I Think I Just Heard John Galt Fart: How the Ex Fed Chairman Finally Learned That There’s Greed on Wall Street

According to a May 6 report by Kat Aaron of the Center for Public Integrity, the aftermath of the subprime mortgage crisis and the ensuing global economic meltdown have left former Federal Reserve Board Chairman Allan Greenspan utterly dumbfounded by the failure of lenders and investment firms to act on their own to prevent the crisis.

"Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity, myself especially, are in a state of shocked disbelief,” said Greenspan (as quoted by Aaron) in his October 2008 testimony before the House Committee on Oversight and Government Reform.

So there’s greed and irresponsibility in the financial industry? Really? Who’d have thunk?

Duh. I’m sure, Mr. Greenspan, that even my seven-year-old child could have told you that.

It’s not my intention to pick on the financial industry here, or to suggest that subprime lenders or investment bankers are inherently any more greedy than anyone else. They’re simply imperfect human beings who, like you and I, need some basic rules to keep their human weaknesses from getting the best of them.

So it seems that “the virtue of selfishness” may not be so virtuous after all. And maybe now that Ayn Rand has gone on to her reward, her protégé, Maestro Greenspan, may finally, this late in his life, get a healthy dose of the reality that those of us who choose to make our careers in private business are not inherently any more virtuous than any other human beings. We are just as prone to the human pitfalls of greed, self deception, arrogance, corruptibility, and even irrational exuberance as are, for example, all those dreaded government bureaucrats that Rand and her followers despised so much.

Self-regulation of industry is a naïve and misguided concept for the simple reason that human beings, due to their imperfect nature, need checks and balances. We can’t have business without rules any more than we can have streets without stop signs and traffic lights, football games without officials, or Scrabble without a dictionary.

This seems so obvious, really, that it’s difficult not to question the underlying motives of those who would argue otherwise. Sphere: Related Content

The Strange History of Non-Bank Banks -- and its Link to the Origins of the Current Economic Crisis

Researching the origins of the current economic crisis makes me feel old. I’m used to thinking of the Reagan administration as a fairly recent era. But here I am reviewing policies that were put in place at the time I came of age, and I realize that what I’m doing is basically historical research.

Looking back from here in the late 2000s at the administration that was in power in the 1980s is not too different from someone in the 1960s researching the Roosevelt administration. And that thought makes me feel old.

The topic du jour that sent me once again back to the 1980s is the concept of the “non-bank bank,” to which a Reuters UK article indirectly alludes in an analysis of comments President Obama made on Saturday in an interview for the New York Times magazine.

Discussing the Obama administration’s outline of expanded financial regulatory powers to prevent a future crisis of the sort that the U.S. is now currently confronting, the Reuters article says that part of the proposed strategy is to create a regulatory body “with the authority to seize large non-bank financial firms, such as insurers, hedge funds, or private equity companies, if they are deemed to threaten the stability of the financial system.”

This made me recall the concept of the “non-bank bank.” It’s a term that I suspect most of us, like me, haven’t heard in some time -- which is probably an indication of just how much of a taken-for-granted fixture this kind of institution has become since its origin in the 1980s.

Although I don’t precisely remember what year it was that I first heard the term, I do have a fairly vivid recollection of the incident. I was in the kitchen at my parents’ house, where I was still living as a commuting college student. My dad and I were going through the evening ritual of dinner among the avocado appliances, accompanied by a news broadcast from a local AM radio station on the NuTone radio/intercom console built into the wall of the eat-in kitchen.

The kitchen, wallpapered in an early-American country pattern of reddish-orange flowers, would have served as a perfect model for the set designer for That 70s Show. Mom, due to a bad back that made it uncomfortable to sit on the hard kitchen chairs, usually didn’t join us at the dinner table. She was enjoying her repast in the living room which, with its rust-colored carpet, could also have served as an exhibit of 1970s decor.

One of the stories on the news broadcast Dad and I were listening to as we dined was about non-bank banks. I don’t recall what specifically was being reported about them, but perhaps it was September 1984 when, according to an article in the January 23, 1986 edition of the New York Times, a Federal appellate court ruled that the Federal Reserve Board did not have the power, without new legislation, to broaden its definition of a bank in order to exercise regulatory authority over an emerging category of financial institution sometimes referred to as a non-bank bank.

“What in the world is a non-bank bank,” Dad wondered out loud after hearing the news story. It was a rhetorical question, of course, because neither one of us knew the answer. It was the 80s, after all, so a quick hop on to Google to find out wasn’t an option. But we did have a vague awareness that certain types of financial organizations, such as insurance companies and investment firms, were trying to get into services traditionally provided by banks. Little did we know that this news story was just one indicator within a much bigger picture of a vast wave of change in the financial landscape that, about 25 years later, would have such profound consequences for the U.S. and world economy.

The Fed appealed the non-bank banks case all the way to the U.S. Supreme court, but lost in an 8 to 0 decision on January 23, 1986. That decision was the main subject of the New York Times article referenced above. Prophetically, the article went on to say that the Court’s ruling was “likely to speed the movement toward interstate banking and the expansion of insurance, retail, securities and other companies into financial services traditionally performed by banks” and quoted Federal Reserve Board Member Charles Partee, in what reads like a warning of dire consequences to come, that “Every merchandiser in the country will have a bank” [with “have a bank” presumably meaning “operate its own bank”].

Now, do you remember who was Chairman of the Fed in 1986, when the Supreme Court made this decision? It was none other than Paul Volcker, who now happens to be one of President Obama’s top economic advisors. So in 1986, under Volcker’s leadership, the Fed appears to have been fighting what it found to be alarming efforts to expand, outside of its regulatory authority, financial activities traditionally associated with banks.

But the story gets even more interesting, because the New York Times article goes on to say that “the Reagan administration, which favors more competition and less regulation,” joined the large companies that wanted to offer financial services competing with those of traditional banks in “urging the court to invalidate the Fed’s regulation.”

So we see the Fed, under the leadership of Volcker, an appointee of President Carter, at odds with the Reagan administration, advocating for a more cautious and controlled approach to the development and growth of the financial services industry.

But the Fed did not prevail. And the rest, as we now know, is history. Interstate banking and the entry of other financial services institutions into traditional banking functions indeed expanded rapidly, paving the way for the folks who brought us such brilliant innovations as the credit default swap.

Local and community banks all but disappeared. In my home town, for example, Suburban Trust Company became Suburban Bank and then Sovran Bank, which before long was absorbed by NationsBank, which was in turn absorbed by Bank of America. My first credit card from an unsolicited, pre-approved offer -- with a whopping $5,000 line extended to me as a student in the 1980s taking home about $50 weekly from a weekend-only job -- was from an out-of-state bank I’d never heard of that ultimately became part of Chase.

In 1987 Volcker departed the Fed, not long after it lost the non-bank banks case. His successor, Allan Greenspan, was once a disciple and part of the inner circle of Ayn Rand. Rand espoused views that are perhaps among the most extreme in history on the supposed virtues of markets free of government regulation. On the subject of regulation, she believed that all that was necessary was the self-regulation of heroic captains of industry who, based solely on the motivation to protect their profitability and reputations, would never do anything lacking in integrity. In the context of the current crisis, those views look astonishingly naïve, given the reckless lack of self-regulation we have witnessed from certain key players.

There’s a certain poetic justice in the fact that Volcker is finally getting a chance to help clean up the same mess that the Fed under his leadership apparently tried to stop, during its earliest stages, in the 1980s. And it even helps put into perspective the issue I opened with of “feeling old” when I dig into the origins of the current crisis. While I was in college and still living with my parents during the non-bank bank controversy, Volcker was already old enough to be the Fed chairman. So imagine how old he must feel now.

I’m also amazed at how consistently, so far, the eye seems to fall squarely into the 1980s when one looks for the origins of the current crisis. It seems that we are truly witnessing the end and final outcome of an era that began when President Reagan, in one of the earliest and most famous speeches of his administration, proclaimed a freeze on new regulations and pledged to get rid of as many as possible. And so he did, including what appears, in effect, to have been a systematic dismantling of certain safety measures that were put in place after the Great Depression to prevent a recurrence -- to which as a consequence, we seem to have come alarmingly close. Sphere: Related Content

Department of Labor Reports Seasonally Adjusted Unemployment Claims Up, 4-Week Moving Average Down

The Department of Labor issued a report today showing an increase in seasonally adjusted initial unemployment compensation claims, a decrease in the 4-week moving average for initial claims, and a continued trend of increases in ongoing claims.

In the week ending April 18, the advance figure for seasonally adjusted initial unemployment compensation claims was 640,000, an increase of 27,000 from the previous week's revised figure of 613,000. The 4-week moving average was 646,750, a decrease of 4,250 from the previous week's unrevised average of 651,000.

The advance seasonally adjusted insured unemployment rate was 4.6 percent for the week ending April 11, an increase of 0.1 percentage points from the prior week's unrevised rate of 4.5 percent.

The advance number for seasonally adjusted insured unemployment during the week ending April 11 was 6,137,000, an increase of 93,000 from the preceding week's revised level of 6,044,000. The 4-week moving average was 5,944,000, an increase of 142,500 from the preceding week's revised average of 5,801,500.

For further details, see the full news release. Sphere: Related Content

Progressive Group Says Lending Decline Continues Despite Favorable Bank Earnings Reports, Calls for Independent Investigation

In a statement issued yesterday, the Campaign for America’s Future, which presents itself as a progressive political group, asserted that major banks have employed accounting rules “to obfuscate losses” in recent favorable earnings reports.

The announcement also called for the government to step in and investigate the causes and scope of the financial crisis. While supporting the Congressional Oversight Panel chaired by Harvard Law Professor Elizabeth Warren as “a step in the right direction,” the announcement warned that a more forceful investigation with subpoena power is needed.

“These major banks are carrying toxic paper that they don’t want to mark down, for fear it would reveal just how insolvent or close to insolvent they are,” according to Robert Borosage, Co-Director, Campaign for America’s Future, in a statement in the organization’s news release. “They understandably will do what they can to hide the reality. In recent weeks, we’ve seen accounting standards diluted to aid them in that effort, and now we see accounting dodges to suggest they are on the way back. Meanwhile, actual lending continues to decline.” Sphere: Related Content

Goolsbee’s Comments on C-SPAN Reveal Themes Underlying Obama Administration’s Policies

During a C-SPAN broadcast on Sunday, reporters interviewed Austan Goolsbee, staff director and chief economist of the President’s Economic Recovery Advisory Council, eliciting comments that, both directly and by implication, highlighted key themes driving the Obama administration’s economic policies.

In an a possible attempt to spotlight a contradiction between administration policy and Goolsbee’s past scholarship as an economics professor at the University of Chicago, Associated Press reporter Steve Scully asked Goolsbee to comment, in the light of the Obama administration’s current deficit projections, on a paper Goolsbee published two years ago. The paper asserted that deficit reductions are an important “insurance policy against global economic shocks and over-reliance on foreign lenders.”

Goolsbee clarified that the current policy does not contradict his past scholarship on the role of deficits during emergency situations.

“This economic crisis would warrant large deficit spending by any measure,” Goolsbee said. “The two-year window in which we are in the middle of crisis is absolutely not the time to try to balance the budget. That was one of the terrible mistakes that Herbert Hoover made….”

The view that deficit spending is a crucial government tool in emergency situations is held widely among economists, as is the converse principle that budget surpluses are advisable during a strong economy.

Although responses to questions about the Obama administration’s tax policies were not directly linked during the broadcast to Goolsbee’s past scholarship, the proposal to increase taxes on households earning over $250,000 annually as part of the strategy to reduce the deficit in the coming years is also consistent with his published research.

While many conservatives continue to assert the supply-side doctrine that tax increases on households with higher incomes impact the economy negatively by discouraging investment and “taxing the job creators,” Goolsbee’s research has included findings that policies reducing the tax burden on higher-income groups may not have the desired effect.

For example, a Brookings paper Goolsbee authored with Mihir A. Desai makes the case that the Bush administration’s tax cuts were not effective in stimulating increased capital investment.

Goolsbee has also tied such research findings directly to a refutation of basic supply-side theories, including a column last year in the New York Times in which he asserts that the consensus of academic research makes the Laffer curve look like “a fleeting figment of economic imagination.”

This apparent grounding of administration policies in solid research gives an all the more hollow ring to the shrill voices of many conservative pundits as they continue to blast the administration’s stimulus package and budget, assert incorrectly that government spending created the current crisis, and support a misguided “Tea Party Movement.” Sphere: Related Content

Deep-Rooted Fear of “Freeloaders” in American Culture May Have Shaped Our Economic Safety Net Policies

When you contemplate the number of American families that have been affected by job losses in the current economic crisis, it’s staggering to consider that, at the beginning of the Great Depression, the nation had no unemployment compensation system to minimize the suffering created during the down-ticks of market cycles.

The reasons why such social policies are relatively recent developments can in part be understood in the relatively simple context of a gradually evolving enlightenment within our society of how working class people should be treated. In this view, social programs like assistance for the unemployed emerged over time for the same reasons as did other protective measures, such as child labor laws, overtime payments, occupational safety regulations, and environmental protections.

As societies shifted away from a primarily agrarian way of life to a more commercially and industrially centered culture, and as the scope of organized business and large markets expanded, awareness gradually increased of the potential harm, as well as good, that organizations and markets could do when left to their own devices. It’s fitting that Adam Smith’s metaphor for the market mechanism was “The Invisible Hand” rather than, say, “The Invisible Mind,” because the metaphor can be extended to help us understand an important fact about markets: a hand, unlike a mind, has no conscience.

So it took time for society to come to grips with “the Dickensian aspects” of the industrial revolution and realize that the impersonal machinations of the market required some prosocial checks and balances. In this view, it’s not too surprising that we were already nearly one third of the way through the 20th century before there was a federal unemployment compensation system.

However, another dimension worth considering is that, in the United States, an additional factor may be at work that has influenced why our safety nets protecting citizens from the vagaries of business cycles are arguably more limited than in some other countries: a fear of “freeloaders” that dates to our colonial origins here in “The New World.”

Many of us can recall, from our elementary school history lessons, the stories of problems in early colonial outposts like Jamestown and Plymouth with people who did not want to pull their fair share of the weight in dealing with the harsh conditions that an unforgiving climate and environment imposed on the settlers, leading to the implementation of strict “no work, no eat” policies.

Given the conditions, the mindset is entirely understandable. But, in or relatively young nation, the mindset appears to continue as a salient component of our cultural memory. Fear of freeloading remains strong even today, evidenced by continued hostility toward groups such as welfare recipients, who, at least in some demographic segments, are still demonized as the cause of a supposedly excessive tax burden, in spite of the fact that such social programs comprise a relatively small proportion of the federal budget. Hostility toward the so-called welfare state may in fact be the result of a political straw-man created during the Reagan era, but the resulting attitude persists among many people.

In “The Old World,” on the other hand, cultural memory of a life as raw and “close to the elements” as that experienced by the initial North American colonists is far more distant. Could this partially explain why, in certain European countries, for example, the social safety net is more extensive, and the reality more accepted as a “necessary evil” that a certain percentage of the population may take advantage of the system and “live off the dole,” so to speak?

The current economic crisis may call for a closer look at this issue, in keeping with the ideas of some thought leaders in economics who, like the Nobel Laureate Paul Krugman, favor markets that are as free as realistically possible while also advocating more robust social safety nets than those that currently exist in the U.S. Sphere: Related Content

Greed Reconsidered

Two threads of thought that might at first blush appear to be unlikely bedfellows converged in my mind yesterday as I scanned the latest news and commentary on the economy. And their convergence drove me to take a look at the current crisis from a more overtly moral perspective than I had previously.

The first thread came from President Obama’s remarks at Georgetown University, in which he made the most direct and wide-ranging moral pronouncements about the crisis that I have heard from him to date (although it’s quite possible that he has done so before and I just missed it). He said that the current recession “was caused by a perfect storm of irresponsibility and poor decision-making that stretched from Wall Street to Washington to Main Street.”

Those are strong words, and they reflect a courage that, in my opinion, is one of the markers of a true leader: the courage to tell people — especially people who have the power to determine one’s continued status as a leader — things they may not want to hear.

By openly pointing to Main Street’s share of the blame, rather than foisting it all on easily demonized targets like overcompensated AIG executives, the President is telling the very rank-and-file voters who elected him that they share in accountability for the crisis. That takes courage, and if anyone can cite an example of a President showing that kind of courage in recent memory, I would certainly like to hear about it.

President Obama went on to recount the widely-reported story of how the crisis all started in the housing market, with people from all levels of the financial food chain — from the everyday homebuyer fudging income figures to take out a so-called “liar’s loan,” all the way up to the investment bankers that bought the securitized mortgages — succumbing to the temptations of easy credit and easy profit.

One could argue that greed, per se, wasn’t necessarily the motivation at all levels of the food chain. For example, one might say that, for homeowners, wishful thinking rather than greed was the driver — wishful thinking that there really was legitimate underlying value behind the run-up in housing prices. Or gullibility in believing all the financial pundits who told us that the housing bubble wasn’t a bubble, and that the increasing prices were driven by a true scarcity in real estate markets.

But after thinking it through, I concluded that to deny the role of greed, even in these scenarios, is to misunderstand and underestimate what greed really is. In everyday life, greed is more subtle than we may consciously realize. It’s not as blatant as the melodramatic, wicked-grin and hands-rubbing-together image that the word greed can evoke. Greed in everyday life isn’t Gordon Gecko greed. Rather, it’s the more subtle lure of gain without pain, the part of us that’s always on the lookout for that one get-rich-quick scheme that might really work, the part of us that might really want to believe that there could be a way, after all, to earn huge profits stuffing envelopes in our spare time.

The second thread of thought came from an article by Al Mohler of the Southern Baptist Theological Seminary, republished yesterday by ChristianityToday magazine: “A Christian View of the Economic Crisis: Is the Economy Really Driven by Greed?”

Mohler prefaces his comments with the qualification that the profit motive driving economic markets is not, in and of itself, a greed-driven motive. Rather, he writes that greed enters the picture “when individuals and groups … seek an unrealistic gain at the expense of others and then use illegitimate means to get what they want.” Among the manifestations of this scenario are the motivations that drive investors, in the midst of an emerging bubble, “to take irrational risks.” And that, of course, is what the current financial crisis is all about.

The comments from both Obama and Mohler are sobering and suggest that many of us who might initially have thought of ourselves as innocent victims rather than causative agents of the crisis might be due for a little soul searching, such as middle-class homeowners who experienced, from the housing bubble, a windfall that is now being counterbalanced by recession-driven losses elsewhere. Markets are collective entities, and their behavior, in the aggregate, can seem impersonal. But we must never forget that they are, ultimately, driven by the decisions and actions of individuals.

As Mohler writes, more individuals, from more walks of life, are participating in investment markets today than at any other time in history. That means more of us should probably take some time out for a period of self-examination of our own accountability for what has happened.

Sphere: Related Content

Blogger Presence at G20 Reflects Changing Journalistic Landscape

The G20Voice, a coalition of NGOs (non-government organizations), reports that news coverage of this year’s G20 summit has broken with convention, with live and direct reporting from the event by bloggers allowed for the first time.

According to the announcement, 50 bloggers covered the summit, giving them, and their audiences, the chance to engage with and influence world leaders on issues including development, climate change and women’s rights. In a process backed by the British Government, the bloggers were nominated by the public, with more than 700 nominations received in 12 days.

The organizations behind G20Voice are OxfamGB, Comic Relief, Save the Children, ONE and Blue State Digital. G20Voice is a collaborative effort demonstrating the breadth of commitment to ending world poverty and inequality.

The 50 include a broad range of bloggers from the G20 countries and the developing world, including:

• Sokari Ekine, from Nigeria
• Jotman – a blogger focused on human rights issues in Thailand and Burma
• Daudi Were – an organizer of African bloggers
• Dr. Kumi Naidoo – head of GCAP and contributor to the Huffington Post
• Cheryl Conte from Jack and Jill Politics
• Enda Surya Nasution – a noted leader in the Indonesian blogging community
• Rui Chenggang – an economics broadcaster from China with an audience, according to G20Voice, of 13 million viewers every evening on CCTV
• Richard Murphy – a blogger specialized in Tax Havens

Karina Brisby, G20Voice project founder and Digital Campaigns Manager, Oxfam GB said: "The G20Voice project was inspired by the articulate, engaging and often outraged posts, tweets, podcasts and videocasts from bloggers all over the world about the current economic crisis and how that affects the issues they are passionate about such as poverty and climate change.

"We are seeing a huge increase in the number of people around the world using digital tools to inform themselves and then contribute to debates about the issues that affect their lives. G20Voice recognizes the importance of bloggers and gives them a unique opportunity to report back to their audiences direct from the G20 Summit itself."

Sphere: Related Content