by bartleby the scrivener | When the economic crisis hit last year, Paul Krugman and other progressives were hopeful that some good might be wrung out of the market's collapse. What price such gossamer hopes now? "The end of the world has been postponed," Krugman said at an economic seminar in Helsinki.
Meanwhile, in an op-ed at NYT, Krugman points out that for the guys who brought about the collapse of Wall Street, it's now pretty much business as before:
"Even as the rest of the nation continues to suffer from rising unemployment and severe hardship, Wall Street paychecks are heading back to pre-crisis levels. And the industry is deploying its political clout to block even the most minimal reforms.
"The good news is that senior officials in the Obama administration and at the Federal Reserve seem to be losing patience with the industry’s selfishness. The bad news is that it’s not clear whether President Obama himself is ready, even now, to take on the bankers."
Obama's a smart guy, so why is he unable to understand the connection between the way the system rewards the financial industry movers and shakers and the need of banks for a massive bailout by American taxpayers? Even I understand it.
But if Obama really doesn't get it, let's hope he reads Krugman's piece.
What’s wrong with financial-industry compensation? In a nutshell, bank executives are lavishly rewarded if they deliver big short-term profits — but aren’t correspondingly punished if they later suffer even bigger losses. This encourages excessive risk-taking: some of the men most responsible for the current crisis walked away immensely rich from the bonuses they earned in the good years, even though the high-risk strategies that led to those bonuses eventually decimated their companies, taking down a large part of the financial system in the process.
According to recent reports, the Fed’s board is considering imposing new rules on financial-firm compensation, requiring that banks “claw back” bonuses in the face of losses and link pay to long-term rather than short-term performance. The Fed argues that it has the authority to do this as part of its general mandate to oversee banks’ soundness.
But the industry — supported by nearly all Republicans and some Democrats — will fight bitterly against these changes. And while the administration will support some kind of compensation reform, it’s not clear whether it will fully support the Fed’s efforts.
I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?” (Krugman)
Gah. Does Obama really not know the answer to that question?
Anyway, Krugman has some good advice for Obama that I can only hope he'll take sooner rather than later.
All I can think is that this was another example of something we’ve seen before: Mr. Obama’s visceral reluctance to engage in anything that resembles populist rhetoric. And that’s something he needs to get over.
It’s not just that taking a populist stance on bankers’ pay is good politics — although it is: the administration has suffered more than it seems to realize from the perception that it’s giving taxpayers’ hard-earned money away to Wall Street, and it should welcome the chance to portray the G.O.P. as the party of obscene bonuses.
Equally important, in this case populism is good economics. Indeed, you can make the case that reforming bankers’ compensation is the single best thing we can do to prevent another financial crisis a few years down the road.(Krugman)
Meanwhile, Bank America is trying to use attorney-client privilege to hold out on turning over information about its acquisition of Merrill Lynch that was requested by the House Committee on Oversight and Government Reform. (Bank
Of America Hiding Behind Its Lawyers: Rep. Town)/
Charlotte, N.C.-based Bank of America has come under heavy scrutiny from state and federal regulators, and politicians, about its hastily arranged acquisition of investment bank Merrill Lynch & Co. last fall. Bank of America agreed to buy Merrill at the peak of the credit crisis last fall as another investment bank, Lehman Brothers, was collapsing.
Regulators have questioned whether Bank of America failed to properly disclose details about problems at Merrill leading up to the deal closing on Jan. 1.
New York Attorney General Andrew Cuomo has been investigating the acquisition for much of the year and is planning to file fraud charges against some of Bank of America's top executives in the coming weeks. He also recently subpoenaed five board members of the bank....
Losses at Merrill forced Bank of America to receive a second round of government bailout money in January after the deal was completed. Bank of America has been among the banks hardest hit by the economic downturn and, along with Citigroup Inc., one of the largest recipients of government aid.
Bank of America has received $45 billion from the government's Troubled Asset Relief Program, including $20 billion to help absorb Merrill losses. The government also agreed in January to a loss-sharing deal to cover hundreds of billions of dollars in risky investments Bank of America was absorbing in the Merrill acquisition.
Meanwhile, AIG is doing better than it was, but may never be able to repay taxpayers for its bailout. (Huffington Post)
In a taxpayer-funded bailout, the Federal Reserve and Treasury Department have provided $182.3 billion to the insurance giant. The Government Accountability Office said that as of early September, AIG's outstanding balance of aid was $120.7 billion.The GAO, in a report released Monday, found "some progress in AIG's ability to repay the federal assistance." But improvement in the company's stability depends on its long-term health, market conditions and continued government support.
The report concluded that "the ultimate success of AIG's restructuring and repayment efforts remains uncertain."
In the meantime, the House of Representatives is expected to take emergency measures to extend unemployment benefits for more than 300,000 out-of-work Americans "who live in states with unemployment rates of at least 8.5 percent and who are scheduled to run out of benefits by the end of September." (Huffington Post)
Meanwhile, the credit-swaps that helped bring down AIG and others are "back in vogue" again.
Geithner recently said that "everybody understands" that we can't have financial institutions go back to their previous practices. (Arianna Huffington)
It's true, we all understand it. The problem is, the system has already gone back. Risky derivatives are traded again, bonuses disconnected from performance are being handed out again, bank lobbyists are spending tens of millions to undermine necessary regulatory reforms again. The only real long-term solution is for the government to ensure that there are no financial institutions too big to fail anymore, so that if they continue to act irresponsibly, then they are just allowed to fail. That's capitalism, remember? The creative-destruction consequences of a free-enterprise system that all these bonus-loving bankers love to extol.If we're really going to protect taxpayers and create a more stable system, the most important reform is to never again be held hostage by institutions that pose a systemic risk and therefore have the power to tell us: "If you don't give us the money, we're going to blow up the whole system." Actually, what we have now is worse than a hostage system because in a classic hostage setup, after you pay the ransom you get the hostage back. We've paid more than a king's ransom, but have not taken the hostage -- our financial system -- back from the banks. (Arianna)
Meanwhile -- speaking of bailouts -- the House is having to extend unemployment benefits for 300,000 out-of-work Americans in some of the hardest-hit states. But the situation for ordinary Americans is worse even than it sounds.
5 million people, about one-third of those on the unemployment list, have been without a job for six months or more, a record since data started being recorded in 1948, according to the research and advocacy group National Employment Law Project."It smashes any other figure we have ever seen. It is an unthinkable number," said Andrew Stettner, NELP's deputy director. He said there are currently about six jobless people for every job opening, so it's unlikely people are purposefully living off unemployment insurance while waiting for something better to come along....
The jobless rate currently stands at 9.7 percent and is likely to hover above 10 percent for much of 2010. Gary Burtless, a senior fellow at the Brookings Institution, said at the Finance Committee hearing that, according to Labor Department figures, 51 percent of unemployment insurance claimants exhausted their regular benefits in July, the highest rate ever.
"It is likely the exhaustion rate will continue to increase in coming months" as the unemployment rate continues to rise, he said.
Stettner predicted that Congress will likely have to continue extending jobless benefits through 2011. (Huffington Post)
Somehow the contrast between the helplessness of the recession's victims and its begetters is particularly galling when you consider how many dollars extracted from currently unemployed taxpayers funded the rescue of the financial services industry.
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