A world gone Madoff

Paul Krugman writes:

"The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.

Let’s start with those paychecks. Last year, the average salary of employees in “securities, commodity contracts, and investments” was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.

But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion...

We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse."

Radical action needed to avoid global economic collapse

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. He warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he said, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience was skeptical, even dismissive — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market.

But Roubini was soon vindicated.

In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. The nation lost 760,000 jobs, the dollar deteriorated, evidence of the huge housing bust and growing panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities.

When Roubini returned to the I.M.F. last September, he predicted a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”

Roubini was one of the few prominent economists who predicted the nation's financial crisis.

So it's worth pay attention to what he is saying about the current economic and financial crisis:

At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster.

The entire piece is linked.

McCain's regulatory flip flop! I was against regulations before I was for them!

McCain defends deregulation of Wall Street!

In last night's debate, John McCain called for more regulation and oversight of Wall Street, despite the fact that he led the effort to pass many of the deregulatory reforms that led to the current crisis.

Interviewed on CBS only a few days before the debate, however, McCain said he did not“regret” championing the deregulation of Wall Street, that it was good for the economy:

Q: In 1999, you were one of the senators who helped pass deregulation of Wall Street. Do you regret that now?

McCAIN: No. I think the deregulation was probably helpful to the growth of our economy.

Watch it:

American People Deserve Warren Buffet's Deal

The Associated Press reports:

In 2007, Wall Street's five biggest firms -- Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley -- paid a record $39 billion in bonuses to themselves.

That's $10 billion more than the $29 billion loan taxpayers are making to J.P. Morgan to save Bear Stearns.

Richard Fuld, the chairman and chief executive of Lehman Brothers Holdings Inc, which filed for bankruptcy protection last week, was awarded $22 million in fiscal 2007, for instance.

Those 2007 bonuses were paid, even though the shareholders in those firms last year collectively lost about $74 billion in stock declines -- their worst year since 2002.
If split equally among the approximately 186,000 workers at the former Big Five Houses, that bonus money means an average of $201,500 per person -- more than four times the $48,201 median household income in the U.S. last year.

If split equally among the approximately 186,000 workers at the former Big Five Houses, that bonus money means an average of $201,500 per person -- more than four times the $48,201 median household income in the U.S. last year.

A billion here, a billion there. Pretty soon you are talking about real money!

The proposed $700 billion bailout of Wall Street investment firms, is a heads I win, tails you lose proposition for the country's large investment firms and their top executives.

Before Congress is stampeded into passing the proposed bailout bill that will buy what may be worthless assets with hard earned taxpayer dollars, it ought to:

1) Mandate Congressional oversight and an equity stake in bailedout firms. The American taxpayer should get the same deal as Warren Buffet;

2) Include real protections for homeowners faced with losing their homes, including allowing them to renegotiate their ballooning mortgage payments;

3) Ensure that when the investment firms regain profitability the profits are shared with the federal government;

4) Establish limits on CEO salaries and bonuses and prohibit golden parachutes! The astronomical executive salaries never reflected market forces. They were the result of CEO board members rewarding members of their old boys CEO network and justified by executive compensation firms whose work was compromised by their conflict of interest - setting CEO salaries while pursuing other more lucrative corporate work for the CEOs whose salaries they were setting.

5) Pass regulations that establish rules governing lending institutions including the hidden banking system of investment firms, hedge funds and private equity firms and ensure transparency of all financial instruments and transactions.

As financial crisis deepens McCain declares the economy strong

Fearing a worldwide financial crisis, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.

The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.

Despite these developments, Republican Presidential candidate John McCain declared the "fundamentals of the economy are strong."

In response, Democratic Presidential candidate Barack Obama asked:"How can you (McCain) fix the economy, when you don't think there is anything wrong?"

U.S shadow banking system faces 21st Century version of 1930's bank runs

Paul Krugman explains in layman's terms the causes of the nation's financial crisis, the worst since the Great Depression, and suggests why it has not become a Presidential campaign issue:

America came out of the Great Depression with a pretty effective financial safety net, based on a fundamental quid pro quo: the government stood ready to rescue banks if they got in trouble, but only on the condition that those banks accept regulation of the risks they were allowed to take.

Over time, however, many of the roles traditionally filled by regulated banks were taken over by unregulated institutions — the “shadow banking system,” which relied on complex financial arrangements to bypass those safety regulations.

Now, the shadow banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s. And the government is rushing in to help, with hundreds of billions from the Federal Reserve, and hundreds of billions more from government-sponsored institutions like Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Given the risks to the economy if the financial system melts down, this rescue mission is justified. But you don’t have to be an economic radical, or even a vocal reformer like Representative Barney Frank, the chairman of the House Financial Services Committee, to see that what’s happening now is the quid without the quo.

Last week Robert Rubin, the former Treasury secretary, declared that Mr. Frank is right about the need for expanded regulation. Mr. Rubin put it clearly: If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks.

But will that logic prevail politically?

Not if Mr. McCain makes it to the White House. His chief economic adviser is former Senator Phil Gramm, a fervent advocate of financial deregulation. In fact, I’d argue that aside from Alan Greenspan, nobody did as much as Mr. Gramm to make this crisis possible.

Both Democrats, by contrast, are running more or less populist campaigns. But at least so far, neither Democrat has made a clear commitment to financial reform.

Is that simply an omission? Or is it an ominous omen? Recent history offers reason to worry.

In retrospect, it’s clear that the Clinton administration went along too easily with moves to deregulate the financial industry. And it’s hard to avoid the suspicion that big contributions from Wall Street helped grease the rails.

Last year, there was no question at all about the way Wall Street’s financial contributions to the new Democratic majority in Congress helped preserve, at least for now, the tax loophole that lets hedge fund managers pay a lower tax rate than their secretaries.

Now, the securities and investment industry is pouring money into both Mr. Obama’s and Mrs. Clinton’s coffers. And these donors surely believe that they’re buying something in return.

Let’s hope they’re wrong.

The entire article is linked.