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Wall Street Is Still Playing the Odds

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Posted on Sep 14, 2009

By Eugene Robinson

It’s been a year since the financial system collapsed like a botched soufflé, and the sense of acute crisis has eased. The wizards of Wall Street are raring to get back to business as usual—and if we let them, we’ll have only ourselves to blame when the next meltdown comes.

The Obama administration and the Federal Reserve get too little credit for skillfully managing this terrible recession in a way that has kept it from turning into an all-out catastrophe. Too-big-to-fail financial institutions were put on life support or eased into oblivion in creative ways that involved massive injections of taxpayer funds—but prevented massive defaults. The auto industry, a victim of collateral damage, was expensively defibrillated and once again has a pulse. Nearly 100 banks have failed so far this year—compared with 25 in 2008 and just three in 2007—but depositors’ money was saved. 

But in the process, the behemoth financial firms have gotten even bigger. And now that the economy has begun to revive, the stock market is getting happy again. I’m as pleased as anyone else to see a rising Dow, but somebody needs to slap the incipient grin off Wall Street’s face.

For one thing, the rest of the country is hardly smiling—not yet, at least. The “good news” is that “only” 200,000 or so Americans are losing their jobs each month, instead of the more than 700,000 monthly job losses we were seeing earlier this year. Unemployment is at 9.7 percent and still rising, albeit more slowly, and may peak above 10 percent. The stock market rally is cold comfort to a worker who just got a pink slip.

And many economists believe there’s another blow coming. The residential real estate market may be bottoming out, they say, but the air still has to be let out of commercial real estate. At this point, the temptation is to ask what difference another trillion-dollar problem would make. But we’d feel it, and not in a good way.

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I have faith, though, that the crisis managers at Treasury and the Fed will minimize whatever pain we still must suffer. What I don’t have faith in is the willingness of President Barack Obama and his team to contemplate, much less execute, any kind of fundamental change in the way Wall Street works.

Even with the reforms the president is proposing, we will still have a situation in which the tail wags the dog—the tail being the financial system and the dog being the actual economy. Wall Street’s theoretical role is to allocate capital most efficiently to the companies that can make the best use of it. Wall Street’s actual role is more like that of a giant casino where the gamblers are rewarded for taking outrageous, unconscionable risks with other people’s money. If the bets pay off, the gamblers win. If the long-shot bets turn out to have been foolish, we’re the ones who lose.

“We will not go back to the days of reckless behavior and unchecked excess,” Obama said Monday in his speech on Wall Street. “The old ways that led to this crisis cannot stand.”

Obama said his proposed program of regulatory reform is based on fostering greater “transparency and accountability.” No one can argue with that. But Wall Street’s biggest failings are transparent enough for all to see. The Masters of the Universe created instruments such as derivatives and credit-default swaps, and encouraged the market in these exotica to grow bigger than the market in actual stock in actual companies. Financial firms spent millions of dollars to develop state-of-the-art software that could buy and sell securities—the real kind or the exotic kind—a split second faster than a competitor’s software could, thus generating a tiny profit on each sale. How does any of this channel capital to its highest and best use? How does any of this benefit the economy?

Compensation is the marquee issue—the unimaginable amounts of money Wall Street’s alleged best and brightest paid themselves for taking stupid risks with our money. I don’t see how this materially differs from theft, and I heard nothing from Obama about trying to claw any of this money back. But executive pay is really a sideshow.

The main event is making Wall Street serve the economy again, rather than the other way around. Putting more security cameras around the casino isn’t nearly enough.

Eugene Robinson’s e-mail address is eugenerobinson(at)washpost.com.

© 2009, Washington Post Writers Group


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By Property for sale Phuket, May 31, 2011 at 11:29 pm Link to this comment

I echo the sentiments. This is a fabulous piece of writing. Oh and we now mid way through 2011 and the crisis has now settled into a reality. Sure there is some movement, though for many the glory days are over and will never be seen again.

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By Sam House, January 13, 2011 at 12:09 am Link to this comment

That’s what I love most about Truth Dig; no matter what I read here I am never surprised. What astonishes me are the righteously indignant commenters who are shocked and outraged by what are patently obvious recidivist behaviors. Oh, so wall street, who were not punished in the least for making billions on a house of cards gambling scheme (they didn’t even have their money taken away, in fact they were bailed out with trillions more) are up to their old schemes? So publicly shaming the anonymous billionaires didn’t work? Shocked! Shocked I am!

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By bogi666, September 16, 2009 at 8:58 am Link to this comment

The obscene bonuses paid on Wall St. are based on short term, 3 month results without any consequences for bad CEO performance. This is the Corporate mindset, 3 months. These bonuses should be subject to higher tax rates including unlimited Social Security contributions. The individual taxpayers bailout of the CORPORATE WELFARE KINGS is pretty much the end of the Republic and the devolution into Fascism, with NAZISM also on the rise. This is the element which includes racism. Fascism by definition according to its founder Mussolini is when the government collects taxes for the purpose of DOLING IT THE TAX MONIES TO THE CORPORATE WELFARE KINGS.

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By glider, September 15, 2009 at 9:19 pm Link to this comment

Hey Jim Yell,
Thanks for your lucid post. I am happy to see you have not been “fooled again”.  Take care bro.

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By glider, September 15, 2009 at 5:20 pm Link to this comment

Lou,
“they were “too big to fail” in 2008, how are they going to fail moving forward if they are bigger TODAY??  This talk about “regulation” is meaningless bullshit”

Yep, the new truism is “too big to regulate”, and has been for some time.  We are living in an era where in one breath bought politicians justify massive multi-trillion dollar ripoffs of the people by declaring corporations “too big to fail” and then do nothing about their own “too big” acknowledgement.  Much of the public wealth transfer happens over a weekend, and yet we are treated to year long spectacles regarding spending a buck on public welfare.  Meanwhile there is no regulation, and what finally passes will be ineffective congressional committee lobbyist mandated reform solely directed at placating a stupified public. You can thank your corporate owned mass media, your corporate infiltrated government, and your corporate bought off POTUS master con-man for it all.  Witness Obama’s partner, scumbag Gietner shouting four-letter explicatives at those that oppose giving the Fed banking cartel yet more power.  Fine job they have done, why would anyone complain?  Government anti-trust responsibility is dead as we are deep into a state of Corporatocracy now.  Obama won the 2008 the advertising campaign of the year.  Welcome to the new United States of America.  Do you feel betrayed?  Are you pissed off yet?

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By Fat Freddy, September 15, 2009 at 4:26 pm Link to this comment

Although, in theory, Ms Bair is correct in wanting to break up the big banks, her actions at the FDIC are the opposite. The FDIC is actually creating more big banks. Take for example the case of failed bank Colonial BancGroup Inc. of Montgomery, Alabama. Instead of splitting up the assets, and auctioning them off at “fire sale” prices, she allowed Winston-Salem, N.C.-based BB&T Corp. to just take over all of their assets and branch operations in a back room deal. This is just an example of more consolidation.

And more regulation is not the answer either. Look at it this way: If there’s a couple of guys standing on the street corner selling drugs, and a cop comes along and chases them away, what will they do? Why, they’ll move to another street corner, what else?

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By msgmi, September 15, 2009 at 1:29 pm Link to this comment
(Unregistered commenter)

Wall Street should be allowed to leverage any amounts without regulation and move financial instruments in whatever direction they see fit; that is, as long as they use their own profits to roll the dice with their own money and not that of the clientelle whom they keep suckering at every turn.

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By Jim Yell, September 15, 2009 at 12:42 pm Link to this comment
(Unregistered commenter)

I saw this coming decades ago as jobs were moved out of the country to avoid the true cost of production. Avoid the environmental controls, avoid paying living wages, avoid paying the cost of infrastructure and as a by product get rich easy, have more money and let labor starve. That is what this economy has been about.

It was enabled by banks giving huge amounts of money to corporate raiders who paid the money back from hostile takeovers by dismantling factories and shipping them to 3rd World Companies, by bribing our elected officials not to regulate money, not to block hiding wealth in low tax countries, not to control our borders and to allow the Military Industrial Complex to highjack our military in their grabs for resources without paying the people from whom they were taken.

As this continues the very idea of America is being killed by the right, the very ones who talk the loudest about patriotism and so quickly forget to take care of America First. Treason is in this country and it wears a tie and lives in outrageous splendor.

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By Lou, September 15, 2009 at 12:23 pm Link to this comment
(Unregistered commenter)

How about this irrefutable fact to debunk the Big Lie:  The banks are now more CONSOLIDATED THAN EVER, if they were “too big to fail” in 2008, how are they going to fail moving forward if they are bigger TODAY??  This talk about “regulation” is meaningless bullshit.  The fact of the matter is that the big institutions are now bigger than ever, flush with taxpayer cash, flush with case with fees and overdrafts, and with hundreds of smaller banks technically insolvent, who do you think will pick up their pieces?

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By Louis Starks, September 15, 2009 at 10:17 am Link to this comment
(Unregistered commenter)

G. Anderson hits the nail on the head.  How foolish, indeed.  The propagandists want you (us) to believe in the fairy-tale of a JOBLESS RECOVERY.  Last I checked the US GDP was based upon 70% consumer consumption, not manufacturing or other real “economies.”  As the jobless rate remains at or above 9% FOR THE NEXT 3 TO 4 YEARS, then what?  You can be sure Pravada USA (aka the “media”) won’t broadcast stories of pain and hardship, though they will whip up the pain and hardship of the RW Authoritarians. 

Essentially we’re toast.  There is little to no proof, concrete evidence, that the USA is competent and capable of solving it’s problems, aside from the glaring greed and inhumanity of the corporations.  Our “political” class is clueless, the 4th Estate a PR spokesperson for the corps.  Welcome to USA version of Weimar Republic.

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By P. T., September 15, 2009 at 9:59 am Link to this comment

Essentially, what Wall Street wants to do is to continue to gamble, using the taxpayers’ money to back it up.  For the bankers, it is a heads I win, tails you lose situation.

At the root of the problem, I believe, is a systemic crisis:  a lack of profitable investment opportunities in the stagnant, real economy.

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By Reality, September 15, 2009 at 9:16 am Link to this comment
(Unregistered commenter)

Much is now made of Goldman Sachs paying back part of its bailout money, but forgotten is the $12.9 billion that Goldman got as its cut of the $180 billion AIG payoff. That is money that will not be paid back.

Make Goldman Sachs pay, with bonuses totaling $6 billion this year, they can afford to pay in full or on a 5-10 yr. installment plan.

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By Howie Bledsoe, September 15, 2009 at 8:53 am Link to this comment
(Unregistered commenter)

This guy is a tool.
The big bizz got us into this mess to begin with.
shoving money at them every time they mess up is like rewarding a child for eating too much sugar by giving it a candy bar.  And of course, each time it happens, the big bizz consolidates it´s power even more, devalueing the $ ever more, and destroying healthy competition of banking and investment firms to monopolizing the power structure.
these guys are lower than low. If our kids have learned anything from all of this, it is this;
there is no traitor in a global reality.

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By bane-richter, September 15, 2009 at 7:36 am Link to this comment

(For superior analysis and articles frequently written from a viable authority’s perspective, visit Counterpunch.)
Another round of stimulus might be what’s needed for that pesky employment problem. But since we have a Republican President in office and a drooling, obedient press, it’s better to blight parts of the country and allow the wealthy to regain confidence in their 401ks and the use of their credit cards and continue the lie of the “free market”.

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By Fat Freddy, September 15, 2009 at 5:33 am Link to this comment

Let me make this clear. The big banks and investment firms were investing far too much money in things like derivatives and exotic securities. So, where was all that money coming from that they were investing? You and me? Only partially. A lot of it was coming directly from the Treasury and the Federal Reserve. Whenever the Treasury prints money, or the Fed loans money at an interest rate below the natural market value (interest rate), it is inflationary. Anybody remember the 1970s? That’s what is in our future.

And then, after the banks lost all of that money in risky investments, what does the Fed do? It gives them even more money (TARP). Talk about throwing good money after bad. Perhaps, you could say, throwing bad money after bad. So, the banks and investment firms can now operate with no fear of bankruptcy (at least the big ones can). Not only that but, the big banks can expect to absorb all of the smaller banks that can’t keep up.  And many of the regulations currently in place, place huge barriers to new, start up banks, while benefiting the larger ones.

There are many in the government that feel that by helping these big banks and corporations, they are helping you and I. This could not be further from the truth. By pumping more and more money into the economy they are, in effect, devaluing the money that you and I have. Meaning, our money will buy less and less goods and services.

In my opinion, the big banks that that are over-leveraged should be immediately split up and their assets “auctioned off” to the smaller banks and start ups. The banks that cross a certain threshold of “too big to fail” should be immediately forced to divest a significant portion of their investments.

Radical? No, not really. This is what is being recommended by FDIC Chairperson Sheila Bair, and The Independent Community Bankers of America (ICBA).

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By Ouroborus, September 15, 2009 at 4:40 am Link to this comment

Oh boy, I mean, um, er, ah, well, really, erm; never
mind!

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Fat Freddy's avatar

By Fat Freddy, September 15, 2009 at 4:30 am Link to this comment

I have faith, though, that the crisis managers at Treasury and the Fed will minimize whatever pain we still must suffer… ...and encouraged the market in these exotica to grow bigger than the market in actual stock in actual companies.


These two statements totally contradict each other. You say you have “faith” in the Fed and Treasury, but you don’t seem to understand that it was the monetary and fiscal policies of these two that were responsible for the mess in the first place. Who do you think “encouraged the market”? There is no way to encourage the market more than pumping billions of dollars of cheap (as low as 1%) money into the economy. The big banks benefited the most from all of that cheap money. They took all of that cheap money, and instead of investing it in real projects, they invested it in exotic securities and derivatives. Plus, they wrote [and bought] a ton of residential mortgages thet never should have written in the first place. There was not enough “real” investments for the banks to invest in. It’s a type of inflation. Too much money, chasing too few goods and services sound investments. And add to that, the practice of fractional reserve banking. So tell me, how can you really trust the Fed? If Obama really supports transparency, he can start in his own back yard, by supporting bills in the House (Ron Paul), and the Senate (Bernie Sanders) to audit the Fed.

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By ardee, September 15, 2009 at 2:48 am Link to this comment

Without investigations and criminal charges where applicable we are left with crooks who made many,many millions while crashing our economy. Why would they not do it again?

In the same vein, the crooks in the Bush administration need the same treatment or another administration will see fit to further corrupt our laws.

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By G.Anderson, September 14, 2009 at 10:43 pm Link to this comment

How foolish.

To believe that this is over, that the same people who caused this, the ones who have been given almost a trillion dollars in tax payer money have averted a financial disaster. 

According to the economists who predicted this disaster, we are still at the beginning of at least 10 more years of far worse economic problems to come.

The collapse of comerical real estate, has been predicted from the start, along with a worsening of the mortgage disaster when a second wave of ARM’s reset, these new ARM’s already have a default rate higher than the last one. 

It’s likely that insiders will be selling again, just before this so called correction, once again gaming the system. They will also use this new bubble to try and kill financial reforms.

This whole country is skating on thin Ice, our government is a failure, because they won’t do what is necessary to fix things.

Confront and depose from power, the crooked corporations who are destroying us, until that happens we will continue to fall toward the bottom.

Because that is the bottom line, we have to chose between Democracy or Plutocracy, and if we don’t have the guts to do it, then this great experiment called The United States of America will cease to exist.

That’s what this has been about from the very beginning, a bare knuckle fight with the corporations for our very existance. Making bargains will bully’s never work, compromise and negotiation never works, you have to fight our you’ll loose. And if you lose you might as well start wearing a tube of vaseline around your neck on a chain. 

The corporations have been given everything they wanted since Reagan, and look what they did with it, they practically destroyed this whole country, and as long as they are in charge we will continue to head in that direction.

Our government has been decapitated, they are no longer in charge. No matter how much they huff and puff, and blow at the corporations it won’t change a thing.

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By LostHills, September 14, 2009 at 9:53 pm Link to this comment

The only sane thing is to let them fail when they make mistakes and put them in jail when they break the law. You can’t fix anything by giving them more money to make more mistakes with. Let these bloated dinausaurs crash and burn, and spend the public’s money putting folks back to work. The Obama administration has not fixed anything yet. They have been stupidly and criminally making things worse since January. We are sliding into another depression, and every dollar this administration has thrown at AIG, JP Morgan Chase, etc. has only served to grease the skids.

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