Wall Street and Code Words
In the January 2010 issue of Chronicles, University of South Carolina law professor William Quirk noted that the federal government is "propping up Wall Street with $23 trillion in cash and commitments." The reason for this unprecedented and extraordinary commitment is the financial crisis that Professor Quirk has argued was caused, at least in part, by deregulation of the financial sector, particularly the repeal of the Glass-Steagall Act that had separated commercial banking and investment banking. Now, the Obama Administration appears to be moving toward separating commercial banking from investment banking again. One need not agree with everything the Obama Administration is proposing to recognize that this is a serious problem deserving serious debate and analysis.
Unfortunately, most of the "conservative movement" has shown itself, once again, to be incapable of either. National Review editor Rich Lowry argued that people should realize that "Wall Street bashing won't do anything to improve their lives," while Jonah Goldberg noted that "such populist scapegoating rarely makes for good policy over the long haul." It seems to me that if reregulation would prevent future financial crises of the sort that has caused the federal government to commit $23 trillion to propping up the financial sector, it may well improve the lives of Americans, even if it involves criticizing the hallowed precincts of Wall Street or engaging in a little populism. But Goldberg, always eager to focus on the trivial, also noted that if Conan O'Brien "was a Wall Street guy getting $45 million for failing, Obama would be all over it," suggesting that if Obama isn't bothered by the millions O'Brien is getting from NBC he shouldn't be bothered by billions Wall Street is paying out in bonuses after the federal government committed trillions to Wall Street.
Incredibly, the debate over Obama's proposals has also turned into a debate over anti-Semitism. It started when Rush Limbaugh argued that American Jews should not support Obama because "To some people, banker is a code word for Jewish, and guess who Obama's assaulting. He's assaulting bankers." Limbaugh's attempt to suggest that the Obama administration is anti-Semitic caused Abe Foxman of the Anti-Defamation League to say that Limbaugh was the one engaging in anti-Semitism, which prompted Kathryn Jean Lopez and Michael Ledeen of National Review to jump to Limbaugh's defense, with Lopez citing Limbaugh's absolution by a man Limbaugh terms his "good friend," Norman Podhoretz, and Ledeen arguing that American Jews should be moving away from Obama because of Obama's "attacks on 'greedy bankers' . . . free broadcasting, and of course the crusade against American medicine, all enterprises in which Jews have long flourished."
Of course, criticisms of Wall Street have nothing to do with anti-Semitism, a fringe phenomenon that fortunately has no purchase in American politics. But even though anti-Semitism is a marginal phenomenon in America, accusing one's political opponents of anti-Semitism has proven a very successful tactic indeed, which is why Limbaugh is eager to tar liberals and Foxman is eager to tar conservatives with that brush. Indeed, Limbaugh's defender and "good friend" Norman Podhoretz, with the help of National Review, has long sought to equate dissent from American policy in the Mideast with anti-Semitism, with the intended effect of squelching debate on a topic of vital importance to this country. The last thing we need is for debate over financial regulation to become another topic off limits for discussion or a topic dominated by spurious charges and counter-charges of bigotry. Rather than more obsessing over "code words" and politically motivated charges of anti-Semitism, what Americans need is serious and unfettered debate over the many grave problems facing our country.
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Thanks to Tom Piatak for outlining clearly the battle lines in this debate. His assertion about the anti-Semitism card is spot on also. It's use has become as tiresome as it is predictable.
The fact that Limbaugh would haul this arrow out of his quiver reflects how deeply ill the "conservative" patient is. In his early days Rush would often rail against abortion and play his accompanying sound effects but once he really jumped into the big-time with Clear Channel, the books, TV, etc, his passion for that subject somehow diminished to a few pro-forma mentions during election season. Isn't he supporting the re-appointment of Bernanke? The same genius who oversaw this financial crisis in the first place?
We would all do well to heed Professor Wilson's admonition about never confusing Republicans with conservatives.
"We would all do well to heed Professor Wilson’s admonition about never confusing Republicans with conservatives."
Yes, Harry, I have found this admonition to be quite helpful. Another good rule of thumb is to be suspect of anything the two parties seem to agree upon, such as pay raises for congress, "much needed" tax reform, or fighting the war on terror with a coalition of the willing. These are code words that initiate another frontal assault on the poor man and his wages,or perhaps some obscure vestige of common sense, cultural heritage, and what have you. Dr. Wilson has gone so far as to suggest, on rare occassions, that most of us would be better off without the Republican party. The older and grumpier I get, the more peace that idea seems to give men.
Wall Street's interests appear inimical to those of most Americans. Wall Street demands globalization with all that comes with it- outshoring, absolute free trade, industrialization, the shrinking of the middle class, and the withering of industrial towns- and both parties grant Wall Street its demands. Wall Street demands massive immigration, legal and illegal, to the detriment of the wages of the working class and the loss of the social cohesion of thousands of towns and neighborhoods throughout the land and Wall Street receives its wish. Wall Street blunders itself into a financial cataclysm, demands assistance, and the leaders of both parties ride to Wall Street's rescue. Why is such a cancer allowed to run the country's economy? Perhaps allowing Wall Street to implode next time would be the wisest course.
I like my idea for a revamped fairness doctrine best, one where the most absurd and fanatical hosts of the leftist and globalist persuasions must share a show together.
What would be more entertaining than watching the likes of Hannity and Olbermann being forced to share a show together? How about Michael Savage and Mike Malloy? If I can't have freedom of association in my day to day life than political pundits shouldn't either.
Good article. We should also use the "intellectual dishonesty" card in this. Charges of anti-Semitism all too often depend on most people's reluctance, however justifiably, to charge their accusers with intellectual dishonesty. Maybe part of the problem is that most people don't know how to argue, and thus don't know what intellectual dishonesty is. Still, telling the truth might well mean saying that Norman Podhoretz (to name one) is often intellectually dishonest when he accuses people of anti-Semitism, and not just mistaken or overwrought.
The case against "bankers" stands on its own. Only a determined idiot or blind ideologue will want the money-manipulators to basically get off the hook after what they did. In the "determined idiot" category put David Brooks and his "The Populist Addiction" in today's paper.
Limbaugh was discussing Norman Podhoretz's book "Why are Jews Liberals" and whether the independents in Massachusetts were in fact the Jewish vote that is turning against Obama.The segment was not about protecting Wall Street. What Foxman inferred to the next day with the intent to bring the Jewish vote back to Obama, was a purposefuly and maliciously inverted and taken out of context quote from Media Matters in a way that is cited above. As far as Obama and regulating banks, the case is strong that scapegoating is in fact what is going on. We can suspect that it is all show, as bank executives were among the strongest Obama supporters, Jewish or otherwise.
Mr. Bailey,
If Limbaugh had learned a valuable lesson from Foxman's attack on him, he would have denounced the whole game of politically motivated charges of anti-Semitism. Instead, he wraps himself in the mantle of Norman Podhoretz, who helped invent that game, and tells Foxman to look for anti-Semitism in the Obama Administration, where Limbaugh is certain it is lurking: "And Mr. Foxman, if you really want to go after anti-Semitism you should first start looking at it on the left and within the Obama administration and within his circle of friends, because that’s why you’re going to find it."
The notion that anti-Semitism is lurking anywhere of importance in America, a nation that currently has 13 Jewish Senators--each of whom has won a statwide election--is absurd. I have no use for Podhoretz, Foxman, or Limbaugh. By the way, let me know when Limbaugh endorses reregulation of Wall Street. I won't be holding my breath.
8. Mr. Piatak, I don't think that there is a way to defend against charges of antisemitism, once you have been charged you are tainted forever. Denouncing the game is not going to help either. Saying that there is antisemitism in Obama administration is ineffective as well. Basically Limbaugh got himself in trouble and Foxman won and that is all. My point however was that this whole episode had nothing to do with defending bank practices ot Wall Street. Hpwever I am in agreement with you on your second point. Limbaugh will not indorse reregulation of Wall street when he gets to it in the next few days.
I may be wrong, but I think that in Switzerland there has never been a separation between investment and commercial banks. If that is true, it would be interesting to know why Swiss banks have are so much better, give such better service, and dont fail.
That's not a claim against Glass-Steagall, since it was obviously a necessary law in the American banking system, and the Swiss system is different, but it's still an interesting question.
@9: Interesting for sure, but as you hint, Swiss affairs in general tend towards the inimitable.
What many of the 'conservative' rank-and-file (I refer here to folks in the hinterlands, not the preening mountebanks in the beltway of Sodom-on-Potomac) completely fail to understand is that there is nothing resembling a free market in Wall Street - rigged casino tables for billionaires being anything but free. The bankstas and corporate elite are really High-Church Marxists while the public sector unions (SEIU), ACORN, La Raza, et al are their low-church counterparts. It the folks in the middle who are being destroyed - and are indeed the prime targets of both wings of the Gramscian dragon/Giant Vampire Squid which works night and day at devouring the few remaining shreds of a collapsing nation.
Thanks, Tom, for a clear presentation of an important distinction. Back in the 30's and 40's Mencken and Nock rejected the term "conservative" because it meant someone who shilled for big business. Russell Kirk and Richard Weaver and Bob Nisbet--with important support from Mr. Buckley's NR--changed all that. Now the boys at NR and NRO have come full circle or is it just the case of the proverbial dog returning to its vomit?
"what Americans need is serious and unfettered debate over the many grave problems facing our country." For the purposes of such a debate I would like to pose a question. It is estimated that the banks loaned out in mortgages three trillion to people who could not afford to pay them back. Did they do this voluntarily?
Mr. Bailey,
I would refer you to Prof. Quirk's articles on the financial crisis in Chronicles, some of which have subsequently been put on this website.
Some historical perspective. The financial crisis has its roots in the Greenspan Fed. The decision to dramatically lower interest rates and keep them there for a prolonged period was the precipitating factor. Those low rates caused institutions which depend on interest income to have to look beyond their normal bonds and notes for the returns required. One area was to begin investing in commodity index funds, newly minted and sold by Wall Street as a new investment class. That new money pouring into commodity markets was a large factor in the big rise in energy and food prices we've seen. Another new Wall Street creation was Collaterized Debt Obligations made up of pools of loans for autos, credit cards and most famously, mortages. Wall Street sliced and diced these instruments and with fictitious ratings sold them to institutions needing the higher returns they generated. As demand for those Mortgage Backed Obligations rose, supply had to be created and inevitably Gresham's Law kicked in as lending standards declined. At this point some concern about the danger of these CDOs resulted in demand for insurance and Credit Default Swaps were born. These CDSs were sold by companies who were willing to assume the risk of loan defaults for a premium up front. The biggest seller of CDSs was AIG which basically bet that the real estate market would never decline. Because those CDSs were traded in an opaque unregulated market, none of the banks knew who was holding worthless paper and if their counterparties were solvent. This froze the credit markets and the rest is history. Both political parties were responsible for the crisis. Both Bill Clinton and George W. Bush were happy to sign legislation enacted by both parties in Congress that contributed to the disaster and expecting legislators in the pocket of the big Wall Street banks to enact true reform is a long shot at best. Finally, the biggest perpetrator at AIG was a fellow with the last name of Cassano.
Another new Wall Street creation was Collaterized Debt Obligations made up of pools of loans for autos, credit cards and most famously, mortages. Wall Street sliced and diced these instruments and with fictitious ratings sold them to institutions needing the higher returns they generated..... some concern about the danger of these CDOs resulted in demand for insurance and Credit Default Swaps were born. These CDSs were sold by companies who were willing to assume the risk of loan defaults for a premium up front. The biggest seller of CDSs was AIG
Cassano was president of AIG's financial products division, which trafficked in the credit-default swaps. He earned $280 million in cash and for every dollar his financial products unit made, 30 cents came back to Cassano and other top execs.
After the unit lost $11 billion, Cassano was fired Feb. 29 but got to keep $34 million in bonuses and was kept on as an AIG consultant at a salary of $1 million per month.
This is standard procedure for multi-national corporations and so long as conservatives are willing to take from poor men to pay for it and keep the scam going, we should be OK for the foreseeable future.
By the way, is it really $23 trillion? Is that astounding number the true cost of the bailout? Regardless, I have been reading Professor Quirk's economic commentary with great interest. He has an unusually keen understanding of the banking crisis.
Dr. Fleming, they are indeed like a dog returning to their vomit. If you read Lawrence Goodwyn's magisterial history of populism, you quickly realize that the Republican Party, even more (but not, in the final analysis, all that much more) than the Democratic Party, is hostile to the economic and political interests of ordinary people.
To whet the appetite, here are Goodwyn's first words in his abbreviated history (not the long one published by Oxford): "People understood that the war--the Civil War--had changed everything in America. . . . [t]he crucial postwar topic for the nation concerned the need to reorganize the country's exploitive banking system. . ."
Let's get fundamental. We don't need complaints and tinkering with the Fed. The only hope is to smash the power of Wall Street and the bankers. People have been trying to do that since the 1850s and have never succeeded. Nor will we until we can pay politicians more than the bankers can.
. Thank you Mr. Piatak, I might have read it but I will check it out again. I wonder if anyone here has read Howard Husock's "The left's 1 trillion shakedown." It was published in 2000. So far it seems that the respondents believe that the banks loaned the money out voluntarily.
“To some people, banker is a code word for Jewish, and guess who Obama’s assaulting. He’s assaulting bankers.”
Rush Limbaugh is too stupid for words.
#18 Dr.Wilson writes:"
Let’s get fundamental. We don’t need complaints and tinkering with the Fed. The only hope is to smash the power of Wall Street and the bankers. People have been trying to do that since the 1850s and have never succeeded."
This would also help in diminishing the current nonsense which passes for political debate in our time. Rather than such
false political issues we could simply ask, "Who put up the money and why?" Now of course such a task is like trailing skunks or herding cats, but at least it is more honest labor than party work.
Mr. Bailey,
Yes, the Community Reinvestment Act bears some of the blame. But what made that bad situation even worse were the actions detailed by Andrew Stanton in post 15 and by Prof. Quirk in his articles.
"The only hope is to smash the power of Wall Street and the bankers."
It looked like some of them were finally on the ropes toward the end of 2007 and 08 but Bush, McCain and all the Republican contenders flew back to Washington to help bail and haul water for them. Said it was our duty to revive and rearm them for our own good, etc. etc. Seems like every time a true patriot gets one of them down, there are thousands of yankees running to his rescue.
Take a good look at anti's and ism's in our America today.
They need seeing for what they have to offer at any time
to the nation and people. Emotional language needs real
heads-up cleaning. There is much "shoulding" in a mire.
@17, Mr. Zaretke, I can only agree with you more. "Professor Quirk... has an unusually keen understanding of the banking crisis."
Most financial writers tend to produce opaque explanations or sensational ones. Dr. Quirk's understanding results in a dispassionate clarity that makes him the best economic writer I have read. It breaks my heart when people shovel around Paul Krugman's slop as if it's worth even a click of the mouse button.
@18, Dr. Wilson, "Let’s get fundamental. We don’t need complaints and tinkering with the Fed."
This is a crucial point. There were a lot of direct causes to this bubble (Community Reinvestment Act, loose monetary policy, overly complex/risky financial devices, deregulation, general false sense of rising wealth due to selling abroad of manufacturing job assets, etc.), but none so important as the ongoing sweetheart understanding between Congress, the Treasury, the Fed and the other private bankers. These people are really smart, rich and powerful, and I have to think if our politicians would not implicitly back them with an endless underwrite, they would behave a little better. Regulations (even Glass-Steagall) strike me as a ruse.
"The only hope is to smash the power of Wall Street and the bankers. People have been trying to do that since the 1850s and have never succeeded."
Would someone refresh my memory, isn't this the 3rd incarnation of a central bank in our country? They've been destroyed in the past, why not again?
"Nor will we until we can pay politicians more than the bankers can."
There is perhaps another approach. Pay them less. I've seen a popular email going around talking about stripping Congress of many of its financial perks: Pensions, Insurance, high wages, etc. This would be a good thing and hopefully attract different kinds of people.
I am also wondering if Chronicles will be covering the recent SCOTUS ruling where the "conservative" block of justices just re-opened the flood gates of collective power and big money.
#22. Mr Stanton and Dr. Quirk summarize well the end game. However without the 40 year legislative rampage of the Left that preceeded it, these machinations in the last 10 years or so would not have been possible. It defies logic that the banks would loan their money out knowing full well that their applicants could not pay them back.Unless the US government FORCED these banks into risky loans under a huge threat of lawsuits, denial of licenses, personalized vituperation of bank executives etc. (for a case study please examine the rise of NACA). These loans were not voluntary! This is the centerpiece of the problem that needs to be analyzed further before we should accept a desirable producerist explanation for this whole crisis. #15. I would note that Bush actually tried to reign in both Fannie Mae and Freddie Mac but to no avail, and that Bush's role in expanding the Left's legislative agenda was minimal at best. When the Bush administration tried to stop some of these practices championed by the Left, they encountered vehement opposition from the likes of Barney Frank and other Democrat operatives, including those who were running these two government corporations in question and those who made huge personal fortunes as their corporate officers and lawyers.
"Unfortunately, most of the “conservative movement” has shown itself, once again, to be incapable of either. National Review editor Rich Lowry argued that people should realize that “Wall Street bashing won’t do anything to improve their lives,” while Jonah Goldberg noted that “such populist scapegoating rarely makes for good policy over the long haul.”
To them populism is good only when you're electing RINOs to the U.S. Senate, not when you're trying to formulate policy.
Jack writes: "without the 40 year legislative rampage of the Left that preceeded it, these machinations in the last 10 years or so would not have been possible."
Name Allegations and Affiliations
Richard Nixon Republican 6 years
Gerald Ford Republican 2 years
Jimmy Carter Center/Left Democrat = 4 years
Ronald Reagan Great Right Hope = 8 years
George Pappy Bush Moderate/Republican = 4 years
William J. Clinton New Left Democrat = 8 years
George Little Bush Mindless Conservative = 8 years
Obama Rookie = 1 year
total = 41 years
Faithful Republican Service = 28 yrs
Faithful Leftist and New Left Service = 13 yrs
Can we at least agree at the end of these last 40 years looking back, there were really no political leaders from either party that were worth getting all worked up about?
Clyde Wilson is correct: Both parties are but two sides of the same Banksta-minted base-metal coin. Jorge W. Busheron, America's first Mexican president, was a major instigator in the creation of the mess with his incessant promotion of the CRA to achieve his "a McMansion for every Mexican" ideal which fueled the housing bubble. (read Steve Sailer for all the gory details). As old George Wallace used to say, there's "not a dime's worth of difference" between the two political parties.
Yes we can agree to that Robert. But we are still stuck with the root of the problem, which is the Left's machinations in order to either get into or stay in power by subverting the free markets un general and the housing market in particular. Once again, just because we are willing to accept a producerist explanation should not stop us from identifying the specific ways in which the workings of markets were being purposefully distorted. You may have had a chance to listen to the AIG hearings today. It was not only about greed. Perhaps the securitized risk securities existed for the benefit of the Leftist agenda as well. It will all come out eventually. Why bother reregulating the financial sector if the Fed and the Treasury can pick the winners and losers at their whim? If anything need reregulating is the way these bailouts were done instead of letting those who were bankrupt fail.
It's also worth pointing out that opposition to the 1999 law changing Glass Steagal was led by none other than Ron Paul. At the time he said in opposition to S. 900, the Gramm-Leach-Bliley Act that was passed [my comments in brackets:
----------------
Congressman Ron Paul:
* Government policy and the increase in securitization are largely responsible for this bubble [the 1999 boom that soon went bust]. In addition to loose monetary policies by the Federal Reserve, government-sponsored enterprises Fannie Mae and Freddie Mac have contributed to the problem. The fourfold increases in their balance sheets from 1997 to 1998 boosted new home borrowings to more than $1.5 trillion in 1998, two-thirds of which were refinances which put an extra $15,000 in the pockets of consumers on average--and reduce risk for individual institutions while increasing risk for the system as a whole. [It got even worse in the next decade, as we now know.]
* The rapidity and severity of changes in economic conditions can affect prospects for individual institutions more greatly than that of the overall economy. The Long Term Capital Management hedge fund is a prime example. New companies start and others fail every day. What is troubling with the hedge fund bailout was the governmental response and the increase in moral hazard.
* This increased indication of the government's eagerness to bail out highly-leveraged, risky and largely unregulated financial institutions bodes ill for the post-S. 900 future as far as limiting taxpayer liability is concerned. LTCM isn't even registered in the United States but the Cayman Islands! [Trillians now have been spent on bailing out the banks.]
* Government regulations present the greatest threat to privacy and consumers' loss of control over their own personal information. In the private sector, individuals protect their financial privacy as an integral part of the market process by providing information they regard as private only to entities they trust will maintain a degree of privacy of which they approve. Individuals avoid privacy violators by `opting out' and doing business only with such privacy-respecting companies.
* The better alternative is to repeal privacy busting government regulations. The same approach applies to Glass-Steagall and S. 900. Why not just repeal the offending regulation? In the banking committee, I offered an amendment to do just that. My main reasons for voting against this bill are the expansion of the taxpayer liability [by 2010 now costing us trillion$$$$] and the introduction of even more regulations. The entire multi-hundred page S. 900 that reregulates rather than deregulates the financial sector could be replaced with a simple one-page bill.
[As a friend of mine once said of NAFTA and GATT, each hundreds of pages long, "Any bill the size of a phone book is crooked."]
#31. What a great piece of information! All the more reason why the AIG hearings should be expanded further and turned into something akin to the Nixon hearings. If you are holding billions worth of securitized risk and if you know that it's value depends solely on whether the housing market prices continue to climb then you have to say something. sound an alarm and insure against the financial collapse. It is not about lack of regulation of the insurance securities industry,and not about not being covered by the same mechanisms that protect banking. It is about knowing this and not doing anything about it! If Gaithner/Paulson were smart enough to do what they did to prevent the collapse of the world financial system, then they should have been equally smart to predict it when they were working at Goldman/Sachs and come out and warn everybody publicly. And at the end of the game Goldman Sachs is left standing alone while all the competitors dissapear! Like one of the congressmen said: "it stinks to high heaven".
@ Mr. Seiler (#31)
Something worth observing, vis-a-vis Mr. Quirks' many fine articles in Chronicles explaining the crazy-quilt of investments that brought this economy down:
Yes, it was unwise to repeal Glass Steagal restrictions. But as I observed years ago when writing about the collapse of the savings and loan industry, attributed by many to deregulation, which also allowed the wild speculative lending, it isn't just deregulation that caused the problems. It's deregulation in an taxpayer-protected industry.
The big speculators in the S&L knew they were protected by the taxpayer-subsidized deposit insurance, that the government would bail them out should everything collapse. So did the banks loosed when Glass-Steagal ended.
FDR predicted back in the 1930s that federal deposit insurance would cause bad banking practices. He was right.
There's more to the issue than this, but that's the jist of it.
If the bankers and their boards of directors knew they were personally and perhaps criminally liable for losses, in all likelihood the wild speculation would not occur.
Clyde Wilson wrote: "People have been trying to do that since the 1850s and have never succeeded. Nor will we until we can pay politicians more than the bankers can."
Which is precisely why private money to political campaigns should be made illegal. With this recent decision by the SCOTUS to allow unlimited contributions by corporations to political campaigns, a smart politician would begin pushing for legislation making ALL private contributions, (personal and corporate), to political campaigns illegal and make future financing carried out with public funds. By completely eliminating ALL private money to political campaigns, no one could complain that the rights of corporations to free speech were being unfairly singled out and the power of the big moneyed lobbyists would be, if not eliminate, sharply diminished.
(One can only imagine what honest policy debates one might finally see in the house or senate on reforming financial regulation or the Middle East, for example, without being distorted by the big money from Wall Street fat cats and AIPAC, respectively.)
With the power of big money to distort their decisions curtailed, elected officials in DC would be forced to listen to people now again with the clout the framers of the constitution had envisioned when they wrote that document, their constituents.
It's not just that the industry is tax-payer protected, it's tax-payer created. The banking industry gets to create money from nothing. What is hard for people to understand is that before you sign the mortgage on your home, the note on the car, or the credit slip at MacDonald's, the money to buy the home, the car, the burger doesn't exist; it comes into being in the act of borrowing it. A power that should be belong to the people, or to firms with goods-producing abilities, is appropriated and monopolized by a small group. Of course they're bailed out; the gov't must protect the money creation function in an expanding economy. But the proper response is to take the money-creation authority away from these people; that is, end the fractional reserve banking system.
@ Mr. Kirkwood, #33. You're right. As someone once pointed out, regulatory agencies always end up being controlled by the regulated industries. That's because industry pays more and hires the smartest people, while government is run by power-mad dunces easily bribed.
@ Mr. Seiler (#36):
Hold it a minute. By "power-mad dunces" are you suggesting that government really isn't here to help me?