the wall street-washington complex is alive and well

Apologies for the sporadic blogging of late. I’ve been travelling a fair amount and I also wrote a piece for CNBC.com on the Five Ways to Spot a Dead Company Walking.

Two important and closely connected events took place in the world of finance since my last post. First, former Fed chair Ben Bernanke announced that he was taking a job as an “advisor” at the massive hedge fund Citadel Group. Then the stock of Goldman Sachs hit $200 for the first time since January of 2008. You might not think these things are related, but to me, they’re inextricably linked–and extremely dispiriting.

More than half a century ago, President Eisenhower warned the nation about the burgeoning Military-Industrial Complex. That monstrous public-private hybrid now sucks up more than half of all discretionary spending. But these recent events prove that the Wall Street-Washington Complex might be even more dangerous.

Seven years after the Great Recession brought the world’s financial system to its knees, the stock market has rallied intensely thanks to Bernanke’s former shop, the Federal Reserve, keeping interest rates at zero for seven (!) years and pouring unprecedented monetary stimulus into the system via the purchase of over $4 trillion dollars in Treasury and mortgage debt.  This has done little to grow the economy for most Americans but it has enriched Wall Street operators like Citadel, Bernanke’s new employer, in a major way. Citadel also benefited from the bailouts engineered by Bernanke and former Treasury Secretaries Henry Paulson and Tim Geithner. Geithner landed a lucrative job on Wall Street, too, despite having no prior experience in the investment business.

If you think these firms are hiring former government honchos for their knowledge of the markets, I’ve got a nice orange bridge to sell you in San Francisco. They’re obviously doing so to capitalize on their ongoing connections to those still in positions of power. Where I come from, that’s called inside information.

As corrupt as it is, the revolving door between government and Big Finance might be acceptable–if it actually helped most Americans. But the powerbrokers in the public and private sectors only seem interested in taking care of themselves and each other. It’s a small club–like many of their compatriots on Wall Street, Bernanke, Geithner and Paulson all went to Ivy League schools*–and if you don’t belong to it, you just don’t matter that much to them. The proof of this is in the pudding, and by the pudding I mean the atrocious economic numbers we’ve seen since the financial crisis. While rich investors have gotten fat on our liquidity-choked stock indexes, real wages have been stagnant, job growth has been anemic at best, and the labor participation rate recently hit a 50 year low of close to 62 percent. That’s shameful.

In each of the last six years, the US has grown below three percent. Compare that to the eight years when Bill Clinton was president, when the slowest annual growth exceeded three percent.  More amazing is the fact that during Clinton’s last four years we had four balanced budgets, something nobody should expect to see again. Since 2008 our nation’s debt has ballooned to over $18 trillion, yet growth has been tepid. Why? Firstly, Mr. Obama has probably hurt growth with tax increases. But possibly a bigger explanation is the fact the 2008/2009 bailouts disproportionately protected some of the worst managed companies in American history. Specifically, the major New York investment banks remained intact. The one exception was the mess called Lehmann Brothers, which did file Chapter 11 before its carcass was consumed by Barclay’s. The other four banks richly deserved a similar fate. The biggest and baddest of those, of course, is Goldman Sachs–the firm that Henry Paulson ran before becoming Treasury Secretary and the firm that just saw its stock top $200 for the first time since before the crisis.

It pays to have friends in high places–and it really pays to have friends in high places who depend on you for a large chunk of their personal wealth. Paulson sold almost $500 million worth of Goldman common stock before taking office, but tens (and perhaps hundreds) of millions more in options and restricted shares almost certainly remained in a blind trust while he was deciding where to direct billions in taxpayer money.

Without the unprecedented inventions of Paulson, Geithner, and Bernanke, Goldman and the other big Wall Street banks were facing a possible bankruptcy filing, in which each firm’s stock price likely would had been zeroed out in the ensuing reorganization. If that had happened, they would have seen their market share captured by better managed and more nimble upstarts, and those new firms would have injected much more growth and enthusiasm into our financial system. Those newcomers also would have had every incentive to avoid risking a major crisis again. What incentive do Goldman and their peers have to check themselves now? None, of course. They know they can make high-risk, high-reward plays, because they’re almost guaranteed to be bailed out again if they go south. They’re in the club, after all. And you’re not.

* A lot of people don’t realize that the combined undergraduate enrollment of all the Ivy League schools is around 60,000 people, about the same amount as the total enrollment at Ohio State University.


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