Fix Wall Street … Please
I apologize to those of you who are sick and tired of the flood of Wall Street news. You want to know more about the ‘real’ economy, and less about finance.
Well, blame the banks.
They have co-opted our economy, and are abusing it for fun and profit.
They have to be stopped.
There is no credible story within the domestic affairs of America larger, or of more importance, than the state of our banking system. I mean this not just as a comment about the economic sphere but about the political sphere.
The financial crisis of the past two years has exposed the incredible choke hold the big banks have on our democracy. They can, and they did, expect taxpayer assistance to defray the cost of the compound and manifold errors of judgement that they made. They expected us to pay them for their mistakes. They expect us now to go back to being compliant as they pile up vast profits and pay themselves massive bonuses even as the millions of workers who suffered as a result of their errors still wallow in fear and poverty.
I say no.
I hope you do as well.
It is time to rebalance the economy and cut back the stifling weed that Wall Street has become.
A banking system, like the oil in your car’s engine, should be effective and anonymous. It should enable other sectors of the economy to generate wealth. It should be constructed on trust and relationships. It should enhance and supplement industry. It should be responsible with, and respectful of, your money. In short should be a supportive and essential cog in the overall economic machine. It should never become the be all and end all of the economy it is supposed to support.
Unfortunately our system outgrew that proper role. It became a rapacious, short term, deal oriented cesspool where it is expected that your banker is trying to take advantage of you. Relationships be damned. Short term profit be praised.
As Blankfein of Goldman Sachs says repeatedly – sophisticated investors should know what they are getting into when they trade with his firm. Absolutely: they are trading with a business whose word cannot be trusted.
In the ‘anything goes’ vision of the marketplace that infuses and informs the Goldman Sachs culture anyone can and should do anything. Anything. Get the deal done. Pocket the profit. Move on. No remorse. No looking back. No consideration. And, above all else, no ethical qualms. The presumption is that all players in the market are equally capable of stabbing all others in the back. So Goldman simply does it first.
This is a recipe for failure.
But only in the long run.
In biology we have learned that the most survival effective strategy is that called ‘tit for tat’. This means that when you defraud me, I will defraud you. In other words we all apply the golden rule. As Confucious first wrote, and as Kant famously argued, we should all act towards others the way we would want to be acted towards.
The crucial aspect that makes ‘tit-for’tat’ effective is that all the actors in the game know that they will cross paths again and that the playing field is level at each meeting. Plus all players will remember the way in which they were treated in the past. So an actor who cheats will be cheated upon in turn, and learn, eventually, not to cheat.
Goldman evidently disagrees.
They have abandoned the time honored banking principle of protecting and nurturing clients, and adopted a deal driven ‘attack at all costs strategy’. In their game, there are no clients, just sources of information. There is no confidentiality other than that needed to shroud the next deal. Because the deal flow is so large, and because Goldman’s size enables it to cast a wide net into that flow, it no longer fears the repercussions of cheating on a client. Tit-for-tat is useless when there are no opportunities to get even. And it is especially useless when one or two players get to be so big that even past victims have to continue to deal with them.
This is the state of Wall Street.
What was already a very restricted choice of players to partner with, is now even more narrow. The game has been tilted even more Goldman’s way. The failure of Lehman and Bear Stearns has handed more power to the remaining players. Now even more they can ignore any pretense and go for the jugular. That this is so is evidenced by the 91% jump in Goldman’s first quarter profits.
The economy, you and I, may languish, but Wall Street is back to its trading, raging, best. Those profits, and those at Citi, JP Morgan Chase, or Bank of America were driven, not by good old fashioned banking – lending so the economy can grow – but by trading exotic made-up products back and forth between each other. No value was injected into the economy other than the ability of the traders to go and spend those big bonuses.
To make matters worse, Jamie Dimon, CEO of JP Morgan Chase bemoaned just yesterday that he and his fellow bankers lacked access to the political process. This lack of access, Dimon suggested, is leading legislators to wrong conclusions: the banks need to be left alone to do their business – ‘God’s work’ to quote Blankfein – and not fettered by silly little things like new regulations.
This is, frankly, absurd. The banks employ approximately 1,500 lobbyists, and contribute millions, if not billions, to the coffers of politicians. Plus the records of Tim Geithner’s telephone calls show that he spoke to Dimon more often that he spoke to his boss, Obama. Bankers crawl all over Washington. They dictate legislation. Literally in the case of the changes to the bankruptcy code enacted under George Bush.
Dimon does not need more access, he needs less.
Or at least the rest of us need a voice in what goes on in Wall Street.
Ultimately we all need to realize that the financial crisis was also a political one. It showed just how deeply the banks have managed to burrow into the center of our economy. By discarding the regulation that had served society well for 70 years we unleashed not only an economic whirlwind, but a distorting force in our national politics. No one can talk of economic policy without negotiating with the banking system. The banks, and their attitude and power, intrude into every single conversation we have about how to fix the economy. The way in which we structure solutions, and even the way in which we allocate our wealth, all have to pass muster with Wall Street. The traders there can disrupt policies they don’t like. Which would be fine if those traders knew anything about long term finance. But as we now all know: they don’t care beyond the next deal. Anything with a maturity beyond the next bonus cycle is irrelevant to their thinking.
So bank reform is not just about putting the banking genie back into its old bottle, but it is about ridding ourselves of an unwanted voice at the political decision making table.
We need a banking system that is quiet and humble, not one filled to the rafters with hubris and that thinks the economy dances to its every whimsical tune.
Our bankers have outgrown their social value. They are now a malevolent force in society. They forgot what banking is.
We need to teach them.