Wall Street's Just Deserts
By Harold Meyerson
Thursday, September 18, 2008; Page A21
At the risk of speaking ill of the dead, what good was Lehman Brothers, anyway? And if Merrill Lynch was so bullish on America, why is it that, despite the torrent of foreign investment that flowed in to Lehman, Merrill and their Wall Street peers over the past half-decade, so few jobs were created in America during that period of "recovery"?
During the late, lamented Wall Street boom, America's leading investment institutions were plenty bullish on China's economy, on exotic financial devices built atop millions of bad loans, and, above all -- judging by the unprecedented amount of wealth they showered on the Street -- on themselves. The last thing our financial community was bullish on was America -- that is, the America where the vast majority of Americans live and work.
Over the past eight years, the U.S. economy has created just 5 million new jobs, a number that is falling daily. The median income of American households has declined. Airports, bridges and roads are decaying. Rural wind-power facilities cannot light cities because our electrical grid has not been expanded. New Orleans has not been rebuilt. And as productive activity within the United States has ceased to be the prime target of investment, household consumption -- more commonly known as shopping -- has come to comprise more than 70 percent of our economy.
The banks' underinvestment in America was hardly due to a lack of capital. But even as petrodollars and China's dollars poured into Wall Street, the investment houses directed trillions into new and ever more dubious credit instruments, which yielded massive profits for Wall Streeters and their highflying investors, and put chump change into efforts to improve, to take just one example, American transportation.
It was not ever thus on Wall Street. In the late 19th and early 20th centuries, bankers such as August Belmont and J.P. Morgan invested European capital in American railroads and steel. Moreover, by the 1830s, a major political party, the Whigs, had arisen on a platform of "internal improvements" -- fast-forwarding the nation's development through a public commitment to building roads, rails and canals. Their successor party, the Republicans, continued these commitments, as Lincoln's support for the transcontinental railroad and land-grant colleges makes clear.
By the mid-20th century, the behemoths of American manufacturing reinvested their own resources to meet most of their capital needs, while New Deal-era and subsequent administrations (including that of Republican Dwight Eisenhower) invested heavily in the nation's infrastructure. Wall Street played a diminished role during the golden years of mass American prosperity but came roaring back beginning with the financial deregulation of the Reagan era.
Finance set the terms of corporate behavior over the past quarter-century, and not in ways that bolstered the economy. By its actions -- elevating shareholder value over the interests of other corporate stakeholders, focusing on short-term investments rather than patient capital, pressuring corporations to offshore jobs and cut wages and benefits -- Wall Street plainly preferred to fund production abroad and consumption at home. The internal investment strategy of 100 years ago was turned on its head. Where Morgan once funneled European capital into American production, for the past decade Morgan's successors have directed Asian capital into devices to enable Americans to take on more debt to buy Asian products.
Worse yet, as Wall Street turned its back on America, so did government. The Bush administration and congressional Republicans (John McCain among them) kept American incomes low by opposing hikes in the minimum wage; helping employers defeat unionization; and shunning policies to modernize infrastructure, make college more affordable, and boost spending on basic science and research.
Today, it's the Democrats who sound like Lincoln's Republicans. In recent months, the Obama campaign and liberal think tanks in particular have generated numerous proposals for heightened public commitment to infrastructure and education. Unlike tax cuts, which chiefly bolster our ability to consume imported goods and commodities, infrastructure investments make us more productive and have a multiplier effect that creates more jobs over and above those that the government funds directly. Congressional Democrats have included major infrastructure investments in their pending new stimulus bill, which Bush and GOP leaders oppose.
Someone needs to invest in the United States of America. For the past decade and, in a broader sense, for the entire duration of the Reagan era, both government and Wall Street have opted not to. Should Barack Obama win, the era of neglectful government will probably come to an end. No matter who wins, Wall Street is vanishing before our eyes. And by the measure of their contribution to America's economic strength and well being, both Reagan-age government and Wall Street's investment banks plainly deserve to die.
Lawyers contribute to the society by keeping everyone honest, it is an honest profession.
Pretty much in line with my opinion, Wallstreet has become more a leech on the back of hard working Americans than it is an asset, 80% of Wallstreet costs of operations could go away and America would not be deprived of a thing. Let's get America's best and brightest minds off of Wallstreet and into doing something productive.
A MINORITY VIEW
BY WALTER E. WILLIAMS
SEPTEMBER 17, 2008
Here's what the U.S. Constitution says: "All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills."
How many times have we heard politicians, pundits and guardians of our news media say that President Bush cut taxes, or Obama is going to raise taxes? The fact of the matter is that presidents have no power to raise or lower taxes. They can propose tax measures or veto them but it is Congress that has the ultimate power to raise or lower taxes since they can, with a two-thirds vote, override a presidential veto.
The same principle applies to spending. Presidents cannot be held responsible for budget deficits or surpluses. A president cannot spend a dime that Congress does not first appropriate. Given these plain facts, are politicians, pundits and media people -- who persist in talking about a president cutting or raising taxes, or creating a budget deficit -- ignorant, stupid or deceptive?
Did President Clinton create more jobs, or did President Bush? Let's look at it. In 1996, I landed a job at Grove City College team teaching a course with one of its faculty members, Professor Dirk Mateer. I would like someone to tell me how President Clinton created that job for me. Did he call the college president and say, "Hire Williams"? Did he give Grove City College, a private college, resources to hire me? He surely didn't call me up and say, "Williams, there's a job waiting for you at Grove City College." So what precisely do people mean when they say this president or that president created jobs? You might argue, "You're right when it comes to a president creating jobs, but Congress can create jobs through appropriating money for infrastructure such as highways and bridges."
That's true in one sense and false in another. You can see this by asking, "Where does Congress get the money to create the jobs?" They won't get it from the Tooth Fairy or Santa Claus; they must get the money from taxpayers. That means if Congress collects $100 from a taxpayer for highway construction, he cannot use that $100 for some other expenditure that would have created a job. If Congress borrows the money for highway construction, it causes interest rates to be higher and therefore less job-creating investment. The bottom line is that Congress can only shift employment or unemployment but cannot create net new jobs.
Many politicians and pundits claim that the credit crunch and high mortgage foreclosure rate is an example of market failure and want government to step in to bail out creditors and borrowers at the expense of taxpayers who prudently managed their affairs. These financial problems are not market failures but government failure. The Community Reinvestment Act of 1977 is a federal law that intimidated lenders into offering credit throughout their entire market and discouraged them from restricting their credit services to low-risk markets, a practice sometimes called redlining. The Federal Reserve Bank, keeping interest rates artificially low, gave buyers and builders incentive to buy and build, thereby producing the housing bubble. Lenders were willing to make creative interest-only loans, often high-risk "no doc" and "liar loans," in order to allow people to buy more housing than they could afford. Of course, with the expectation that housing prices will continue to rise, it was no problem for lenders and borrowers but housing prices began to fall, leaving some people with negative home equity and banks in trouble.
The credit crunch and foreclosure problems are failures of government policy. In fact, what we see now is a market correction to foolhardy government policy. Congress' move to bailout lenders and borrowers who made poor decisions will simply create incentives for people to make unwise decisions in the future. English philosopher Herbert Spencer said, "The ultimate result of shielding men from the effects of folly is to fill the world with fools."
I was hearing around the edges today that President Bush's economic advisors and others are strongly suggesting a moratorium on selling short for at least three months. I would like to see that made permanent to make it much more difficult to manipulate the market for personal gain. Wasn't it George Soros who broke the Bank of England some years ago using that tactic? I understand the principle though I have a tough time wrapping my brain around it enough to fully understand exactly how it works.
Just basing my opinion on listening to financial guru types talking about how 'investors' band together to intentionally drive down the price of a stock so that they can personally benefit selling short. When many millions of people have their retirement funds in the market invested on faith that the companies will grow and prosper, I can't believe that is a good thing and I can't see how that should be legal. What I don't understand is the details of exactly how selling short works as I have never (and don't think I probably would) do that despite reading numerous explanations of it. That does not mean that I don't know what it is. I don't know how a nuclear reactor works either, but I know what one is.
Spendi does provide a different perspective that I will look at however. And he did it without being sarcastic and condescending which I much appreciate.