Yesterday Digby turned me on top an old quote from the 2009 version of El Presidente that I had missed. He was talking about Jamie Dimon and the other Wall Street banksters:
?It?s almost like they?ve got-- they?ve got a bomb strapped to them and they?ve got their hand on the trigger,? President Obama said on Thursday of the banks he?s chosen to bail out. ?You don?t want them to blow up. But you?ve got to kind of talk [to] them, ease that finger off the trigger.?
Romney constantly talks about job losses under Mr. Obama. Yet all of the net job loss took place in the first few months of 2009, that is, before any of the new administration?s policies had time to take effect. So the Ohio speech was a perfect illustration of the way the Romney campaign is banking on amnesia, on the hope that voters don?t remember that Mr. Obama inherited an economy that was already in free fall.
How does the campaign deal with people who point out the awkward reality that all of the ?Obama? job losses took place before any Obama policies had taken effect? The fallback argument-- which was rolled out when reporters asked about the factory closure-- is that even though Mr. Obama inherited a deeply troubled economy, he should have fixed it by now... [A]ccusing Mr. Obama of not doing enough to promote recovery is a better argument than blaming him for the effects of Bush policies. However, it?s not much better, since Mr. Romney is essentially advocating a return to those very same Bush policies. And he?s hoping that you don?t remember how badly those policies worked.
...This is especially true if you focus on private-sector jobs. Overall employment in the Obama years has been held back by mass layoffs of schoolteachers and other state and local government employees. But private-sector employment has recovered almost all the ground lost in the administration?s early months. That compares favorably with the Bush era: as of March 2004, private employment was still 2.4 million below its level when Mr. Bush took office.
Oh, and where have those mass layoffs of schoolteachers been taking place? Largely in states controlled by the G.O.P.: 70 percent of public job losses have been either in Texas or in states where Republicans recently took control.
Which brings me to another aspect of the amnesia campaign: Mr. Romney wants you to attribute all of the shortfalls in economic policy since 2009 (and some that happened in 2008) to the man in the White House, and forget both the role of Republican-controlled state governments and the fact that Mr. Obama has faced scorched-earth political opposition since his first day in office. Basically, the G.O.P. has blocked the administration?s efforts to the maximum extent possible, then turned around and blamed the administration for not doing enough.
As they sifted through the wreckage of our economy following the financial crash of 2008, regulators and lawmakers were faced with a conundrum. Would they let the big banks that had gone out on a limb with those newfangled debt-backed securities take a beating, as the ?logic? of the free market would dictate?
The received wisdom was that the really big financial services firms couldn?t be allowed to simply crash and burn, no matter how appropriate that outcome might have been. They were ?too big to fail?; we were told that their demise would halt the flow of capital throughout the economy, depriving it of its lifeblood. Panic was running through the capital markets, and the ?credit crunch? could only be alleviated with a massive government bailout-- hundreds of billions to ?recapitalize? the banks and restore liquidity to the system.
That was a highly debatable proposition. Economists at the Federal Reserve Bank of Minnesota crunched some numbers and found that lending between banks at the time had been ?healthy? and ?bank credit [had] not declined during the financial crisis.? The Minnesota Fed?s economists saw ?no evidence that the financial crisis has affected lending to non-financial businesses.? The researchers called on lawmakers to ?articulate the precise nature of the market failure they see, [and] to present hard evidence that differentiates their view of the data from other views.?
The Minnesota Fed?s conclusions were backed up by a study of Treasury Department data by Celent Financial Services, a consulting firm. According to Reuters, Celent?s researchers concluded that the ?data actually suggest world credit markets are functioning remarkably well.? Rather than a widespread banking problem, Celent found that the rot was limited to ?a few big, vocal banks and industries such as car manufacturing, which would be in difficulty anyway.?
There was no question that banks had been writing far fewer loans and money wasn?t flowing, but some economists pointed out that Americans had lost millions of jobs, several million homes, and trillions of dollars in stock market wealth, and as a result fewer people were looking to finance new big-ticket purchases. And businesses, seeing their customers tighten their belts, weren?t terribly eager to borrow money to expand. In other words, Washington was focused on Wall Street as if its problems were disconnected from the immense pain being experienced in the brick-and-mortar economy.
Others, however, noted that the financial services sector-- banking and insurance-- employed more than 6 million people. Not all were rich traders; there were secretaries and janitors, too. In late 2008, CitiGroup announced it would lay off 53,000 employees, the second-largest workforce cut by a single company in U.S. history. That brought the number of people who lost finance jobs to 180,000 that year, and those people would spend less and pay fewer taxes, and many would have trouble paying their own mortgages. The sector?s unemployment rate rose from 3.9 percent to 4.6 percent in just four months in late 2008. Could Washington really let the financial services industry decline even further in the midst of a recession?
While this debate about ?too big to fail? played out, a very relevant point was lost in the furor: there was scant discussion of the fact that our financial sector had become bloated during the previous decade and was swimming in capacity the rest of the economy didn?t need.
Here?s a fun fact about the finance industry. Historically, it grew and contracted with the business cycle. When the economy was going gang-busters and businesses were expanding, it was there to provide capital and insurance and connect investors with entrepreneurs and innovators. Then, when the business cycle took an inevitable downturn, it would contract. Financial firms would stop hiring. The number of bankers and insurers would shrink.
But a funny thing happened on the way to the financial meltdown. As the Associated Press noted, ?When the Internet bubble burst in 2000, the [financial] sector never stopped growing. Instead, it ballooned over the past eight years to around 10 percent of the U.S. economy, puzzling economists.? It?s not such a puzzle, though. In large part, the continued growth of the sector was based on the explosion in derivatives?high-value vapor-- rather than on anything connected to real growth in the ?nuts and bolts? economy.
When the recession of 2001 began, the financial services sector employed 5.7 million people. At the time, the total value of derivatives held by U.S. commercial banks was thought to be around $42 trillion.6 By the third quarter of 2007-- before the crash-- the financial sector was employing almost 6.2 million people, and the estimated value of derivatives held by U.S. banks had skyrocketed to almost $170 trillion-- almost three times the value of the entire world?s economy. During the intervening period, the ?real? U.S. economy was in the doldrums: from 2000 to 2007, the economy added jobs at the lowest rate in the post?World War II era.
?The financial sector,? wrote Dean Baker, ?has nearly quadrupled as a share of the private sector, yet it provides no obvious benefit that was not available 30 years ago?:Finance is an intermediate good; like trucking, it provides no direct benefit in itself. Rather, its benefit is in its support for the productive economy. If we had four times as many employed in trucking (relative to the size of the economy) as we did 30 years ago, people would be very concerned about our grossly inefficient trucking sector.
It was this incredibly bloated sector of the economy providing ?an intermediate good? that we had to rescue-- keep that in mind.
When the Financial Tail Wags the Corporate Dog
The financial sector?s size isn?t the only issue to consider. Its influence on the behavior of the rest of our corporate culture is something that we take for granted, but maybe we shouldn?t.
Consider for a moment how often you?ve heard that ?the markets? are happy-- or unhappy-- about something that is occurring? You know, ?The markets reacted with enthusiasm to an announcement by the Fed today...? Not enough people ask the very logical question ?Just who are these markets and why the hell should I care if they?re enthused??
?Markets,? in this sense, means how owners of stocks and bonds feel about their prospects of making a nice return on their investments down the road. And because we?re talking about owners of stocks and bonds, we?re talking about America?s economic elite. According to economist Edward Wolff, those in the top 1 percent of the population controlled almost half of our financial wealth in 2007 (excluding tangible assets like homes, boats, and cars). The top 5 percent owned 72 percent; the top 10 percent of the distribution were holding onto 83 percent of the nation?s financial wealth, and so on. The bottom 80 percent-- eight out of ten Americans-- owned just 7 percent of the nation?s financial wealth.
In America?s executive suites, ?the markets? are all-powerful, but it wasn?t always so. The modern system of finance developed during the progressive era-- from the late 1890s through the 1920s-- and its creation was heavily influenced by prevailing anger at the power of huge private trusts. Dispersed ownership and new forms of finance-- through stocks, corporate bonds, and other securities-- were seen as an antidote to the influence of the robber barons, that handful of dynastic families who controlled large swaths of the U.S. economy.
Since then, the original function of the financial markets-- to link investors? capital with innovative firms-- has been turned on its head. Today, says Lawrence Mitchell, a professor of business law at George Washington University, corporate behavior is very much dictated by the financial markets-- quarterly earnings, stock prices, and the like-- and not the other way around. That?s not a good thing. [But it very much is a Mitt Romney thing.]
In his book The Speculation Economy, Mitchell cited a recent survey of CEOs who run major U.S. corporations. It found that almost 80 percent of them would have ?at least moderately mutilated their businesses in order to meet [financial] analysts? quarterly profit estimates.?Cutting the budgets for research and development, advertising and maintenance and delaying hiring and new projects are some of the long-term harms they would readily inflict on their corporations. Why? Because in modern American corporate capitalism, the failure to meet quarterly numbers almost always guarantees a punishing hit to the corporation?s stock price.
And corporate managers? own fortunes are tied to their companies? share prices through bonuses, stock options, and other incentives. The desire to make the financial sector happy often dwarfs other imperatives; Mitchell calls it ?short-termism? and suggests that making a company?s balance sheet look good, quarter to quarter, also drives CEOs to sacrifice values such as worker safety, environmental protection, and other social goods.
This dynamic, too, was completely absent from the debate over whether the Titans of Wall Street were really ?too big to fail.?