Obama

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What Went Wrong?

Much as I try it is becoming more difficult for me to avoid the thought that we are headed back into recession. Or at least into such low growth that it feels like a recession. If we get much above 1.5% GDP growth for the rest of the year I think we should congratulate ourselves. It didn’t have to be this way, but we have failed. A renewed recession, or ‘near’ recession, is the punishment for our failure.

There is plenty of blame to go around:

There is a conspicuous lack of leadership from the White House. The Democratic caucus in Congress is not to blame: they have attempted to shovel stimulus at the economy, but the White House provided little or no political cover for the necessary actions. The public is now so spooked about debt – and you all know I think that is a foolish concern – that we are very unlikely able to get any concerted policy action to stem the decline. Worrying about debt during a moment of crisis such as this is a bit like fretting over the paintwork of a sinking ship. Who cares what it looks like tomorrow if it’s at the bottom of the ocean and not floating? The lack of urgency in our policy response to the drop in demand two years ago is staggering when we compare it with the drama that surrounded the bank bail outs. It’s as if policy makers thought that by saving the banks from their lunacy was sufficient to re-float the economy that the banks had trashed. Nobody seems to have calculated the correct depth of the abyss into which the banks threw us. This complacency was particularly evident at the White House after Obama came into office. His advisors miscalculated the political backlash against stimulus and didn’t even make the effort to sell the right policy. Instead they caved in before the fight and opted for a ‘get by’ package in the false hope that it would blunt the decline and that GDP would reflate by itself.

That was feckless and stupid. We are all suffering the consequence.

The Republicans are also to blame. They have advocated Hoover style economics from the start. I cannot think of a single policy position they have proposed that helps rather than hinders growth. At times they have been downright nasty: Senator Kyl’s statements in the past few days about unemployment assistance typifies the GOP position. Somehow the unemployed are evil hangers on and freeloaders who need to be punished rather than helped. To give Kyl his due he acknowledged that some assistance was in order, but that it should only come at the price of cuts elsewhere. As economic policy this makes no sense: unemployment assistance pays us back in the extra demand that it creates. That it is also socially beneficial from a moral standpoint is secondary to the main point. It is sound economics. That the GOP fails to recognize this is testimony to their deep commitment to the pre-1930’s social structure. Pre-middle class, pre-entitlement, pre-modern, they cling to disproven economic theory as if it is an enduring truth.

Also feckless and stupid.

The economic profession is also to blame. One would have thought that the last 70 years would have been ample time to sort out an economic theory to deal with Depression like slumps. Instead we have regressed to pre-Keynsian free market dogma and enshrined it within a web of abstruse and incomprehensible mathematics, as if a ton of neat formulae make it right. Wrong. Unfortunately the entire academic effort of the last 30 to 40 years has been a total waste of time. Yet the theories that emerged from that period are the ones that infest the minds of our business and political elites. So much so we have a collective block against the policies that saved the day in the Depression and would do so again now. Government spending and radical action by the Fed are still needed, but until we shed the wrongheaded theories of the likes of Milton Friedman and Robert Lucas we are doomed to repeat Hoover’s errors. We know where they lead.

Also stupid and feckless.

Then there’s all those damn foreigners.

One of the big problems we face is that we are too connected with the global economy for our own policies to be sufficient. We need other countries to move correctly also. They are not. One of the original causes of the crisis was the massive imbalance in the global economy between nations that consumed and those that saved. The US was obviously a consuming economy. This meant that it spend more than it earned. This imbalance showed up in the horrid Federal budget deficits of the Reagan and Bush eras; and in the ever present trade deficit. That trade deficit implied an equal surplus on the capital account – there are two side to trade: the goods and services balance, which is the ‘trade’ account; and the cash balance needed to pay for those goods, which is the ‘capital’ account. If the trade account is in deficit, which ours has ben for decades, then we need to have an equal surplus on the capital account to pay for it. That capital surplus shows up in all sorts of ways: foreign purchases of US government debt, companies, and property are all ways in which we acquire the cash we need to pay for the goods we import. Think of it this way: we sell Rockefeller Center to the Japanese and use the cash to buy Sony TV’s.

This flood of capital into the US was recycled through our real estate market and provided much of the cash used to inflate the property bubble. Without our trade deficit there would have been much less cash to pump that bubble up.

But: the problem is not all ours.

The German, Japanese, and Chinese economies are doing the opposite. They are deliberately under-consuming. Their domestic policies are designed to encourage exports. That means their economies are generating excess savings – German workers save rather than borrow and rely on exports to create jobs. Those savings flow into the global economy as part of the capital flow towards the consumer countries. In effect German, Chinese, and Japanese workers are lending to American [and UK etc] consumers so that the latter will continue to import and thus create jobs for those workers.

Now we reach the crux of the problem: if Americans turn to savings, as they have done during the crisis – the resultant huge drop in demand is a definition of recession – then we need that drop in consumption here to be offset by a surge in consumption in the former ‘savings’ economies. Have we had that? Not at all. Those economies have re-trenched too. So not only were they under-consuming in the good times, they are even worse now. So they are adding to the problem and not helping. When nation’s pursue economic policies built around exports they are implicitly seeking to undermine those of the consumer economies. They are deliberately exporting unemployment, debt, and the disruption that are associated with those factors. Typically such policies have been normal for emerging economies: the US followed the same path in the late 1800’s. But once an economy reaches maturity the export based economy becomes a problem because of the implications for global imbalance. Japan and Germany both are particularly culpable since they have a vast capacity to consume domestically, but steadfastly refuse to enact policies to encourage such activity.

The best example is Germany. Europe’s largest economy is being thrown through a bout of austerity to ensure its budget is balanced. That protects Germans but essentially exports unemployment to its weaker neighbors like Greece and Spain. So those two are forced to over-react to their internal problems because they are dealing not only with domestic crises, but also part of the German refusal to consume. Yet it was German capital flooding into Spain that inflated the Spanish real estate bubble and blew up the Spanish banks! Prior to the crisis unemployment was much lower in Spain than in Germany, and the government accounts were in better balance. It was German economic policies that threw Spain into the fire, yet the Germans see fit to lecture the Spanish on the need for austerity.

This is truly stupid and doubly feckless.

So there you have it. Inept policy making, weak leadership, and rotten theorizing. That’s quite a mountain for the economy to climb. I don’t expect it to succeed.

It’s all gone wrong.

The second half will reveal just how wrong.

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Jobs? and Obama’s Speech

Well if we needed confirmation that Obama’s sudden firm focus on jobs is justified, today’s report of claims for unemployment insurance provides all we need.

Claims dropped 8,000 to 470,000. The problem with this is that last week we saw a sudden uptick of 34,000, and most of the ‘experts’ thought that this week’s number would more than offset that. Last week’s report was looked at as an aberration: it included a backlog of data sent in by states where Martin Luther King day had messed up the data collection. The Fed’s, it was argued, had erroneously inflated the numbers – the seasonal adjustment failed to account for the data collection problem and treated the increase as normal. Thus it was widely expected that this week’s data would see an equally strong decline.

Well that line of reasoning sounded fine at the time. Now it looks a tad hollow. The optimists keep grasping at anything, even faux seasonal adjustments, to find evidence of growth and recovery. The truth seems to be much more banal and unfortunate: there is no such evidence.

Instead the outlook for jobs is firmly stuck in neutral. Most weeks bring a tiny amount of progress, then, every so often, we see a reversal. Cumulatively we are moving in the right direction, but improvement is glacial.

Looking back we can see that the levels of new unemployment claims has backed off substantially from the hideous peaks of last year. the issue we face is that with progress so slow, and with no breakthrough seemingly imminent, we all feel as if nothing is going on. And perception is everything. As long as the weak employment outlook hangs like a dark cloud over us there will be no sudden spurt of activity. On the contrary, attitudes will stay gloomy and nerves fraught – hardly the way to enter spring or summer.

I should make a comment on last night’s state of the union speech. Frankly I found it ordinary. I missed it in real time so I was forced to watch it this morning, and had the benefit of commentary already in hand. As theater it was better than its economic content was policy prescription. I liked the brick thrown at the insane Supreme Court decision to allow big business to buy elections. Only in America could ‘freedom of speech’ be so contrived as to condone corruption. Orwell must be proud of the new meaning given to that phrase.

The sad fact is that this administration, by turning away from health care and towards the budget deficit, cost control and jobs programs merely highlights its weakness of last year. I agree we need action on jobs. Lots of action. Expensive action. How that squares with the need to freeze the budget – except for defense and entitlements – I don’t know. The speech seemed like an effort to stand tall after the defeat meted out by the Senate leaders – those 40 41 Republicans who now run the country. A concerted attack on unemployment was what many of us were shouting out loud for last year. Why it took a year of humiliating senatorial obstructionism and defeat to get the message drummed into Obama’s head I don’t know.

Recall those infamous bank stress tests from early last year? I criticized them at the time because they included a worst case scenario that included only 8% unemployment rates. I argued that unemployment was bound to be much more than that, so the stress tests significantly understated the problem – in fact I said they were rigged so the banks would all pass. Well, now it looks even worse: the administration probably did think that 8% was the worst case. Otherwise they might have been more urgent it attacking unemployment back then when it counted for so much more. So the stress tests weren’t rigged, the administration was totally ill informed about the extent of the damage to the economy. Which is odd given the number of very sharp [supposedly] that are acting as advisors.

So here we are a year later, the rot still eating away at the economy, and all of a sudden we get an urgent message from the White House: its all about jobs now. Duh. Yawn.

And the capitulation to Republican thinking on the deficit could not be more complete. If you are a deficit hawk Obama is now your guy. If you want to limit spending on domestic programs while we pump more money into the military, Obama’s your guy. The surrender to GOP policy talking points is stunning. Last year I disparaged the Republicans for arguing that we need, as a country, to cut government spending so that the voters see that ‘government gets it’. It was terrible policy then and it remains terrible policy now. That Obama has gone from laughing at them to agreeing with them is tragic. He is making no attempt to make the correct argument to the voters: we need to keep spending. He has given up.

Having said that, as far as I can tell no one in the administration believes that a freeze on domestic discretionary spending will solve anything. It will shift the cost curve not one jot over the long term. Only substantial cuts in defense spending and strong limits on health care costs will accomplish that. Since, for whatever reason, we as a nation are unwilling to face that reality, we are forced to use ruses and window dressing to convince ourselves we are making progress. Frankly I am tired of ruses: they remind me of George Bush and his infamous eleven year expiry date for his tax cuts. Including things in budgets – like those expiry dates – that you have no intention, ever, of doing, is both disingenuous and gutless. I expected that from Bush, I expect more from Obama.

I think its called leadership.

One point Obama made was important though: the Senate is totally dysfunctional. As I have noted here, it is odd in the extreme that the confirmation of Bernanke can be pushed through on the basis of a straight majority, but nothing else can. Moreover the stupid and undemocratic notion that we need 60 out of 100 to constitute a majority for all legislation is just bizarre. It fosters obstructionism and grandstanding. And it spits in the face of the voting public who elect majorities and then expect action. For a country so obsessed with its constitutional foundation it is beyond strange that we all tolerate a system of government that is nowhere mentioned in that hallowed document.

In the context of the Senate’s preference for discussion rather than actual legislation, I expect Obama’s attempts to get a good jobs program or substantial financial reform to founder the way that health care did. We will be reduced slinking through the back door once again with minor tweaks and bureaucratic alterations simply because the bold option is obstructed by our Republican led government.

Nothing in the speech inspires a change in my expectations: Obama is good at words, but the unemployed people of America need action. Now.

Put up, or shut up.

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The Freeze Part 2

No I haven’t changed the basic thrust of my opinion: the freeze still is rubbish. It covers a small part of the budget and so will garner very little by way of actual deficit reduction. At the same time it represents an abject capitulation by the White House to Republican arguments. At best it panders to populist emotions about government profligacy in the face of private penury.

And we all know how wrong that is.

Ezra Klein absolutely nails the capitulation issue. Obama has tossed overboard one of his better arguments: health care reform was our best and brightest shot at cutting the deficit. The problem became that the GOP was successful in getting the public think of reform as a new, and costly, government program, which it isn’t. Obama conspicuously failed to get his message across: his view of reform was that of cost control rather than of entitlement extension.

Come to think of it I doubt he really tried.

In the longer term, after the effects of the crisis have abated, the basic deficit questions can be resolved down to these:

  1. Revenues have been slashed by the Bush tax cuts of 2001 and 2003 without resulting in an offsetting boost to GDP growth. Greg Mankiw tried to explain them as Keynsian deficit spending, but he absolutely failed to make the case. Instead the loss in revenue has plunged us into red ink on a permanent basis : this is the structural problem we need to fix.
  2. Entitlements are too expensive. The really big issue is health care. We cannot keep Medicare funded the way it is now. It will bankrupt us. It needs modification. Bush added vast costs and blocked the implementation of efficiencies. The current health care reform fixes those errors and more.
  3. In contrast Social Security is relatively easy to fix: raise the retirement age to reflect modern demographic realities; and eliminate the ceiling on social security taxation. Along with minor tweaks these solve any cash problems the program has.
  4. Defense spending is way too high. We are conducting wars hither and yon, without any limit in time or extent. Frankly we cannot afford to anymore. We need to modernize and reduce the military: one attractive plan is to eliminate the air force as a separate entity and spread its functions into the army and navy. The savings would be enormous.
  5. Our debt levels expose us to much higher interest costs if rates jump at some future date. Right now we are lucky rates are historically low. That luck could run out at any time.

Fixing all these problems would not be easy at the best of times. In the context of a fractured and recalcitrant Senate hell bent on obstruction it seems impossible without strong White House advocacy and leadership. Which we do not have.

By capitulating to the 41 GOP senators who, for some reason, put the fear of god into him, Obama has adopted their agenda in a craven attempt at electoral survival. He has put survival ahead of principal. He now stands for nothing other than winning elections, and so prolongs rather than changes the course of the Reagan/Bush trajectory – which would be great if that trajectory led somewhere other than deeper into debt.

The implication is that, instead of making fundamental shifts in spending on entitlements and defense, we will focus simply on tax and spending cuts only. Defense will be ruled off limits. Intelligent cost reduction of health care will give way to the reduction of benefits and the reduction of entitlements rather than the enforcement of cost control.

The change we can believe in is long forgotten.

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Obama and Banking: Another Bust?

The cynic in me wants to begin by asking: will he screw this one up as well?

But, I should think more positively and at least attempt to be pleased with the gruel the White House keeps packaging as gourmet food.

We cannot get into a discussion of the latest rumors about finance reform without at least commenting on the ridiculous election result in Massachusetts. So allow me to go there first with a rant – I promise I will keep it short!

It is frankly astonishing that the Democrats could be astonished. They screwed themselves royally. Their candidate was a complete twit and committed the full allowance of electoral mistakes. Her campaign should henceforth be held up as how to not to defend a safe seat. The irony is so vast: the Democrats and Obama screwed up health care reform by losing Teddy Kennedy’s seat. This would be the same Ted Kennedy who devoted his life to health care reform. Nice one Obama.

But the blame extends everywhere: the insipid performance of the Senate majority as it wandered through its self-absorbed and delusional debate over health care reform was both an insult to the people of America and a fiasco of political suicide. I have never been so aghast at politicians. The ridiculous and foolhardy outreach to Republican,s who had absolutely no intention of compromise, was a scene straight from a comic book: the president and his fellow travelers deluded themselves into believing that folks like Snowe and Lieberman were actually worth reaching out to. For what? They did not support health care reform in any shape, form, or way. They wanted to kill it from day one. So we were all condemned to watching the Obama frog be boiled. Apparently the only person unaware of his fate was Obama himself. His obsession with bi-partisanship will destroy him. Someone needs to tell him the simple rule: it takes two to compromise.

Maybe the truth is more simple: he doesn’t have any beliefs. He certainly was quick to give up on reform. Too quick in my book. There was no fire. No anger. No heavy leaning on waverers. No attempt to shape debate. All we got was a pallid and soft ‘reality checked’ view that we have to ‘reach out’ and water down so as to ‘get something’ done. Having sold us on the watered down version, the least Obama could do was get that Massachusetts win and assure that even the weak reform was passed. Instead he failed to be energized by the prospect of that loss. I have to conclude he wasn’t committed to reform in the first place.

Those who argue he had no choice are part of the problem too. Look what his vision has brought us: a diminished party presence, a diminished opportunity, and a diminished nation. Some change we can believe in.

Now what? having run away from all the big fights in 2009, what capitulation can we expect in 2010?

Well: finance reform.

Which ends my rant and begins the commentary.

The Wall Street Journal is reporting that Obama is going to announce, later today, measures that will significantly restrict the big banks. Notice that wording: ‘restrict’ not ‘reduce’.

In other words: here we go again.

Obama is congenitally unable to be tough. So instead of starting in a strong position and then working back to the middle compromise, he anticipates where the end will be and starts there. The obvious result is that he has to compromise from there and ends up giving into the opposition. That was the fate of health care and it could be the fate of bank reform.

We need smaller banks for two major reasons: one is that we simply cannot afford to bail out big banks anymore. The biggest banks are now so large that to bail them out would bankrupt the US Treasury. If not bankrupt, the damage would be so great that we would be severely limited in our fiscal policy options were we in another recession. Don’t forget that this last crisis began as a result of banking stupidity. The limited fiscal response – the weak stimulus – was conditioned by the fact we were already swimming in a sea of red ink courtesy of the Reagan-Bush years and the bank bail outs of 2008/2009. Had we been in a modest surplus, as we were at the end of the Clinton era, our response could have been more robust and the recession less damaging. People’s jobs were destroyed by our history of fiscal ineptitude stretching back to 1981.

The second reason we need smaller banks is competition. The record profits now being reported by the banks, in their trading accounts at least, stem in large part from the reduced competition in many fields of investment banking. Our entire banking system lacks sufficient competition to keep the big players honest. The suspicion of rigged markets and abnormal profits hangs over Wall Street because there are so few active players in the game. We need more, not fewer, banks. The quickest way to get more banks is to break up those we already have. It wouldn’t be the first time America has gone down that road.

The proposal Obama is expected to announce include negative incentives to discourage bank growth, and rules to reinstate the separation of investment and commercial banking. These are two very important actions needed to shore up the banking system, but already we can detect the Obama weakness.

Instead of proposing outright break up for the big banks – splitting them into two or three and breaking out their investment banking pieces as new organizations – the administration is simply proposing ‘rules’ and ‘regulations’ to achieve the same goal in a less aggressive manner.

This sounds like a slippery slope again.

The banks are already ramping up their formidable lobbying efforts. We can almost hear certain senators trembling at the thought of the money that will flow into their coffers if they suddenly find a reason to oppose anything too disruptive. The Federal Reserve Board opposes bank break ups as being unnecessary. Bernanke recently gave his opinion on the causes of the crisis: he attributed it to a lack of sufficient regulation, so he supports the creation of more rules as the preferred method for reform. Presumably he will make sure these rules are enforced – unlike the rules he didn’t enforce before. Larry Summers and Tim Geithner are too wedded to Wall Street to argue for anything radical. In fact, nowhere in the current corridors of power do I see an advocate of anything remotely like strong reform. Except for Paul Volcker perhaps.

We are ruled by timid or corrupt bureaucrats.

The analogy that springs to mind – in view of the health care mess – is of Neville Chamberlain and appeasement. I have a vision of Obama stepping off a plane waving a book of new rules and regulations, claiming to have reformed the banks, and having saved us from a new melt down. While in the background armies of lawyers and accountants trample through those same rules and regulations and reduce them to valueless garbage within hours of the ink having dried.

The risk of fighting tanks with paper is that tanks tend not to notice the paper. And the banks are acting like armies of tanks raging through the economy and pillaging it at will. They need to be blown up.

Fundamental reform is just that – fundamental. If we honestly believe the banks are too large then we should have the courage and foresight to make them smaller. We shouldn’t ‘suggest’, ‘guide’ or ‘ask’. We should force. Frankly force is the only language the banks seem to understand given their total disregard for the public as expressed in those annual bonuses they are handing out to themselves.

Of course we might disagree as to whether the banks are too large. In which case lets discuss that. The onus is on the banks to prove that they are not anti-socially managed or constructed. And yes I mean ‘anti-social’. I have read some commentators argue that the banks have no social responsibility and that their only goal is to make profits for their shareholders. That is true only in part, and even then the banks fall short.

As long as taxpayers are acting in bail out mode the banks have to take social claims against their behavior seriously. They are not solely beholden to private interests if social money is to be used at any point. Society has both a right and an obligation to interfere in bank management to ensure our money is being deployed wisely. Having smaller banks is one way to get such assurance.

Even if we don’t agree that society has an active interest in internal bank affairs, shareholders surely do. In which case we should ensure that shareholders actively participate in matters such as bonus policy. At the moment bank shareholders – and in particular the institutional shareholders like retirement funds – are far too passive. The idea that 60% of Goldman Sach’s revenue is syphoned off for pay and bonuses suggests that the managers have the upper hand against the shareholders. Imagine the retirement fund’s valuations if that revenue was passed on to the shareholders instead of being carved out for the employees. If your retirement fund has shares in Goldmans Sachs you should be wincing every time you read about those bonuses – its your money being paid out to those traders!

So what do we conclude?

The health care mess gives us little assurance that Obama has the character to take on an entrenched industry. He seems not to have the stomach for big political debates. Instead he is a bureaucrat and thinks that tweaking rules will ‘nudge’ the banks to do the right thing. Later today we will learn how he interprets the lessons of the Massachusetts election. Will he become even weaker? Will he trim even more to the right? Will he cave in more quickly to the powers that be?

The good news is that he appears to be taking that advice of Paul Volcker who has been an active advocate of braking up the banks. This may be a sign that the lesson learned was that the country needs strength at the top.

We can hope can’t we?

Hope … I seem to remember a presidential campaign in which that was a big word.

Doesn’t that seem a long time ago?

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Banking: Where’s The Anger?

Wow, banking lives a charmed life. Not eighteen months have past the gambling the big banks undertook in the mid 2000’s sank the economy, but there they all are getting ready to pay our fat bonuses. Don’t we all wish we could live like that? So even as the ‘real’ economy still sheds jobs, over 85,000 in November, the intrepid souls who gamble on Wall Street have recovered and are going to be paid their due.

Somewhere in the last Obama must have woken from the sloth that has characterized him so far this year: he ventured out long enough to knock the fat cats and to promise a ‘levy’ on the banks sufficient to pay back all that TARP money. Hurrah. I won’t hold my breath however because this administration has, in its very short life, made a specialty of using palliative words and then delivering nothing to back them up.

Robert Reich has an excellent column in today’s Financial Times in which he lays into the financial ‘reform’ being proposed as a fix for the problems that led to the crisis. I agree with his overall conclusion: nothing that is being proposed comes even close to solving the central problems. Once again we are being misled. Once again we are being given weak and uninspired leadership when we need strength and character. We are being treated to a charade and being told it is serious drama.

Those of you who have read my comments throughout the past year will know that I have lost all faith in our bankers to be trusted to perform banking with any skill or social responsibility. What goes in on Wall Street is not banking in the manner most of us imagine. Gone are the days of sobriety and conservative evaluation of risk. Gone is the value seen in a long term relationship with a customer. Gone is the fiduciary trustworthiness that fosters loyalty. And gone is the value placed on the memory of bankers who have seen recessions or crises before. All gone.

In their place are a set of post-modern ideas driven purely by greed, faulty economics, and an abiding need on the part of bank managers to make a personal buck at all costs – even if it means robbing their shareholders blind. The entire industry has slipped from being a respectable, if boring, source of predictable profits, to a glitzy, casino like, and seedy source of bonus pool cash for managers. From Park Avenue to Atlantic City boardwalk.

This has been a transition into lunacy that began a long time ago.

I wish I could say I was not part of it, but I distinctly recall conversations with financial employees – people like the CFO – of the bank I worked at where the topic was how to ring more return on equity from an old fashioned bank. You can’t without wrecking the bank. The implication is a very simple one: more return requires more risk. In good years bank managers fall prey to the notion that it was their skill forcing the return on equity up. In bad years they blame the economy. In good years they see vindication in the risks they took, and decide they are skilled enough to take more. In bad years they blame the risk managers they ignored the year before.

One way around taking more risk on the balance sheet is to bulk up on charges to customers that have no balance sheet impact: hence ATM charges, and all those other charges that bloat bank earnings but offer little no service in return. I understand banks need to cover the costs of all that infrastructure they build to service us – bank branches cost a bundle – but covering costs and price gouging so as to fatten bonus pools are two distinctly different exercises.

Now, of course, those monster fees the banks are charging are being used to cover the gaping holes created by the gamblers. So not only did we send the banks bail out money to keep the gamblers afloat, but we are now paying extra fees as well. Those gamblers must return a pretty penny sometime if they are worth all these serial bail outs.

It’s easy to sit here and vent frustration at the total lack of response in Washington. It’s entirely another thing to watch as the banks set off down the same disastrous road that led to the crisis. Unfortunately all the signs are that they headed exactly down that same path. The combination of low interest rates, lessened competition, and an expanded safety net has increased the bank’s appetite for bad banking. Their risk profiles are already increasing even though the last crisis is still being investigated.

That there is little public anger over this is astounding. I know that most folks are sick of the bonuses being paid out, but the problems in banking go far deeper and wider than that. Those bonuses are a symptom, not the sole cause of the problems. Yes, pay incentives need to be brought both back to reality and connected to long term profit. But that is just the start: those bonuses exist because the banks make way too much profit. At the height of the last lunacy bank profits accounted for 40% of all the profits made in the American economy. That is simply ridiculous. No one, except the bankers, think that four in every ten dollars of value in our economy comes from banking. Add in all the hangers-on like the accountants and attorneys who validate and execute securitized transactions and the amount of our wealth being sucked into what should be an intermediary business is staggering.

The social value in banking is in moving capital around efficiently, and in allocating it to the most profitable, wealth creating activities. What seems to have happened is that the money was diverted into finance for finance’s own sake. The industry didn’t allocate capital, it simply accumulated it. Now this might well be an indictment of our non-banking managers who obviously cannot create enough value to justify receiving the capital themselves. It might also be an indictment of the economy at large because we have distortions that attract capital away from industry and throw it at asset bubbles like real estate – the American fixation with real estate is a proximate cause of the last crisis that also hasn’t gone away. But the larger social question we need to ask is: how did the banks run off with all that capital they were supposed to be channeling into productive and wealth producing stuff we all could benefit from?

It is that question we need to resolve. My guess is that we don’t want to hear the answer: they rigged the game and invented a slew of unnecessary ‘products’ like most of the derivatives and securitized assets of the past decade whose returns are inflated by the leverage banks added to their bets. Regular business would never take that amount of risk. Then again, regular business does not routinely and artificially inflate itself in order to look profitable.

In the end we all have to realize that the banks syphoned off our wealth for their own benefit. They pumped up their profit margins by taking stupid risks which enabled them to justify keeping the money for themselves. Those of us who were fixated on short term indicators like the stock market fell for the ruse and facilitated the cash flow in.

We were robbed.

Now we all know that: where’s the anger?

Obama we are waiting.

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