The Clinton Bubble

The Clinton Bubble

Robert Scheer
April 29, 2009 - TruthDig.com

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Has Timothy Geithner ever had lunch with a non-megamillionaire who has lost his job or home because of the banking meltdown? I ask that question after reading the list of the treasury secretary's luncheon dates when he was head of the New York Federal Reserve, a list that the government was forced to provide in response to a lawsuit.

During those years when he was supposed to be supervising Wall Street, he supped most often in the top-echelon dining room of some bank or at the home of one of the financial moguls who created the mess that has now bankrupted billions throughout the world. One of his frequent luncheon buddies was Sanford I. Weill, who as chairman of Citigroup lobbied successfully for the reversal of key regulations that dated back to the New Deal era. That change permitted Weill's oligarchy to become "too big to fail."

Another preferred dining companion was Robert Rubin, who as Bill Clinton's treasury secretary pushed through Weill's favored deregulation-a disastrous "reform" that lies at the heart of the current mess-and who went on to become chairman of Citigroup, where he presided over a downfall of the company that required a $45 billion taxpayer bailout. Geithner had worked for Rubin at the Treasury Department, and it was Rubin who got him his job at the New York Fed and hooked him up with Barack Obama.

Geithner has since pushed the Obama administration to approach the banking crisis not in response to the needs of destitute homeowners but rather from the side of the bankers who are seizing their homes. Instead of keeping people in their homes with a freeze on foreclosures, he has rewarded the unscrupulous lenders who conned ordinary folks.

He still wants to give more money to Citigroup, which has just been found woefully short of cash by Treasury's auditors, and has not stopped Fannie Mae, Freddie Mac and some other big banks ostensibly under government influence, and indeed sometimes ownership, from recently ending their temporary moratoriums on housing foreclosures. Geithner has been in the forefront of coddling the banks in the hopes that welfare for the rich will trickle down to suffering homeowners, but that has not happened.

As The New York Times revealed this week in a devastating exposé of Geithner's record: "An examination of Mr. Geithner's five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk-taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street's giant financial institutions. His actions, as a regulator and later a bailout king, often aligned with the industry's interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records."

Most revealing was the Times' discovery that Geithner shocked a meeting of top government officials, convened by then-Treasury Secretary Henry M. Paulson to deal with the financial crisis, when "[h]e proposed asking Congress to give the president broad power to guarantee all the debt in the banking system. ... "

Now I know that the conventional wisdom among Democrats is that the Clintonistas were wildly successful in running the economy when they had their turn, and that Rubin and his protégés Lawrence Summers and Geithner deserve a lot of the credit. But that view is dead wrong. The seeds of the current economic chaos were planted in those years, in which Wall Street lobbyists were given everything they wanted in the way of radical deregulation, and hence was born the madcap world of credit swaps and other unregulated derivatives.

The result was a Clinton bubble, which saw the rise of a new superrich class that vastly skewed income distribution in favor of what was termed the "working rich" by Emmanuel Saez, who deservedly just won the top prize for young economists, the American Economic Association's John Bates Clark Medal. Members of the "working rich" are well represented in the top 1 percent of income "earners," who, according to a study by Saez, "captured about half of the overall economic growth over the period 1993-2006." The record is clear that from the first year of the Clinton reign, the new class of superrich, including many Wall Streeters, benefited as much as the other 99 percent of the nation's population did from the policies that Clinton put in place and George W. Bush accelerated.

To add salt to the wounds of those left out of the bubble, the Clinton administration summarily ended the federal poverty program in the name of a so-called welfare reform that "devolved" programs for the poor to the tender mercy of the states. The meanness derby between the cash-strapped states is on, and the poor, a category that includes a growing number of folks who only recently were judged "middle class," are abandoned.

What is involved here is an extreme case of government-condoned "moral hazard" offering outrageous compensation to the superrich for screwing up royally. Where is the socially conscious Obama we voted for? E-mail him and ask.

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Robert Scheer is editor of Truthdig.com and a regular columnist for The San Francisco Chronicle.

Money for Nothing

Money for Nothing

Paul Krugman
April 26, 2009 - New York Times

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On July 15, 2007, The New York Times published an article with the headline "The Richest of the Rich, Proud of a New Gilded Age." The most prominently featured of the "new titans" was Sanford Weill, the former chairman of Citigroup, who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.

Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.

All of which explains why we should be disturbed by an article in Sunday's Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.

Why is this disturbing? Let me count the ways.

First, there's no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.

Remember that the gilded Wall Street of 2007 was a fairly new phenomenon. From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy's wheels turning.

So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it's hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.

Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of "good" financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?

Still, you might argue that we have a free-market economy, and it's up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It's a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a "welfare."

I'm not just talking about the $600 billion or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.

One can argue that it's necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn't just outrageous; it's dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we're seeing similar rewards offered to people who can play their risky games with federal backing.

So what's going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren't plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can. They're making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it's eat, drink and be merry, for tomorrow you may be regulated.

Or maybe not. There's a palpable sense in the financial press that the storm has passed: stocks are up, the economy's nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.

We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people's money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.