July 20, 2009
Last week’s news that Goldman Sachs reported $3.44 billion in earnings for the second quarter of 2009 provoked widespread outrage that was rather hard to avoid. Even Jon Stewart saw fit to provide his viewers with an informative audio-visual presentation concerning the role of Goldman Sachs in our society. Allan Sloan pointed out that in addition to the $10 billion Goldman received from the TARP program, (which it repaid) Goldman also received another $12.9 billion as a counterparty to AIG’s bad paper (which it hasn’t repaid). Beyond that, there was the matter of “the Federal Reserve Board moving with lightning speed last fall to allow Goldman to become a bank holding company”. Sloan lamented that despite this government largesse, Goldman is still fighting with the Treasury Department over how much it should pay taxpayers to buy back the stock purchase warrants it gave the government as part of the TARP deal. The Federal Reserve did more than put Goldman on the fast track for status as a bank holding company (which it denied to Lehman Brothers, resulting in that company’s bankruptcy). As Lisa Lerer reported for Politico, Senator Bernie Sanders questioned whether Goldman received even more assistance from the Federal Reserve. Because the Fed is not subject to transparency, we don’t know the answer to that question.
A commentator writing for the Seeking Alpha website under the pseudonym: Cynicus Economicus, expressed the opinion that people need to look more at the government and the Federal Reserve as being “at the root of the appearance of the bumper profits and bonuses at Goldman Sachs.” He went on to explain:
All of this, hidden in opacity, has led to a point at which insolvent banks are now able to make a ‘profit’. Exactly why has this massive bleeding of resources into insolvent banks been allowed to take place? Where exactly is the salvation of the real economy, the pot of gold at the end of the rainbow of the financial system? Like the pot of gold and the rainbow, if we just go a bit further…..we might just find the pot of gold.
In this terrible mess, the point that is forgotten is what a financial system is actually really for. It only exists to allocate accumulated capital and provision of insurances; the financial system should be a support to the real economy, by efficiently allocating capital. It is entirely unclear how pouring trillions of dollars into insolvent institutions, capital which will eventually be taken out of the ‘real’ economy, might facilitate this. The ‘real’ economy is now expensively supporting the financial system, rather than the financial system supporting the real economy.
The opacity of the Federal Reserve has become a focus of populist indignation since the financial crisis hit the meltdown stage last fall. As I discussed on May 25, Republican Congressman Ron Paul of Texas introduced the Federal Reserve Transparency Act (HR 1207) which would give the Government Accountability Office the authority to audit the Federal Reserve as well as its member components, and require a report to Congress by the end of 2010. Meanwhile, President Obama has suggested expanding the Fed’s powers to make it the nation’s “systemic risk regulator” overseeing banks such as Goldman Sachs, deemed “too big to fail”. The suggestion of expanding the Fed’s authority in this way has only added to the cry for more oversight. On July 17, Willem Buiter wrote a piece for the Financial Times entitled: “What to do with the Fed”. He began with this observation:
The desire for stronger Congressional oversight of the Fed is no longer confined to a few libertarian fruitcakes, conspiracy theorists and old lefties. It is a mainstream view that the Fed has failed to foresee and prevent the crisis, that it has managed it ineffectively since it started, and that it has allowed itself to be used as a quasi-fiscal instrument of the US Treasury, by-passing Congressional control.
Since the introduction of HR 1207, a public debate has ensued over this bill. This dispute was ratcheted up a notch when a number of economics professors signed a petition, urging Congress and the White House “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.” An interesting analysis of this controversy appears at LewRockwell.com, in an article by economist Robert Higgs. Here’s how Higgs concluded his argument:
All in all, the economists’ petition reflects the astonishing political naivite and historical myopia that now characterize the top echelon of the mainstream economics profession. Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy — its monetary order — cannot produce money and set interest rates better than free-market institutions can do so. It is high time that they extended their education to understand that central planning does not work — indeed, cannot work — any better in the monetary order than it works in the economy as a whole.
It is also high time that the Fed be not only audited and required to reveal its inner machinations to the people who suffer under its misguided actions, but abolished root and branch before it inflicts further centrally planned disaster on the world’s people.
Close down the Federal Reserve? It’s not a new idea. Back on September 29, when the Emergency Economic Stabilization Act of 2008 was just a baby, Avery Goodman posted a piece at the Seeking Alpha website arguing for closure of the Fed. The article made a number of good points, although this was my favorite:
The Fed balance sheet shows that it injected a total of about $262 billion, probably into the stock market, over the last two weeks, pumping up prices on Wall Street. The practical effect will be to allow people in-the-know to sell their equities at inflated prices to people-who-believe-and-trust, but don’t know. Sending so much liquidity into the U.S.economy will stoke the fires of hyperinflation, regardless of what they do with interest rates. In a capitalist society, the stock market should not be subject to such manipulation, by the government or anyone else. It should rise and fall on its own merits. If it is meant to fall, let it do so, and fast. It is better to get the economic downturn over with, using shock therapy, than to continue to bleed the American people slowly to death through a billion tiny pinpricks.
So the battle over the Fed continues. In the mean time, as The Washington Post reports, Fed Chairman Ben Bernanke takes his show on the road, making four appearances over the next six days. Tuesday and Wednesday will bring his semiannual testimony on monetary policy before House and Senate committees. Perhaps he will be accompanied by Goldman Sachs CEO, Lloyd Bankfiend, who could show everyone the nice “green shoots” growing in his IRA at taxpayer expense.
My Friend Lloyd
July 30, 2009
If you came to this site hoping to find a favorable article about Lloyd Blankfein, I feel sorry for you.
I just returned from a visit to my old home town, a little place up north called Chicago. Whenever I go back there, I like to check in with a woman I consider “The First Lady of Chicago Music”: Lonnie Walker — musician extraordinaire and owner of The Underground Wonderbar. If you enjoy blues and jazz, it doesn’t get any better than what you will hear from Lonnie and her band.
Back in the early 1980s, my then favorite “First Lady of Music” in Chicago was a nightclub DJ named Suzanne Shelton. She recently organized a 30th anniversary reunion party at the club where she worked: a bar named Neo. Back during the bar’s early years, Suzanne was cute. Today she is beautiful. At the party, she introduced me to her son, who is now just two years younger than my age when I first started hanging out at Neo in June of 1980. The nightclub eventually got a bit of exposure in a Robert Altman film entitled: The Company. The movie was about a dancer in the Joffrey Ballet (portrayed by Neve Campbell), who held a second job serving drinks at Neo. As the film reveals, one enters Neo by walking down a small alley running west from Clark Street. During the early years of the club, the alley walls were festooned with graffiti. One of the spray-painted postings was the statement: “Neo = Home”. For many of us, it certainly did. I met a few girlfriends there during the ten years after my introduction to the place. The last girlfriend I met there became my companion for five years. Those of us who returned to Neo last Friday, rekindled long-lost friendships and reminisced over the valuable relationships we had developed with so many people, some of whom no longer walk among us. I wasn’t the only one who flew in from out of town for the event. The club’s original manager, Tom Doody, now owns a resort hotel in Playa del Carmen, Mexico with his wife, Pamela. It’s called The Blue Parrot.
One old friend I enjoyed seeing was a fellow named Lloyd Bachrach. Lloyd started coming to Neo in the second half of the eighties and was recognized there as “The Guy with the Cane”. I remember many occasions when Lloyd would approach the DJ booth to chat with his old friend, Jeff Pazen, who spun records there. (Records were on the verge of becoming obsolete at that point). As Lloyd would approach the DJ booth, the faces on the kind-hearted people standing around that area revealed a degree of concern and an apparent decision to help convey Lloyd’s music request to the disk jockey. Before anyone could move, Lloyd placed his cane on the ledge atop the five-foot wall in front of the booth, grabbed the ledge, pulled himself up and quickly maneuvered around, 180 degrees, sitting down in front of Jeff to discuss girlfriend issues or whatever other subject was of interest at the time. The faces of the would-be Good Samaritans all revealed the same reaction: “Uhh … I don’t think I could do that.” For my part, I would stare down at my Cuervo Gold and tell myself: “I know I can’t do that — despite the assurances to the contrary coming from the stuff in this glass.” Rather than thinking of himself as disabled, Lloyd always perceived himself as differently-abled. This attitude eventually led him to become a motivational speaker, operating a business called: Yes You Can. Lloyd’s website features a video telling his life story. Given the current economic situation, I think Lloyd’s story is an important one, providing inspiration to cope with the adversity we are all experiencing, to one degree or another. His video reinforces the notion that we’re all hard-wired — perhaps by something genetic — to adapt, survive and thrive. The “survival instinct” is just at the core. The baby abandoned in the dumpster, who lives for a few days until someone finds her — the short kid who gets picked on by bullies but goes on to get a black belt — and the alcoholic on the curb, who sobers up to pull his life together on his own — they all find something within themselves to take control over their lives and succeed. I’m reminded of the old “nature vs. nurture” debate. When one lives in an adverse situation, can whatever setbacks he or she encounters ultimately be overcome by something in that individual’s nature? Lloyd’s approach seems to allow one to reach in and find whatever that is — to “unlearn” whatever mental processes became obstacles to one’s well-being and success. This process should be important to us — both as individuals and as a society.
At a time when America’s largest corporations rely on mass layoffs to create the illusion of prosperity for their quarterly earnings reports — it’s nice to know that there are people like Lloyd Bachrach, who help others to cultivate their better instincts. I’m proud to be his friend.