Thursday, October 22, 2009

Where's the outrage? (Sunday Reflections for October 25, 2009)

“Where the hell is the outrage?” That is the title of a long post this past week by financial advisor and blogger Mike Shedlock. The post was in response to the announcement of the multi-billion dollar profits and employee bonuses of the huge Wall Street investment bank Goldman Sachs.

Shedlock is a strong supporter of free-market capitalism so the fact that Goldman made profits and paid bonuses is not what upset him. It was how they did it. Goldman, of course, is one of the “too big to fail” banks which received billions in government bailout money last fall. Those tax dollars were intended to keep the banking system from imploding and enable banks to loan money again. Yet as most anyone who has tried to get a loan has discovered, credit is still tight for both individuals and businesses.

To the consternation of Shedlock and many others, the big banks that took government funds are now making money again but are doing so not by lending but through speculative investments. In other words, the government bailout kept the banks afloat but that’s about it. Little of that money has found its way into the economy as credit. Instead, most of it is creating billions in profits for bank shareholders and billions in bonuses for bank employees.

Why is this happening? Shedlock relates at length the countless ways Goldman Sachs has been able to influence government policy and regulation. Goldman alumnae are everywhere: from the Treasury to the Federal Reserve to the White House. They are in almost all the other major banks and in countless corporations. Treasury Secretaries Robert Rubin (Clinton), Henry Paulsen (Bush), and Timothy Geitner (Obama) all did time at Goldman. The company and its employees have poured millions into the election campaigns of both parties.

Goldman is the largest member of an elite society of banking and financial empires. For most people (including me), the Wall Street financial world is as bizarre and confusing as atomic physics. Few people deal with it directly yet, as last year’s financial debacle showed, it has enormous influence on the economic health of the nation and the world. Unfortunately what has been missing is any sense that such enormous power also carries with it enormous responsibility.

In response to another critique of Goldman’s practices, a past employee wrote this about the company’s unique environment:

I worked with a lot of great people who were compassionate, funny and even cool. I also met a lot of people who couldn't hide their snobbery even if someone paid them another million to do so. Most of the work is a grind and many supersmart people put their brains to work in this highly competitive place without really even looking up long enough to see the big picture. In their downtime they fix their bleary eyes on shopping and travel sites to get a hint of why they sacrificed so much in the first place. Money, prestige, cool stuff, hot dates, and good times. Oh, and some have families too (boats, multiple homes, private schools...).

Is this the American dream? Is this “the good life”? It takes highly intelligent, hard working people to execute the incredibly complicated (and mind-numbing) financial maneuvers of banking behemoths like Goldman Sachs. But to what end—either for those involved or for society?

In a recent speech, Obama economic advisor Larry Summers (not a Goldman alum) declared that it is time for change. "Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country. . . . [We have] one crisis every three years. Surely a system that produces this many accidents and accidents this severe is a system that is in very much need of reform."

Yet the need is much larger than preventing “accidents.” Credit and investment are essential to every economic participant. As the source of these funds, banks’ function is not unlike that of the public utilities which provide gas, water and electricity. Such companies could not stop delivering these essential commodities because they found a more profitable way to invest their money. The same should be true of banks and the credit they provide.

America, of course, is the world’s pre-eminent champion of free enterprise. Nonetheless, we practice capitalism not as an end in itself but because we believe it is the system most conducive to the prosperity of society as a whole, rather than the prosperity of a few. Businesses and the people who run them can be greedy or stupid—or both. Preventing these tendencies from causing harm to others is one of government’s essential roles.

Yet government can’t perform that role, if it has been co-opted by the interests it is trying to monitor and regulate. Nor can a free economy function when businesses are allowed to completely separate themselves from the social consequences of their practices and products. Nor can democracy function when it becomes obvious that certain segments of society are being grossly favored over others and the mechanisms for correcting such inequity have broken down.

With Goldman Sachs—a company salvaged just a year ago at enormous tax payer expense—about to pay out bonuses larger than what most people make in a lifetime, yet at the same time failing to provide the supposedly essential service it was rescued for, it’s hard not to see that there has been a catastrophic breakdown in our social compact. This is a recipe for both continued suffering and injustice as well as dangerous social discontent.

Thus says the LORD: For three transgressions of Israel, and for four, I will not revoke the punishment; because they sell the righteous for silver, and the needy for a pair of sandals — they who trample the head of the poor into the dust of the earth, and push the afflicted out of the way. (Amos 2: 6-7)

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