I’m Speechless About How Much Damage Obama Is Doing When It Comes To The Financial Sector

I was a big fan of Obama and felt he would be very good for the country, but I am one of the few supporters that hasn’t been surprised at his lack of reforms thus far. It was obvious he was going to defend the status quo and attempt to address the country’s problems through the existing political lenses. I have always thought that this would fail and at that point his “real presidency” would start, in which he had to set a new path. However, I must say that I never thought he’d actively make the problems of the status quo worse.

It’s becoming increasingly clear I was wrong. Read this post by Glenn Greenwald.

It’s to the point where prominent economists (some with Nobel prizes and others that have been in charge of cleaning up developing markets) are publicly calling us an oligarchy no better than many banana republics, a fact left out of public discourse. Read Yves Smith’s post on the media’s role in this state of affairs. Fraud experts believe that these events are going to lead to fraud (or at least lack of trust) on such a large scale that it will threaten any economic recovery by itself.

Needless to say, putting an active member of GS as the COO of the oversight board (not to mention the vast majority of SEC, Treasury and Fed officials are prior members of investment banks) will do little to change this dynamic.

There is a lot of movement on the right to take advantage of this (ranging from heartfelt concern to mere political calculation) and to me the question is whether the left will rise up and be able to cooperate in a unified front. Dean Baker issued a call for a mass protest against the large banks…will he and other progressives start standing up against Obama directly?

Update: I feel that I should point out that Congress and the White House are moving towards “regulating” the banks. Look at Larry Summers’ statement that came out today. However, the question is not whether there will be regulations, but whether the regulations will be any good.

A House committee passed legislation that is purportedly to regulate derivatives better, but the people that have been warning about derivatives for years claim that the new regulations are weaker than the status quo! The SEC division mentioned in Greenwald’s post was another example of new oversight that was supposed to address the problem, and look who they put in charge.

I anticipate that that Democrats will move to pass a lot of such regulation and claim they are addressing the problem (while using it against the Republicans as a political cudgel) while in reality there will be little improvement and perhaps worsening.

However, unless there is a concerted effort by the people that have the authority to take on the propaganda, I have little doubt it’ll work. Personally, I am growing weary of reading Nobel prize winners and fraud experts giving their academic assessment of the situation without any political movement behind it.

Update 2: Here is an article about GS’s problems…ones of PR.

I really like this part: “Goldman executives know they have a public opinion problem, and they are trying to figure out what to do about it — as long as it does not involve actually cutting pay.”

In any case, while they are patting themselves on the back for being so shrewd, I thought I’d take the opportunity to point out that a lot of their profits are from the very new practice of High Frequency Trading. This post on Zero Hedge explains that it should be generating about $4 billion a year for them, which is over 30% of their total profit, assuming that they keep up the record of the prior quarter (even more if they can’t). The practice involves holding onto stock for microseconds in an effort to extract money from people that are trading normally, and currently makes up around 70% of all trading volume. While the entire culture is very interesting from an intellectual standpoint (it’s literally led to its own electronic ecosystem where different programs compete with different strategies, attempt to fill niches and evolve based on how well they’re doing) from a practical standpoint they aren’t providing any service and it’s merely a “tax” (or stealing) from the rest of the players.

I do feel like that is a major contributor to their record profits aside from the other issues. It’s also something that more market players are wanting a ban of.

Author: MIKKEL FISHMAN, Economics Editor

22 Comments

  1. Obama inherited, Mr. Fishman, a mess akin to walking into a sewage plant that someone blew up with 10 sticks of dynamite.

    I'd like to see how you could handle it. Even the “experts” say the financial situation was so bad when Obama took office that they didn't quite know what to do about it. I'd say all in all Obama's group is doing the best they can with what they have. They cannot perform miracles unfortunately and miracles are about what we need after a horrendously expensive illegal war and the fallout of rampant deregulation in the financial sector.

    *rolls eyes*

  2. If you actually took time to read about it all you'd see the vast majority of what you said isn't true. The “experts” in control of the treasury, Congress and that are adherents of monetarism (the intellectual movement that has been behind most deregulation) may certainly have not seen it coming and not know what to do about it, but the vast majority of people stated in the links above (of which there are probably about 30 in total) have seen this coming before the public even knew of the word subprime and have talked about solutions for ages. Many of them have hands on experience — multiple times — with cleaning up failed economies and institutions. They have literally been the ones called to help when it became obvious that there were no miracles in sight.

    If you followed the stuff you'd also see that most of it is more deregulation and weaker oversight of the financial sector that I know you (rightly) blame as being a major cause. They don't even pretend anymore, they just hand over the keys right to the major players and tell them to drive. While that practice of not pretending started under Bush, it's continued and accelerated under Obama.

    Your comment though is why I alluded in the post that it's worthless to expect change until those people I've mentioned represent an actual movement. They can say whatever they want and point to tons of past crises, but the majority of people will react like you in deference of authority and in terms of what the controlled messaging is (in this case that no one knows what to do and they are working with what they have).

  3. I was no fan of GW Bush. His presidency sucked. We agree on that. But you guys never give him an inkling of credit for anything. He attempted to fix your man, Barney Frank's, mess with Fanny and Freddy – the single biggest contributing factor to the mess in which we now find ourselves.
    Here's an example: I'm not a fan of Obama. But I give him credit for dropping the missle shield and firming up Russian ties to help with Iran in the long run. Good call.

    When libs do that to Bush, it's just as bad as the Limbaugh-types do it to Obama.

    And:
    If the war is “illegal”, why doesn't Obama end it? After all, he is nothing if not a proponent of adherance to international law.

  4. “He attempted to fix your man, Barney Frank's, mess with Fanny and Freddy – the single biggest contributing factor to the mess in which we now find ourselves.”

    Uh no. Fannie and Freddie are miniscule problems in relationship to everything else (I'm not saying they aren't problems, just small ones when it comes to the cause). The largest problems at those GSEs actually formed well after the housing market collapse because they were the sole buyers. Before that the bulk of the suspicious activity was in non-conforming loans (and hence not sold to them) or loans where it's been shown that there was fraud.

    The largest contributing factor by far was excessive liquidity and deregulation (that occurred primarily under Clinton) that allowed for banks to take on excessive leverage.

    Sorry if it sounds like I'm jumping on you, it has nothing to do with you personally. It's just that the whole Fannie/Freddie meme has been crafted and pushed by the same people that were doing things far worse. There is no evidence to support that meme and indeed it all points the other way.

  5. I'm becoming more and more afraid, as many are, that the election of Obama was really nothing more than a smoke screen. Such a striking changing of the guard had to mean that the way things worked in the past was going to change moving forward with a shiny new president. Well, as the smoke starts to clear, and the big banks are now bigger than ever and back to reporting humongous profits while the rest of the country lies in ruin, the veil is still covering many a believers eyes. Nothing has changed, in fact, things have gotten worse: http://theendisalwaysnear.blogspot.com/2009/10/

  6. I didn't think you were jumping on me, mikkel. It's cool.

    But under Clinton is when it all started. We agree there.
    But Barney and the gang did severe damage. As you acknowleged, the legislation was passed to treat banks and investment houses under the same umbrella. It allowed a whole array of liquidity misdealings. Those were allowed by Clinton. Bush attempted to put some brakes on it a bit, but was met by Barney's insistance that the system wasn't broken and that “poor people deserve a home too”. All three presidents and the DNC wizards in Congress are responsible.

    It really sounds as if you and I are saying the same thing from two different angles.

  7. Mikkel, this is something of a tangent, but what do you think of old-fashioned “trust-busting” to help get a handle on some of these issues (certainly not all). Well, really it's “new-fashioned” trust-busting.

    The reason everyone gets so upset about the pay of Goldman Sachs, for instance, is that just months ago we took money out of the pockets of people making $40,000 a year and gave it to a company that is already giving every one of its employees $700,000. If we had let this company bear the fruit of its employees amazing work, they'd be gone. But of course we bailed them out, mostly, because of the perception that they were too big to fail. Letting them bear the fruit of their policies was considered too harmful to the rest of us.

    Is a partial solution to regulate the size of financial companies so that they cannot be too big to fail?

    Of course, other regulations could be useful too: better rules and enforcement of leverage, and reliable, trustworthy auditing, not the bogus hire-your-own-auditor-who-doesn't-even-look-at-some-of-the-books auditing we've had.

  8. Yes. I only objected to you saying it was the “single biggest contributing factor” because that rhetoric has been used by people to argue that *less* regulation and *more liquidity* is the answer (i.e. that the government screwed everything up and if we just hand Wall Street more power they'll fix it).

  9. There are immense legal issues with this because of the technical status of banks and international law…it's too complex to address off the bat.

    But in general, yes that's the agreed upon solution by nearly all the respected people involved (about the only fully agreed upon point). There has been a lot of studies both through mathematical modeling and historical anecdotes that support the hypothesis that highly connected entities that are very large cause these instabilities and lead to regulatory capture (where regulation is done to protect the largest players, not in the public interest).

    The #1 step is to break up these large players into smaller pieces, and from that perspective we are far far worse now than we were before March 2008 when Bear fell. Some of the commenters have suggested that if the banks were kept at a proper size a lot of the other regulations may be unneeded.

    I think it's important to note that it's not the banking industry as a whole that is benefiting. The vast majority of banks are actually suffering due to increased FDIC fees and regulations that are written in a way they can't get around while those with more power and maneuverability can.

    However, I have read many people that have questioned the legality of such an action, and as such I think it may be required to build up a parallel financial system that obeys these rules while letting the existing one rest on its own laurels.

  10. I love that term “regulatory capture”. It's very clear and applicable to the entire governmental system really.

    Thanks for keeping me informed.

  11. The biggest problem was people had an unrealistic idea of what affordable housing was. It wasn't the housing you wanted to be able to afford like they thought. Also there was the problem of some loose regulation, something John McCain, Chuck Hagel, and George Bush made efforts to tighten but were defeated by Congressional opposition led by the democrats. There certainly were other factors too, which Republicans certainly had their share of the blame on, but when I see folks try to blame this all on Bush I have to laugh at the pure ignorance of such statements.

    Also see
    http://www.youtube.com/watch?v=_MGT_cSi7Rs
    http://www.youtube.com/watch?v=hxMInSfanqg

    From 2003

    New Agency Proposed to Oversee Freddie Mac and Fannie Mae
    http://www.nytimes.com/2003/09/11/business/new-

    and 2005
    http://www.govtrack.us/congress/record.xpd?id=1
    http://www.govtrack.us/congress/bill.xpd?bill=s

  12. I feel the same way about people that try to blame all that happened under Carter on Carter alone but everyone still ignores me and I would guess the same will be said about Bush.

  13. Awesome post, mikkel.

    I'm behind anti-trust monopoly busting. Guess that's why Teddy Roosevelt remains one of my favs.
    Couldn't we just legislate the size of corporate worth in relation to GDP? For example, your bank cannot control or own funds greater than .5% DGP (or something like that – I'm not an economist). That way, they could continue to grow and thrive in a dividend/loss capacity; and still be kept to a size that cannot bust the nation in tough times.

    ???

  14. I notice that Leonidas pays no attention to the fact that, as Mikkel pointed out to JD, Fannie and Freddie were not the huge factors in our current problems that he is trying to intimate they are. Since the “tightening” that he refers to applies only to those companies it wouldn't have helped all that much.

  15. There used to be tons of regulations like that in all sorts of fields, but they have been whittled away.

    There still is a regulation that no bank can have over 10% of total deposits…it's just ignored entirely (technically all the major banks got wavers in order to merge when doing all the consolidations the past year).

    The same thing for most media (TV, radio).

  16. I never expected President Obama to fix anything when it came to the banks and the financial sector in general. The financial sector IS money and money is the DE FACTO influence in Washington and beyond. Let's think about it, if the government went completely hardcore and just smashed the banks, the free marketeers will scream so loud that Pluto would shift in orbit (not the mention a one government bank scares the crap out of me). If we let the banks go completely willy nilly, we would be living in an eternal pyramid scheme of credit default swaps, CDOs, psuedo-dollars, and all kinds of nifty financial vehicles (which equally scares the crap out of me).

    And guess what friends, I really don't have many ideas on to REALLY reform the financial sector due to me somewhat limited knowledge. So I now go pour myself a glass of wine!

  17. Enjoy the wine, T!

  18. “There used to be tons of regulations like that in all sorts of fields, but they have been whittled away.”

    Yup. And I think most of us know which party had the greater hand in championing that particular accomplishment. Now I never expected Obama to be any sort of miracle, just the lesser of the evils. Turns out he may not be as “lesser” as I'd hoped. One thing for sure, the money-as-god philosophy that has this country by the cojones is taking us down the road to ruin. At the very least I think we can forget about this really being any sort of representational democracy anymore. I mean really, who is naive enough to think they are being represented to any worthwhile degree?

  19. JD
    “He attempted to fix your man, Barney Frank's, mess with Fanny and Freddy – the single biggest contributing factor to the mess in which we now find ourselves.”

    I suggest you have read only one side of the sub-prime crisis cause.

    http://www.city-data.com/forum/politics-other-c

    Wall Street, Countrywide, etc were hip deep into the mess before they pulled Freddie and Frannie in with them. Read the response in that article as well. The problem was not politicians, the problem came from unregulated greed of capitalists.

  20. Hemm, your link doesn't back up that claim. Fannie and Freddie were pulling out all the stops since at least 2000, well before Countrywide started pressuring them in 2004.

    Politicians were most definitely culpable:

    Whenever competitors asked Congress to rein in [Fannie Mae], lawmakers were besieged with letters and phone calls from angry constituents, some orchestrated by Fannie itself. One automated phone call warned voters: “Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.”

    Capitol Hill bore down on [Fannie CEO Daniel] Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.

    Your charge of “unregulated greed” is deserved, but obviously there *were* regulators. Attempting to let them off the hook for not doing their jobs is unconscionable.

  21. I agree with Dr J. on this one Hemm. The link didn't add up.
    Also, the legislation to allow the mortgage houses to be aligned with Investment houses (regulatory wise) was in 1999. That was the first big mistake – to allow mortgage houses act as investment houses with liquidity issues. Thrown in all the rest of the wagon-spokes and you've got a wheel of disaster (2008-2009)

  22. It's a good thing your damage (and misconduct) meter is pegged already, Mikkel.

    There is slightly over one more year to go before the 2010 elections, and much worse disaster (including that which we know is due, but which has been forestalled by short-term “deferred unpleasantness” work both rushed and manipulative) is to come, but not without more attempts to conceal or merely postpone it — until after those 2010 elections, or at least until the Dems can achieve some more far-left goals as accomplished fact, like health care “reform” and climate craziness legislation and regulations and policy lunacy, for example. No wonder Krugman the Hack is at the forefront among a number of harpies clamoring for more “stimulus” as well as other far-left initiatives.

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