Wall Street Brings Class War to America?

The financial crisis is squaring up a new class struggle: The handful of financial elites versus the rest of us. Where’s our common interest? What’s good for them (a $10 trillion bailout) costs us jobs and public services, and deepens the public debt. Financial elites have effectively hijacked our economy and there will be hell to pay to get it back.

Beginning in the mid-1970s the twin policies of financial deregulation and tax cuts for the super-rich laid the groundwork for the rise of financial industry billionaires. We were told these policies would fuel an enormous investment boom that would cause all boats to rise. Not quite. Income certainly gushed to the top fraction of one percent. But then we entered the financial industry Twilight Zone: The super-rich accumulated so much money that they literally ran out of investments in normal industries that produced real goods and services. Wall Street, now a deregulated Wild West, rode to the rescue by creating all manner of new paper investment opportunities. Instead of buying a piece of a factory or company through stocks and bonds, you bought derivatives. Or you gave your money to hedge funds where you could “earn” outsized returns with little risk — just what the super-rich craved. Unfortunately, the entire enterprise was built upon layer after layer of leverage. The result was an unstable upside-down pyramid of “structured finance” balancing on a very narrow base of real tangible assets.

All of this worked just fine until it didn’t. You know the rest of the story. When housing prices stopped rising, these paper assets – the CDOs and all the rest – went up in smoke, incinerating the rest of the economy in the process. (Please see The Looting of America for an easy-to-read account.)

On their long way up, financial industry billionaires grabbed our economy by the cojones– and they’re not letting go.

via Les Leopold: Wall Street Brings Class War to America?.

via Les Leopold: Wall Street Brings Class War to America?.

Simon Johnson: Wall Streets Victory Lap

By now you have probably realized — correctly — that “financial reform” has turned into a victory lap for Wall Street.When they saved the big banks, with massive unconditional support both explicit and implicit over a year ago, top administration officials promised they would be back later to fix the underlying problems. This they — and Congress — manifestly have failed to do.Our banking structure remains unchanged, the rules will be tweaked at the margins, and the incentive and belief system that lies behind reckless risk-taking has only become more dangerous. The back story, if you can still stomach it, is in 13 Bankers.There is only one small chance for any sensible progress remaining — and you are about to see this crushed in conference by the supporters of unfettered big banks.Senator Blanche Lincolns proposal with regard to derivatives has much to commend it. A fiduciary duty for swaps dealers vis-à-vis customers would be entirely appropriate — in fact long overdue.Real time price reporting should also help regulators at least begin to understand what is driving market dynamics, for example around the May 6 “flash crash” — a point that Senator Ted Kaufman has also been making most forcefully.Legal authority against market manipulation would be greatly strengthened and there would be more protection for whistleblowers. And the kind of transaction that Goldman entered into with Greece — a swap transaction with the goal of reducing measured debt levels, effectively deceiving current and future investors, would become more clearly illegal. All of this is entirely reasonable and responsible — and completely opposed by the most powerful people on Wall Street.

via Simon Johnson: Wall Streets Victory Lap.

via Simon Johnson: Wall Streets Victory Lap.

Thinking About Financial Reform « The Baseline Scenario

More broadly, of course, all of these reforms add up to little more than “baby steps”.� The big mistake was made long ago, when the administration decided not to push the megabanks when they were politically weak (the argument of 13 Bankers).� This was only compounded and confirmed when Treasury and the White House came out against the Brown-Kaufman amendment.

As a result, the financial system will remain largely the same as it was before September 2008 – perhaps the megabanks will be slightly constrained in their activities, most likely not (at least for Goldman, JP Morgan Chase, and Morgan Stanley.)

As we argued in our start-of-the-year piece on Bloomberg, all of this sets us up for another boom-bust cycle, this time centered around emerging markets.� Savings will be recycled out of emerging markets through “too big to fail” banks and similar institutions in the US and some parts of Western Europe – generating debt-based capital flows back into other parts of those same emerging markets.

“China can only go up”, “Russia is back”, and “Brazil and India are now different” are the siren calls.� And of course, to some extent there is truth in this rhetoric – but the expectations are already becoming exuberant.

All great bubbles begin with a truly convincing shift in fundamentals.� And many of them are all kept going by reckless lending on the part of Citigroup and its competitors – remember emerging markets in the 1970s and 1990s, US commercial real estate in the 1980s, and US residential real estate in the last decade.

via Thinking About Financial Reform « The Baseline Scenario.

via Thinking About Financial Reform « The Baseline Scenario.