Great article this morning in the NYT by Frank Rich, “Fight On, Goldman Sachs!”, about Wall Street’s “sleazy role in the Great Crash of ‘08.”
Rich writes about “capitalism’s worst ‘innovation’ in our own Gilded Age: the advent of exotic, speculative ‘investments’ that have no redeeming social value,” and tells about trader John Paulson who in 2007 alone made over $10 million every day. Rich reports that, “the financial sector’s share of domestic corporate profits, never higher than 16 percent until 1986, hit 41 percent in the last decade.”
About the economic melt-down that cost the economy eight million jobs, Rich writes, “As many have said something is fundamentally amiss in a financial culture that thrives on ‘products’ that create nothing and produce nothing except new ways to make bigger bets and stack the deck in favor of the house.”
Magnetar is a hedge fund where, Rich tells, “Bankers who worked on Magnetar deals walked away with their huge bonuses well before disaster struck.: He quotes a program from a radio program by Ira Glass, This American Life, “Bankers made money even when they were buying things that eventually blew up the bank.”
The Glass program commissioned a Boardway Show song — ala “The Producers” — on how to become rich. It is well worth a listen here. Rich writes, “Go online, listen to it and laugh. But the fact remains that those who truly hurt America are laughing harder still, all the way to the bank.”
Still there is no real grass roots movement to bring fairness back to the marketplace or to undo much of the damage caused by the mortgage mess, where peoples’ home equity (often their entire life savings) were converted into fees for mortgage insiders, who were able to con both homeowners on the front end and investors on the back end. Part of this was the myth that we could finance a consumer economy on the inflation of home prices, rather than wages which have been stagnant or declining as ordinary peoples’ share of the wealth they produced have declined. A combination of perverse incentives in the front of large up front fees for originating loans regardless of their quality, and the ability to sell them “downstream” with impunity due to a deregulated marketplace, eventually lead to a “bubble” dynamic with everyone attempting to grab as much as they could before the inevitable crash occured.
I have been amazed with how little solidarity and empathy people have with their neighbors who are losing their homes in foreclosure, even though foreclosures bring down everyones property values and have gutted neighborhoods such as Santa Clara. Instead many blame the victims rather than the perpetrators. This lack of public support seems to have something to do with why the Obama administration has allowed its mortgage modification program to be so ineffective, and allowed the industry to try to game the system, delay or deny the certain losses for it and everyone else, and hope for some bailout or return to the old days. In the meantime the program frustrates everyone who deals with it and its expensive and aggravating machinery that mostly denies help. In addition the absence of business lending has resulted in lost jobs and incomes, which in turns leads to more foreclosures. We need to replace bad loans with good ones that are affordable, reflect the real value of the home involved, and get rid of the exotic traps that made loans unaffordable and caused the crisis. We also need to prevent similar future crises from arising in an untrustworthy or predatory marketplace. Hopefully as more of these insider scandals are brought to light, with facts that finance insiders like Goldman Sachs who have seemingly been running the country in R and D administrations alike, have been designing and pushing products that they had designed to fail so they could bet against their success, people will see the name for an economy and a financial sector that is productive rather than predatory.
Stan, I need to do some more research about your comment — “The Obama administration has allowed its mortgage modification program to be so ineffective, and allowed the industry to try to game the system, delay or deny the certain losses for it” — your insight adds to my general disappointment with the Obama administration.
Look at http://assets.theatlantic.com/static/mt/assets/business/3-25-10%20SIGTARP%20-%20HAMP%20Report.pdf
http://www.house.gov/apps/list/hearing/financialsvcs_dem/testimony_-_white_4.14.10.pdf