 2002, was an attempt to deal with the accounting mess. But in putting Sarbanes-Oxley together the wise leaders decided not to deal with stock options, a form of supposed incentive pay, but not really. Nothing mattered to the managers but the immediate stock price and the favorable stock options that awaited them as price per share went up. The situation also encouraged fudging the numbers to make performance look better than it was vis a vie Enron and World Com. That’s only half the story. For the managers, even failure equaled success for, when ousted, they walked away with huge sums based on employment contracts which rewarded bad management even when the stock price plummeted. Not so the workers. They lost their jobs and sometimes their promised retirements and savings when the thing collapsed. If they did not succeed, so what?

Then, quietly in 2004 the SEC changed the debt-to-equity ratio allowances for investment bankers from 12:1 to 30:1 and more. The door was open to unfettered speculation. A flood of capital was available along with means to leverage it without ceiling.

Bush tax cuts added to the speculation frenzy. Capital gains tax cuts and lower interest rates, rates that were deductible from tax calculations spurred liquidity. The rich got richer, always true, but never before to such a degree.

Regulation disappeared. Hedge funds went their merry way without so much as a glance from the government. Derivatives, mindless, but complicated instruments, were packaged as bundles of mortgage loans and sold to institutions and the public as sound investments with huge returns.

And now we have these desperate bailouts.

Behind all these stages lies one inescapable tragic fault: the moral breakdown of Americans. Not, in my view, was it ever all that good. But these things are relative. Reagan and his followers let greed sweep through this country as if by invitation. “Greed is good,” said one movie character. And so most of us joined the parade to the extent we were connected and bright enough to do so. Too often that extent exceeded by many miles the modest means at hand to the average consumer.

The doors opened to unsupportable loans for houses, steadily, but not interminably, increasing in market value. The loans, complicated in structure, contained the sleeping devil of adjustable rates in their guts. Credit card debt soared. “If the boss can do it, why can’t I?” Indeed! He couldn’t either. Not after he collected multiple homes, multiple cars, unlimited traveling, the best restaurants, servants, a wife wearing Prada, kids at private schools, country clubs and, now and then, or maybe even more frequently, a high class whore for the evening.

There is nothing new about any of this, of course, not in the larger sense. Even a casual reading of history sketches out what always follows in human affairs. Barbara Tuchman’s “March of Folly” continues undiminished. Past and prologue start with the same letter and they follow each other as night the day. Or should I say the day, the night. For we are in a night now, and how the long the dark will last no one can say.

One thing I can say, I see no bright spot of attitude change in the people with the power and money. Admittedly it is too soon to judge Obama. But he is just one. The power and money elite are the same. And they are shameless. Need I mention Madoff. Or the bankers sitting before Congress saying that the $10 billion they have just received as a bailout is different from the $10 billion they have just set aside for bonus payments to themselves. Can you think of one rich person who has said he is sorry for the excesses he has committed? No, like Madoff, they will squirrel away what they can and hope they are not caught. They will take their undeserved bonuses and golden parachute payments without so much as a blush. This is not the moral fiber we need to deal successfully with what is before us.