To fix the banks, first find the fraud

Conclusion of a presentation by economist and University of Texas at Austin professor James K. Galbraith before Senate Judiciary's subcommittee on crime:

Some appear to believe that "confidence in the banks" can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.
 
You can read the whole speach here and it is well worth it. As the first comment says: Wow.

Beware of bankers in sheep's clothing (Sunday Reflections for November 15, 2009)

The heads of the world’s major banks have discovered that they have a bit of an image problem. A lot of people don’t like them or the companies they work for very much. So the biggest bank, Goldman Sachs, has been working on a strategy to change the public’s perception of them.

The problem, in their view, is that they just aren’t appreciated. People don’t understand what great guys they really are and how important their work is to the well-being of the planet (if not the universe). In fact—and they’ve been reluctant to share this information but realize they must now make it public—they are on a MISSION FROM GOD.

This secret was revealed by none other than Goldman CEO, Lloyd Blankfein. “I’m doing God’s work,” he told The Sunday Times of London.

"I know I could slit my wrists and people would cheer," he says. But then, he slowly begins to argue the case for modern banking. "We’re very important," he says, abandoning self-flagellation. "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle." To drive home his point, he makes a remarkably bold claim. "We have a social purpose."

Blankfein omits a few recent bumps in this “virtuous cycle,” such as last year’s global economic near collapse. What, we might ask, is the “social purpose” of the loss of trillions of dollars in stock and real estate equity, throwing millions of people out of work, and putting governments trillions of dollars in debt to prevent the financial system from going into cardiac arrest?

Blankfein’s interview was reported just a couple weeks after a London conference on morality in the marketplace. Among the speakers was Goldman Sachs international vice president, Lord Brian Griffiths, who similarly insisted banks’ recent astronomical profits and employee bonuses were serving a higher purpose.

“The injunction of Jesus to love others as ourselves is a recognition of self-interest,” Goldman’s Griffiths said Oct. 20, his voice echoing around the gold-mosaic walls of St. Paul’s Cathedral, whose 365-feet-high dome towers over the City, London’s financial district. “We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all.”

Bloomberg.com also quotes the CEO of Britain’s Barkley Bank, John Varley, speaking at a similar event at another London church. “Profit is not satanic,” he said. And lest anyone miss the point, he added later, “Is Christianity and banking compatible? Yes.”

As expected, columnists and commentators had a field day ripping into the audacity of these claims. Rolling Stone’s Matt Taibbi (who has taken on Goldman Sachs before) identified the truly scary part of this story, which is that these guys very likely believe what they are saying. Living in the rarefied atmosphere at the top of the top, you only converse with people just like you. You convince one another that you all deserve to be where you are and that it really is to everyone’s benefit.

You think that reality coincides with your beliefs because your beliefs are true, whereas in truth it’s because you spend all your time with people who believe the same nonsense you do, and generations of your cultural ancestors just happen to have built very high walls all around you fools to keep reality from getting in and spoiling things.

As a result, famously evil nincompoops like Louis XVI and Adolf Hitler were genuinely surprised to discover most people didn’t buy into their systems and actually wanted to tear them down—which they did. Marie Antoinette thought she was being genuinely creative when she advised French peasants to deal with food shortages by eating cake. All it really showed was her total ignorance of what peasant life actually was like—the result, of course, of her never actually having to deal with real peasants.

Some have said Brian Griffiths’ “We have to tolerate the inequality as a way to achieving greater prosperity” may be the new “let them eat cake.” Compensation for Goldman Sachs 30,000+ employees will average over $700,000 this year. Hundreds will earns millions and even tens of millions—this in a company which a year ago was on the verge of collapse, threatening to drag down the country’s financial system with it, and bailed out by billions in federal tax dollars. “Inequality” seems like a meager word to describe this extravagance.

It’s a long stretch from Jesus “recognition” of self-interest to his endorsement of greed and larceny. There is no question that banks perform an important social service. But as one fund manager recently wrote,

[T]he public purpose of banking is NOT to provide profits per se to shareholders. Rather, the provision of the ability to earn profits is only a tool used to support the attendant public purpose.

The Wall Street bank behemoths have completely inverted this reality. Their purpose now is first to provide obscene salaries and profits and, if it’s convenient, to provide business capital and personal finance.

Christians, and Lutherans especially, have long recognized the value of vocation. Blankfein is right: our work can indeed be God’s work, whatever it is, if it meets human needs and serves to make the world a better place. Nor does a Christian ethic require equal compensation for all. Indeed, most ethical theologians recognize the inevitability of inequality in a capitalist system and accept it for the creativity and productivity it encourages.

At some point, however, gross inequality is not encouraging but discouraging as many people rightly sense the system is rigged and their efforts are not being fairly compensated. Blankfein says his people are paid so much because they are so enormously productive—but productive at doing what, besides making lots of money for themselves and their investors? How does their astronomical pay match their contribution to the betterment of society?

It’s now obvious that the dizzyingly complex financial schemes and instruments which have made banks so much money have also made our economy unstable and have cost millions of people their jobs and their savings. The incentive of seven and eight figure salaries is not leading to productivity but to greed and fraud. It is not doing God’s work but undoing it.

Alas for those who lie on beds of ivory,
and lounge on their couches . . .
who drink wine from bowls,
and anoint themselves with the finest oils. . . .
Therefore they shall now be the first to go into exile,
and the revelry of the loungers shall pass away. (Amos 6)

A place to vent your outrage

The American Bankers Association is holding its annual meeting this coming week in Chicago and major demonstrations are planned for October 25-27. Scheduled events include a protest in front of Goldman Sachs' Chicago headquarters and a prayer vigil. Information is available at Showdown in Chicago. If you're wondering "where's the outrage?" (see below) you'll find a fair amount of it here.

Stress tests not very stressful

(CCBlog users note: the site is linking to the wrong post. Check the archives to the right for the post you are looking for. Sorry for the confusion.)

Robert Kuttner has had some astute things to say throughout the current financial crisis. Here is his take on the so-called "stress tests" which weren't all that stressful, and why the weren't. Money quote:

Why is the Fed low-balling the problem? The hope is that by keeping the banks afloat for a few more months, and trying to entice private capital back to the table, the recovery in other parts of the economy will spill over onto the banks. But the greater likelihood is that weakened banks will continue dragging down the rest of the economy.

To loan or not to loan

A new post at Economist's View raises again a question that keeps bouncing around regarding the economic recovery strategy: Should people be saving or borrowing? The quoted article's main point is the contention that excess consumer borrowing rather than stock speculation was the cause of the Great Depression. Ever since last fall's financial crisis, the government's primary stated objective has been to get banks loaning money again--even though everyone agrees excess debt was what created the crisis in the first place. The article and many of the comments cast serious doubt on this strategy. Rather than saving the banks, they argue, this sector needs to contract. Rather than extending credit it needs to remain tight, with the inevitable resulting foreclosures and bankruptcies.

In this view the options seems to be: take the pain now and fix the system once and for all, or minimize the pain and drag out the problem for years to come. This also may be at the heart of the conflict between the aggressive US/UK approach and the more restrained strategy of the continental Europeans. In the latter case, one of the main reasons they are more willing to "endure" the crisis rather than rush to ameliorate it is their more extensive social safety net of public health care, extensive unemployment benefits, etc. If the US had such programs in place, would Washington be advocating a different policy? Are we doing what's right, or are we taking the easy way because we don't have the political stomach to do what's actually necessary?

I'm back

A week in Las Vegas has meant no blogging but I hope to make up for it over the next few days. I'm still amazed how difficult the Ballagio, our supposedly luxury hotel, made it to access the internet. Free wifi in the lobby but with no place to sit. No wifi anywhere else including its many restaurants and bars or at the pool. In the room there was an ethernet port with service @ $15/day/laptop (and the cable, if you didn't have one, was $13). Nor was wifi readily available elsewhere on the strip from what I could tell. Oh well, enough complaining.

The stock market is in a nosedive this morning over the impending bad news for GM and Chrysler. Again, the ups-and-downs of the markets will drive you crazy if you pay too much attention to them (though it is hard not to). That said, there are still a number of voices saying we are a long way from being out of the woods and there is still not enough being done either in terms of stimulus (especially in Europe) or in restructuring the financial system. Yves Smith at Naked Capitalism draws attention to an article in Financial Times regarding continuing trouble with the banks. One quote:

Even if a recovery were to start early in 2010, as some optimistic forecasters believe, most of the pain of the recession is still ahead of us: unemployment and default rates will rise sharply everywhere. Most of the pain in the financial sector is also still ahead of us. This will feel like a depression long after it has ceased to be one.

In my own congregation I am hearing of reduced hours and mandatory days off. Yesterday a woman told me she lost her well-paying administrative job of 18 years when the company went out of business. An importer of items for fund raising programs, they were unable to get financing to carry them through this lean time. I am afraid this story is being repeated with small companies across the country but with little publicity.