I realize that I'm just whistling into the wind here but someone has to say that the phony optimism being ginned up by Wall Street is simply the lead-in to another con.
Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.
The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.
This might - might - mean something if the profits had been generated by increased income from new business but it's important to remember: they weren't. They were generated either by one-time sell-offs of subsidiary companies or businesses, or they were generated by the kind of insider financial trading that Paul Krugman called "worthless if not destructive from a social point of view."
But suppose we grant that both Goldman and Mr. Hall are very good at what they do, and might have earned huge profits even without all that aid. Even so, what they do is bad for America.
Just to be clear: financial speculation can serve a useful purpose. It’s good, for example, that futures markets provide an incentive to stockpile heating oil before the weather gets cold and stockpile gasoline ahead of the summer driving season.
But speculation based on information not available to the public at large is a very different matter. As the U.C.L.A. economist Jack Hirshleifer showed back in 1971, such speculation often combines “private profitability” with “social uselessness.”
Worse still, some of the "profits" the NYT and Wall Street are crowing about came from the exact same kind of knavery that created the crisis in the first place.
Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.
Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers.
Goldman’s role in the financialization of America was similar to that of other players, except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.
And Wall Streeters have every incentive to keep playing that kind of game.
Not that they're the least bit fooled by it themselves. That was hard to believe last time. It's impossible to believe this time, what with them openly foreseeing it. While today's NYT Economy Section was braying about the paybacks and glowing about the govt actually making a profit for once, the Business Section was gloomily predicting a massive downturn.
It’s been a blockbuster summer for the bulls on Wall Street. Shares are up more than 15 percent since mid-July, investors are feeling optimistic, and once-idle money is pouring back into equities.
But as Wall Street heads into September, historically its worst-performing month, the party may be winding down.
Some of the analysts and investors who called a bottom in March, when the markets hit their worst levels in more than a decade, now say they are detecting a peak in share prices, and they warn that stocks could be headed for a sharp pullback.
Markets drifted over the last week as investors shrugged at more signs the economy was slowly turning around. Stock prices are not such bargains anymore. And corporate insiders, including executives and board members, are starting to sell, suggesting that some of the smarter money is heading for the door.
“The people who know are getting out early,” said Art Cashin, the director of floor operations at UBS, who said his “gut feeling” about the markets prompted him to sell some stocks last week. “This rally’s a little long in the tooth.”
(emphasis added)
Translated, the "smart money" knows perfectly well that yet another shell game has been perpetrated on us and the inevitable crash is right around the corner, so they're getting out while the getting is good, leaving us once again holding the bag with the dead pig in it while they jet off to Aruba with the bag loaded with loot. Thievery, slimy tricks, Ponzi schemes, and con games are still being rewarded so why shouldn't the crooks keep crooking?
Neither the administration, nor our political system in general, is ready to face up to the fact that we’ve become a society in which the big bucks go to bad actors, a society that lavishly rewards those who make us poorer.
And themselves a LOT richer. This game is getting awful old and the fact that Obama is still playing to it ought to be telling us something about him. Maybe it is and we just don't want to hear it.
UPDATE: (9.2.09) Matt Taibbi pretty much rips up both the NYT and their claims of TARP "profits".
It was inevitable that the same people who pushed through the multi-trillion-dollar bailout of Wall Street would come out later on and tell us what a great idea theirs turned out to be, in retrospect and under the light of evidentiary examination. And we’re getting that now, with a pair of reports, the above one in the New York Times and another in the Financial Times, telling us the bailout is working because the government has made some money on TARP. They came to this conclusion by quoting Fed officials, who apparently calculated how much interest the Fed earned on TARP investments above what it would have earned on T-bills. The amount so far, according to these worthy gentlemen: $14 billion.
This is sort of like calculating the returns on a mutual fund by only counting the stocks in the fund that have gone up. Forgetting for a moment that TARP is only slightly relevant in the entire bailout scheme — more on that in a moment — the TARP calculations are a joke, apparently leaving out huge future losses from AIG and Citigroup and others in the red. Since only a small portion of the debt has been put down by the best borrowers, and since the borrowers in the worst shape haven’t retired their obligations yet, it’s crazy to make any conclusions about TARP, pure sophistry. Moreover, a think tank set up to analyze TARP, Ethisphere, calculated in June that TARP was still $148 billion down overall, a debt of over $1200 per American. To start talking about what a success TARP is now is beyond meaningless.
"Beyond meaningless" is probably a good description of this whole financial charade. (Via Mark - lotta great links in this post, as usual, just in case you thought nothing significant was going on because you watch TV news).
Every day I compare CNNMoney.com with Calculated Risk. Are they living on different planets?
Posted by: Jake Bodhi | September 03, 2009 at 05:44 PM