The Island Now

Pulse of the Peninsula: Bad actors win big after recession

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Posted: Thursday, September 19, 2013 10:48 am

Five years after the Lehman Collapse triggered the financial meltdown that flushed $14 trillion in wealth down a toilet bowl, the wealthiest 1 percent are doing very nicely, thank you very much. The rest of the 99 percent not so much. Between 2009-2012, the richest 1 percent captured 95 percent of all new income, while the typical middle class family has seen their income go down by more than $2,100; the Walton family which owns Wal-Mart, with more than $100 billion, own more wealth than the bottom 40 percent of Americans, as Sen. Bernie Sanders noted

 Many have reported stories comparing where we were to where we are in terms of the onset of the Great Recession - how the financial institutions have only grown bigger and more consolidated, how the incentives for being reckless with Other People’s Money are still in place with few deterrents, and how none of the CEOs or senior executives has been prosecuted for actions taken that led to the financial crisis. 

Some of the most enraging articles are how well the bad actors like Lehman’s Dick Fuld have all done, with their multi-million dollar parachutes (though they lack the follow-up which is how horribly their employees, retirees and those who had their retirement accounts have done).

The four biggest banks in the U.S., JP Morgan, Bank of America, Citigroup, and Wells Fargo, hold $78 trillion in assets, up from $6.4 trillion when the crisis hit in 2008, according to analysis by Huffington Post. That means their combined assets today amount to 47 percent of gross domestic product (GDP), up from 43 percent five years ago. 

The six biggest, which includes Goldman Sachs and Morgan Stanley, have $9.6 trillion in assets, which comes to 58 percent of GDP.

That is, “Too Much Bigger to Fail.”

Five years after the collapse of Lehman exposed to obscene greed and outrageous compensation paid, “The nation’s five biggest banks are on track to pay out $127 billion in total compensation, including at least $23 billion in bonuses, this year,” Fortune reported (Aug 28, 2013). “That’s up from the $114 billion the banks shelled out to their employees in 2009. It translates to $149,472 per full-time employee for 2013, and is roughly triple the pay of the average American. The figures come from financial filings and the calculations of a top Wall Street compensation consultant.”

Five years ago, in the months before President Obama took office, the economy was shrinking at a rate of over 8 percent, businesses were shedding 800,000 jobs a month, lending to families and small businesses dried up, homes were being foreclosed by the millions, and the American auto industry was on the brink of collapse. 

Obama immediately stemmed the tide that would have taken us into a second Great Recession, but the tide was against him in terms of doing what was necessary to reverse a 30-year trend toward income inequity and the collapse of the Middle Class.

Still, Obama’s actions - many which were controversial like the bailout of the auto industry - can be seen to have immediately stopped the bleeding, reversed course and month after month, first the number of jobs lost steadily came down, then the number of jobs added steadily went up. The stock market, too, began a steady rise and now is more than twice what it was at the collapse, hitting new records.

On the anniversary, the Administration released a report, “The Financial Crisis: Five Years Later,” prepared by the National Economic Council, the President’s Council of Economic Advisers, the Domestic Policy Council, and the Office of Management and Budget.

 “Today’s report makes clear that the president undertook a series of bold, unprecedented and politically difficult measures in 2009 that have performed better than virtually anyone at that time predicted,” National Economic Council Director Gene Sperling told reporters during a press briefing. “It is also a reminder we have come a long way on the economy, but we have a long way forward to go. The worst thing would be to go backwards due to self-inflicted wound due to threat of default in coming months.”

As it turns out, programs that were politically controversial have actually worked out better than predicted. 

According to Amy Brundage, deputy press secretary:

Contrary to Initial Expectations, the Response to the Financial Crisis Is Expected to Yield A Return to the Taxpayer: While initial estimates by the Congressional Budget Office projected the TARP program would cost over $350 billion, Treasury has already received nearly $422 billion in total cash payments back from the government’s investments in TARP and support for AIG. 

That is more than the $421 billion disbursed through TARP [not the full $700 billion]– with further repayments expected. Broader measures of the Federal government’s response to the crisis also project that the government will receive an overall profit.

Treasury Has More Than Recovered Its Investments in Banks and AIG: Contrary to initial estimates that efforts to stabilize the banks and the American International Group would cost tens of billions of dollars, Treasury has recovered $28 billion more than was disbursed on its bank investments so far, while achieving the original policy goals of stabilizing the banks and preserving lending. And investments in AIG from TARP and the Federal Reserve have yielded a total positive return to taxpayers of $22.7 billion.

 The Stress Tests – A Signature Element of the Response – Has Built Confidence in the Banking System Without Putting New Taxpayer Funds at Risk: Within months of the release of the results, the largest banks raised over $80 billion of equity capital from private sources. Today, capital has about doubled at the largest banks, while stress tests modeled after the crisis-era efforts have been adopted as part of the regular supervisory framework in the United States, and stress tests have been adopted as a norm in the global regulatory community.

The Housing Market Is Coming Back: To stabilize the housing market and help families avoid foreclosure, the president took bold action through an array of programs. The Home Affordable Modification Program has helped 7 million households to get government and private sector relief and Home Affordable Refinancing Program nearly tripled in volume after further changes to the program, rising from 400,000 homeowners in 2011 to 1.1 million in 2012, helping over 2.7 million in total. 

While significantly more needs to be done to recover from the impact of the housing crisis, home prices have been rising at the fastest pace in seven years – increasing 12 percent over the past year – resulting in 5 million homeowners coming out from underwater in the last six quarters.

Also, the financial areas that were at the heart of excessive risk, such as derivatives and shadow banking, are smaller than they were and  are regulated far more significantly, Sperling said.

And the measures to rescue the auto industry have produced “striking” results. “It is no secret that not only was the auto rescue controversial in the public, it was even a source of division within the Obama economic team, but the president made the right and politically difficult call. I don’t know that anybody at the time would have predicted that by first quarter 2011, the Big 3 automakers would not just survive, but be profitable for first time since 2004, that the Big 3 would gain marketshare for the first time since 1988, and rather than the projection that we would lose 1 million jobs, have seen 340,000 jobs gain since 2009 in auto-related sector, with manufacturing jobs in general growing for first time in years.”

So the good news is that economists and politicians now have case studies in which to enact policies after the next financial collapse.

 The bad news is that the politicians who stood in the way of Obama’s American Recovery and Reinvestment Act of 2009 - the stimulus program - and continue to force through austerity policies, sequester, and threats of government shut down and default, have left the door open to another financial collapse and are doing everything possible to make sure the economic recovery is meek, weak, and easily reversed. That way, they can continue to blame Obama for persistently high unemployment rates (still above 7%), while doing nothing to ease the pressure that is keeping wages low, consumer demand weak, and tempering the gains in home values. (House votes to repeal Obamacare: 42; votes for jobs creation: 1)

Had the government spent three times as much for stimulus, Paul Krugman wrote in his New York Times column, “We would be a richer nation, with a brighter future - not a nation where millions of discouraged Americans have probably dropped permanently out of the labor force.”

Obama has done his best and embraces the exact agenda that is needed to restore the middle class and the American Dream of equal opportunity to upward mobility. Elements include college affordability, immigration reform, enabling homeowners to refinance, investing in infrastructure, tax reform to encourage investment in America - in other words, all the elements to restore the American Dream, a path to upward mobility.

 Instead, he faces yet another hostage taking by Republicans so fanatical about making sure Americans don’t have access to affordable health care they are willing to shut down government, crash the economy, and for all time, discredit the “full faith and credit of the United States.” The last time in 2011, you might recall, Republicans used this tactic in order to extract cuts to Social Security and Medicare under the guise of addressing budget deficits. But now, budget deficits are coming down faster than any time since the end of World War II - are about 35 percent lower than a year “By the end of this year, we will have cut our deficits by more than half since I took office,” Obama said.

 But in 2011, the mere threat of not paying government obligations by refusing to raise the debt ceiling, stopped a robust recovery in its tracks, and caused a downgrade in the US credit rating, costing millions in extra debt service payments.

 “When the president met with business leaders,” Sperling related, “a couple of companies showed that what happened to consumer confidence through that period was among the worst things they had seen and ranked with things like Pearl Harbor or 9/11. This was when the default didn’t even ultimately take place. One thing a five-year anniversary shows, is that we came back from the brink, we avoided a second Depression, we are growing, expanding jobs, we are expanding again, but we all agree we have a lot farther to go.

 “Here on the 5th anniversary of Lehman, it is an appropriate time to consider what a terrible self-inflicted wound it would be for our country i would be to put at risk, to move our economy backwards instead of forwards by repeating a high-wire threat of defaulting our country over a budget negotiation, knowing the harm even that threat can bring.

 “The president has always made clear that he is willing to negotiate on appropriations, on how to replace the sequester so we don’t have these arbitrary cuts in investments critical to growth and the middle class, and he’s been both willing and courageous on his ability to work on a pro-growth, fiscal agreement, but has always said he cannot, will not, should not negotiate on the debt ceiling because to do so gives credence to threat of default over every policy.”

 “I cannot remember a time when one faction of one party promises economic chaos if it can’t get 100 percent of what it wants.  That’s never happened before.  But that’s what’s happening right now,” President Obama said in his speech marking the fifth anniversary of the financial crisis.

 “But in case there’s any confusion, I will not negotiate over whether or not America keeps its word and meets its obligations. I will not negotiate over the full faith and credit of the United States.  This country has worked too hard for too long to dig out of a crisis just to see their elected representatives here in Washington purposely cause another crisis.”

 But, Obama should have applied some of the winning tactic to Republicans that (finally) brought Russia to corral Syria’s use of chemical weapons by laying out to Congress a nuclear option of invoking the 14th Amendment (Sec. 4): “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

 And if Obama isn’t willing to unilaterally raise the debt ceiling based on the Constitution (Tea Partyers), he should sue the Congress for violating their oath.

 And given the clear successes of Obama’s economic policies (for which he is not given a scintilla of credit) and the catastrophic results of the Republican plan (tax cuts for the rich, austerity for everyone else, shifting spending from social programs to a bloated Defense, no taxes for corporations), I think Obama is on stronger footing.

 Occupy Wall Street has reconvened this week to mark the fifth anniversary All along, they have been calling for economic justice. Here are other elements that are needed to restore economic justice and prevent another financial collapse:

 A transaction tax. The rise of computerized trading where investors make their profits on minute fluctuation sin stock prices, buy/sell in a matter of minutes, is completely destabilizing to the market and points to the lie that the Stock Market fuels business growth and innovation. I wonder how many people realize that the only stock money that goes directly to a company is the Initial Public Offering; after that, all the buying and selling benefits the owners/sellers of the shares. Not a single job is created, except for the broker who makes money on both sides of the trade no matter who wins or loses. Contrary to what Goldman Sachs Lloyd Blankfein insists, Wall Street is not doing “god’s work.”

 Since Wall Street has demonstrated it has no noble interest in the process, not even the interest of companies it buys/sells at heart, just the individuals who get to pocket the bonuses, this country has to return to a mechanism where capital actually did flow to business creation and innovation.

 For example, public-private infrastructure investment fund (something Obama has pushed for and Republicans used to want until Obama advocated it). 65,000 bridges, including 2000 in NYS (Brooklyn Bridge is one) are considered structurally deficient; there is some $3 trillion worth of infrastructure investment needed.

 No taxpayer guarantee for financial institution’s profit-making risk. If banks want to gamble their own money in the Wall Street casino, fine and good, but taxpayers should not be on the hook.

 End Too Big to Fail - if it would put them at a competitive disadvantage to be broken up as the Big Banks claim given the global economy,  there should be some criteria, like when they broke apart Ma Bell (alas only to result in reformation of monopolistic companies)

Criminal liability - expansion of fraud prosecutions. The Justice Department and state Attorney General Eric Schneiderman seem to be finally getting a bit tougher. They need the banksters to know there are real personal risks - not a slap on the wrist and a fine that is considered the “cost of doing business”

 Tax Reform that restores some sense of fairness and encourages productivity: eliminating the loophole that lets billionaire hedge fund managers pay only 15 percent (and no Social Security taxes passed the first $106,000). True corporate tax reform that lowers the rate but captures tax from profitable companies like GE which paid no tax at all through the massive use of loopholes and foreign accounts. Eliminating incentives for corporations to offshore jobs and profits, and incentivizing opening factories in the US.

 A Living Wage that begins to chip away at the income inequity. Just this week, the Census Bureau released a study that showed that poverty is increasing (prompting Republicans to complain of how many people are putting in claims for food stamps and government services).

The Republican extortion has to stop. I say to Democrats: let them shut it down. Hold the Republicans accountable for shutting down the government. But do not give in on Obamacare, Social Security, and Medicare.

Welcome to the discussion.