Monday, April 19, 2010

Paul Krugman says: "Much of the financial industry has become a racket," and it's urgent that we "lower the boom" on the racket


Update: Tom Toles weighs in on Goldman Sachs --

"If we don't lower the boom on these practices, the racket will just go on."
-- Paul Krugman, in his NYT column today, "Looters in Loafers"

by Ken

If we come away with two points from today's Krugman column today, we might stand a chance of steering our way through the shoals of financial industry reform.

The first concerns what's actually at issue in the SEC's civil action against Goldman Sachs.

Business Week reports this afternoon that the SEC vote to sue Goldman Sachs was 3-2, with chair Mary Schapiro joining the two Democratic commissioners in opposition to the two Republican commissioners. The point of the disclosure, presumably, is to undermine the case by letting the world know the SEC was divided on it. What it in fact suggests is that where Republicans are concerned, when rich white people are stealing, it's just business as usual.

I'm going to make an embarrassing admission here that readers are free to second or not in the privacy of their own consciences: I didn't actually read every last word of coverage about the complaint. It's even possible that I didn't read more than every fifth or 12th word. And it's just possible that what I came away with was some version of the notion that those nasty finaglers got caught making a killing by betting that the housing bubble -- you know, the one that then-Fed Chairman "Mumbles" Greenspan couldn't locate -- would burst.

There doesn't seem much doubt now that a lot of Wall Street's "Bubble? What Bubble?" sharpsters were indeed betting against the economy, even as they were selling a different story to their clients, but that's not what's got them in trouble with the SEC, for the simple reason that it's not illegal. As Krugman explains:
We’ve known for some time that Goldman Sachs and other firms marketed mortgage-backed securities even as they sought to make profits by betting that such securities would plunge in value. This practice, however, while arguably reprehensible, wasn’t illegal. But now the S.E.C. is charging that Goldman created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure. That’s what I would call looting.

And Goldman isn’t the only financial firm accused of doing this. According to the Pulitzer-winning investigative journalism Web site ProPublica, several banks helped market designed-to-fail investments on behalf of the hedge fund Magnetar, which was betting on that failure.

You get the difference, I trust. The charge is "that Goldman created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure." Securities that were deliberately designed to fail. It appears that we may actually have laws that at least frown on this (remember, so far it's only civil, not criminal, charges that have been brought), though I'm prepared to believe that if we let those Republicans who are so outraged that they aren't getting to write the financial reform legislation to have their way, we'll wake up finding that such actions, far from being frowned on, will earn the participating banksters valuable points toward premiums like digital cameras or a set of matched luggage.

Certainly that's the message that "Sunny John" Boehner and the rest of the GOP Creep Corps have been trying frantically to communicate to the Wall Streeters: Show us a little love and we'll take care of you. All the while that their Noise Machine is Luntzing the Dems as the Party of Bankster Bailouts.

Of course the Dem creeps in the crosshairs have mostly themselves to blame. How humiliating is it these days to find yourself the target of something said by Republicans which actually contains a grain of truth? When the Luntzers screech that Wall Street and the banksters were in the pockets of the Dems, or vice versa, well, haven't they been in the most recent election cycles? Isn't this the very achievement that won Chuck Schumer his position of some influence in the Senate Dem leadership? What's more an administration whose leading economic-policy lights are Larry Summers and Timmy Geithner, and is staffed with people of their disposition, is poorly positioned to defend itself against charges of collusion with the Big Money industry.

Of course the parts that the GOP Creep Corps leaves out are (a) the cooling off of the Wall Street-Dem romance as crazed Dems have indicated a determination to enact some sort of financial-sector regulatory reform, and (b) the Creep Corps's own assiduous campaign to woo the Wall Street hoods back into the GOP fold. After all, if there's one thing the Big Money players know, it's how to recognize Which Side Their Bread Is Buttered On. As Reggie Perrin's old boss C.J. might have said, "I didn't get where I am today by not knowing which side my bread is buttered on."

Which brings us to the other point we need to take away from today's Krugman column:
The main moral you should draw from the charges against Goldman, though, doesn’t involve the fine print of reform; it involves the urgent need to change Wall Street. Listening to financial-industry lobbyists and the Republican politicians who have been huddling with them, you’d think that everything will be fine as long as the federal government promises not to do any more bailouts. But that’s totally wrong — and not just because no such promise would be credible.

For the fact is that much of the financial industry has become a racket — a game in which a handful of people are lavishly paid to mislead and exploit consumers and investors. And if we don’t lower the boom on these practices, the racket will just go on.

And on and on.


As Paul Krugman noted on his NYT blog yesterday, a talk he gave last week at an economic conference provided him with an occasion to update and clarify his thinking on the subject of financial reform, which he considers "a much messier debate" than the one on health care reform. Last night he posted "a version of what I said," noting that this all happened before the SEC filing against Goldman Sachs.

Krugman has been widely criticized for not attaching enough importance to the problem of the size (and therefore presumed too-big-to-failness) of the financial institutions that need to be brought under control. And in his breakdown of six "competing views of what the problem is all about," including a couple that are fatuous but nevertheless vociferously advanced by pugnaciously ignorant chunks of the populace. (One of these, "government intervention," blames it all on the Community Reinvestment Act, and I myself let myself get drawn into a protracted comment exchange with a right-wing peabrain who wouldn't let go of his psychotic delusions even though every word he said was crap excreted by liars and imbeciles who almost bragged about their contempt for reality. I learned, as if I needed the lesson, that someone who has sworn to uphold lies and delusions to his dying breath can be counted on to keep that faith.)

Krugman still isn't buying size as a central issue.
My view is that I’d love to see those financial giants broken up, if only for political reasons: it’s bad to have banks so big they can often write laws. But I’m not sold on the centrality of too big to fail to the crisis, for reasons best explained in terms of the second doctrine.

That "second doctrine," his "personal preference," is what he calls "shadows": "The rise of shadow banking, institutions that fulfill banking functions but evade the regulatory regime, has undermined stability." To this he would add "some allowance for" Nos. 3 and 4, "opacity" ("We’ve come to rely on complex financial instruments that neither regulators nor the private sector [understand]") and "predation" ("Financial firms deliberately misled consumers and investors").

I bring this up, though, for the later section of the talk, in which Krugman "identif[ies] three forms of reform proposal," and pretty well knocks the stffin gout of all three. He concludes:
So where does that leave us? For sure we have to try to update financial regulation for the 21st century, and for sure doing so will help avert the worst in the future. But I have to admit that I’m not wildly optimistic about just how successful we’ll be.

Does it help to keep in mind that today's column, with its determined talk of lowering the boom on the financial racketeers, was written well after Krugman gave this not-wildly-optimistic talk? Um, for me, I think not so much.

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At 8:18 PM, Blogger angela said...


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