Friday, March 20, 2009

GADFLY
by Mort Malkin

Investment versus Furious Money

President Obama has chosen economics as the first issue among equals to address. The wars can wait. So can health care, education, and a new lapel pin with a Betsy Ross flag. The cause of the economic crisis is the years of collusion between the government and Wall Street. The investment community, so honorable, would have us believe it would regulate itself voluntarily. The investment banks would create money by inventing new derivatives such as collateralized debt obligations, credit default swaps, and tranches. The autonomous (unregulated) rating agencies — Standard & Poor’s, Moody’s, and Fitch — would applaud with AAA ratings. Hedge funds and private equity funds were considered beyond oversight. Privacy rights, you know. The real estate industry and mortgage brokers convinced many would-be homeowners to sign adjustable rate mortgages, below market rates to start and way higher later. But not to worry — by the time the mortgages reset, the property will be worth so much you can renegotiate to a real mortgage. The late night political comedians made quips about NINJA mortgages: No income, No job, Accepted! The investment banks would buy a bunch of mortgages, tie them in bundles with other loans and sell them to savvy investors. Handsome commissions (lower case c) accompanied every transaction. Where did all the money go? Don’t worry, no one in Washington will have the courage to ask for the bailout money back to use in paying some of the principal of inflated mortgages now worth more than the value of the houses.

The reckoning started a couple of years ago — people would pay only so much for a home. House prices started to fall. Adjustable mortgages went to reset, and the banks would not renegotiate. People either stopped paying the loans, or just walked away from homes that were worth less than the outstanding amount still due (underwater mortgages). The banks had to declare these loans toxic and write them down on their balance sheets. But the economy was strong. President Bush said so. Candidate McCain said so. Then, in one swell foop, Secretary Henry Paulson, recently the CEO of Goldman Sachs, asked Congress to give him $700 billion to save the economy, but don’t ask what he’d do with the money.

In every administration, money has run the show. For Reagan, the first order of business was a) to undo the regulations that had limited a free-for-all for Wall Street and b) to reduce the taxes “investors” pay on capital gains (money made while sleeping). Clinton was reminded that “It’s the economy, stupid.” He signed the repeal of the Glass-Steagall Act that had kept banks in their proper place. After repeal, banks of all kinds could pursue business of all kinds. The Bush-Cheney (B-C) administration included monkey business in the mix. Do you remember that right after 9-11 George asked Americans to make sacrifices? He asked us all to go shopping. Responsible investment lost out to furious money. Even Fanny Mae and Freddie Mac were invited on the merry-go-round.

Now, we’re in 2009, and everyone is getting a slice of the taxpayer pie while Secretary of State Clinton thanks China for buying US Treasury Notes. As new Secretary of the Treasury Tim Geithner doles out the billions and receives preferred (non-voting) stock in the investment banks, some pundit voices are raised that the banks are being nationalized. The Obama people assure us (and Republican members of Congress) that the government is not going to run the banks. We must keep our private bankers on, the very ones who got us into all the trouble in the first place. The Milanville Poets, UnLtd quickly pointed out that the CEOs of the investment banks were not bankers but salesmen (hired at preposterous salaries) whose expertise was in deal making & mergers, in developing new “investment instruments” and in influencing the government to repeal some laws & pass other legislation in their favor. It might not be a bad idea for the government — the de facto owner of the banks on whom they lavish so much money — to consider those bank executives as government employees at government wages.

The privateers (pirates blessed by Alan Greenspan) have convinced the government that they must be kept at the helms of AIG, Merrill Lynch, CitiBank, Morgan Stanley, Goldman Sachs … because no one else is available. The Gadfly Revelry & Research gang says it knows of a few Nobel Prize winners in Economics who presently earn salaries as professors and who might be amenable to government employ. We could start with Paul Krugman (Princeton) and Joseph Steiglitz (Columbia). Then, the Prince of the Kingdom of the Dismal Science is Amartya Sen (Trinity College at Cambridge, UK). Prof. Sen, like an Ancient Greek Philosopher, gave us manuscripts such as “On Economic Inequality” and “On Ethics and Economics.” What a choice he would be to replace Lawrence Summers and to lecture Obama on matters that matter.

There was a time long ago that the rich owned stocks & bonds and the workers put their savings in a savings bank. Then, sometime in the middle of the 20th century Wall Street and Madison Avenue convinced us to take stock in America, to invest in the Fortune 500. What could be safer? Merrill Lynch Pierce Fenner and Smith, advised us that the surest way to make money was to hold stocks long term. Gradually, free enterprise and greed found proponents across a few administrations and changed the focus from long term investment to quick profits. Day trading — buying stocks one day and selling them the next — became an honest way to make a living. Day trading led to hourly trading and, of late, to computer trading. Stock & bonds were joined by gaming tables of options, commodities, and currencies at the casino.

It is curious that last summer’s gas price spike was blamed on faceless speculators, not OPEC, not demand from China & India, not Exxon-Mobil. A simple question — “Where do the speculators work?” — told us who they are. Wall Street Traders. It seems time for rules & regulations and limits to money making at the drop of computer driven phone call. The disparity between the incomes of the rich and poor asks not for buying shares of General Electric or General Motors but for investing in the General Theory of Relativity.

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