What can I say? Bank bonuses are climbing again. All is hunky dory. Casandra-Krugman again sounds the alarm. And Geithner, boy wonder, child of the New York Fed, protégé of Rubin, is the unabashed advocate of his dining chums: Citibank mucky-mucks, Goldman and Sacks execs…on and on the list goes. Why, just as Citibank was going into a tailspin, Sanford Weill, its CEO, asked Geithner take over as Citibank’s chief exec.
Joe Stiglitz puts the problem kindly when he says:
“I don’t think that Tim Geithner was motivated by anything other than concern to get the financial system working again,” Mr. Stiglitz said. “But I think that mindsets can be shaped by people you associate with, and you come to think that what’s good for Wall Street is good for America.”
There is a cancerous club mentality that reaches from the Fed to the banks, to the lobbyists, to the government, supported by a cadre of adoring economists singing praises of Summer, hoping to be called to Washington. And who fills the seats on the New York Fed? Execs from Citigroup, JPMorgan, Chase…. They are the foxes; we are the chickens.
There are those who have long decryed the Federal Reserve System as a scam with its fractional banking. You hear them occasionally railing against the system. Mainstream economists generally ignore them, treating them as wackos. Clearly, these folks will never be members of the club.
What bothers me are the incestuous relationships that pervade the Fed, the Treasury, and the banks. It is a revolving door: Exit a bank; enter the Treasury or the Fed. Exit the Treasury; enter a bank. The argument for this chummy arrangement is: A major bank CEO would be a good Fed or Treasury man. Who else has such marvelous insight into the financial workings of the U.S.?
And what about academia? Well, if you have used your skills to make money off the system, if you have entered the financial pit and made money for the big guys, then you can join the club…if you have a good sponsor. So it is with Summer. You can share a good cigar, a barbecue or two. Have the kids and wives get to know each other. Talk shop occasionally as you sip a fine martini. As your resume builds, so too do your connections…and your wealth. You get the key to the revolving door. When Geithner or Summers finally step down, you know where they will land.
Frankly, I am tired of all this. As Krugman says:
…there’s no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.
So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.
Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks.
I am not suggesting that they act as a collective conspiracy, although I sometimes wonder. Nonetheless, this a group of people who are always looking for more power and more wealth. Over time, they have built a system that skims more and more wealth into their pockets. Financial innovation? You got it. More bank charges and trickier credit cards? You got it.
We nibble at the edges, trying to fight back. Maybe all students should not get credit cards. Maybe they should be screened to see if they can handle the credit. Is this the best we can do?
How do you stop the revolving door? With great difficulty. Those who advise the President on Fed or Treasury appointments are those very folks who have the most to gain, the members of the club. I wish we could change the ethos of greed; I wish there were someway of stopping the revolving door. Maybe enforced retirement when you get to the Fed or Treasury level? You cannot be a CEO or financial officer of any major bank? (We have the same problem with ex-Presidents, ex-senators, and ex-congressmen–they all crowd into revolving lobby door.)
What to do. I do have a couple of suggestions, one of which has already been made elsewhere: Break up the largest banks and private institutions. Simon Johnson has made just such a suggestion. In his testimony before Congress, he states the problem:
Jobs in finance became more prestigious, people in finance became more prestigious, and the cult of finance seeped into the culture at large, through works like Liar’s Poker, Barbarians at the Gate, Wall Street, and Bonfire of the Vanities. Even the convicted criminals, like Michael Milken and Ivan Boesky, became larger than life. In a country that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country as a whole – and that the winners in the financial sector knew better what was good for American than career civil servants in Washington.
the advice from those with experience in severe banking crises would be just as simple: break the oligarchy.
In the U.S., this means breaking up the oversized institutions that have a disproportionate influence on public policy. And it means splitting a single interest group into competing sub-groups with different interests.
Another additional way is to draw a real line between government and those entities it oversees.
In this case, draw the line between the financial sector and the Treasury and the Fed. Treasury and Fed cannot comprise individuals from the very sector they oversee. Nor can Treasury or Fed officials take a job in any institution that the Fed or Treasury oversee.
Create two distinct job lines, two professional castes, each with its own ethos and responsibility.
The line between government and private enterprise has become too blurred, too easily subject to abuse. Entering one should mean being forever disbarred from the other. When your life’s work in either is done, you retire–permanently. Bill Clinton should be on the golf course, not lobbying for foreign powers or private companies…or joining this or that corporation as many of the high officials in his and other administrations have done. Retire. Or do philanthropic work.
The disease that has brought the financial sector to its knees now protects it. That very disease has destroyed our health care system…and threatens other sectors of the economy as well.
Breaking up those institutions that have grown too large to fail is certainly one step forward. But we need to do major surgery on the real cancer: Cronyism gone amuck.