In the last two years, the American political economy has undergone extraordinary transformations. The attempt to understand them will surely occupy economists, political scientists, historians, and many others for decades to come; it will be the work of generations. But already from today’s vantage, the shape of what went wrong is becoming clear, and the dangers posed by the U.S. response to the financial crisis are now visible in outline.
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Comments (16)
I wonder if it would really hurt the economy if Congress passed a law that would "reset" the entire financial industry by simultaneously outlawing all of the "financial innovations" and reinstating Glass-Steagal.
I seriously doubt it and also doubt that, aside from credit cards, there has been an "innovation" in finance in the last 50 years that should be legal.
Posted by Mike T | January 11, 2010 10:01 AM
ATMs. We don't need to "outlaw" things; exchange trading, a transaction tax and a 90% marginal tax rate on annual incomes would do nicely.
Posted by al | January 11, 2010 11:12 AM
So instead of just outlawing the practices that allow them to rape and pillage, you'll take a majority cut of their booty?
Posted by Mike T | January 11, 2010 2:59 PM
That's funny.
Except that in no sane universe can a credit default swap contract be compared to a rape.
Posted by Paul J Cella | January 11, 2010 3:30 PM
Ha! Paul, you give me hope.
Is your association with TNA a new one? I read it from time to time and have admired their work for years, but I don't recall seeing your byline.
Posted by Sage | January 11, 2010 5:41 PM
"So instead of just outlawing the practices that allow them to rape and pillage, you'll take a majority cut of their booty?"
It wasn't the swaps so much as the lack of openness and the leverage. The Fed can already deal with the leverage. A small transaction tax will kill the trading that is casino-like without impeding trading that serves the greater economy. Our present tax system encourages the mark to market compensation that encourages risky behavior. As I have pointed out before no one really earns past a certain point. A 90% marginal rate would kill compensation at that level.
Posted by al | January 11, 2010 8:11 PM
Sage -- They've run my essays twice before: http://www.thenewatlantis.com/authors/paul-cella
I am honored to be included in so fine a magazine. They've done great work.
Posted by Paul J Cella | January 12, 2010 8:55 AM
So when did "government in a pinch" commence?
Perhaps in 1979, Carter, the Community Reinvestment Act.
Some pinch.
The above is not intended to absolve private players all to eager to jump into the game.
Which continues, courtesy of adventurous Washingtonians immune to even criticism, much less ousting from public sinecure. And in due time new games will be developed, a new symbiosis born, the blurring of public/private exacerbated even more.
Or, things will stay much the same, just bigger and worse.
Posted by johnt | January 12, 2010 11:02 AM
"Perhaps in 1979, Carter, the Community Reinvestment Act."
Then why does the CRE curve so closely resemble housing?
Posted by al | January 12, 2010 1:26 PM
Al, sorry, do you mean the Center for Regulatory Effectiveness, CRE?
If on the other hand you mean the CRA, I would hazard a guess and say it might be due to the intrusion of hundreds of billions in loans and guarantee's by quasi-government agencies.
But I'm open to both suggestions and corrections.
In any case, does this have direct bearing on my point about "government in a pinch".
Posted by johnt | January 12, 2010 2:29 PM
What one earns is relative. Why should Steve Jobs not be entitled to say that he has earned several billion dollars in compensation since 1997 for taking Apple from a failing company that could have been bought with Microsoft's quarterly earnings to the hottest computer company in the world worth nearly $190B with $26B in cash and no debt?
I freely admit that Jobs is an outlier case, but since you seem to want to make a universal rule by saying "no one," I can disprove that by showing some actually do earn that much.
No serious observer of that industry would dispute that Jobs' leadership was uniquely critical to saving Apple.
Posted by Mike T | January 12, 2010 2:40 PM
Lest you think I'm exaggerating, when Bill Gates made his infamous $150M investment in Apple, that was equal to 5% of Apple's stock which would put Apple's market capitalization at $3B in 1997. Microsoft could, quite literally, have bought Apple in cash in 1997 before Jobs came back on board. That is how radically Jobs' product ideas and style transformed Apple's position in the market.
Posted by Mike T | January 12, 2010 2:44 PM
CRE = commercial real estate, JohnT.
Posted by Paul J Cella | January 12, 2010 2:54 PM
"SEATTLE — Apple Inc. Chief Executive Steve Jobs was paid his customary $1 annual salary in 2009, but Apple's strength through a rough economic climate returned the value of his personal holdings in the company to pre-meltdown levels."
"Jobs does not get a bonus or reimbursement for perks many other CEOs accept, such as personal security, according to a regulatory filing made Wednesday. Apple said it reimbursed Jobs $4,000 for company travel on his $90 million Gulfstream V jet, which he received as a bonus in 1999."
"That's far less than the $871,000 Apple reimbursed Jobs in 2008. The CEO took nearly six months off in 2009 for medical leave, during which time he received a liver transplant. He returned to work at the company's Cupertino, Calif., headquarters part-time at the end of June."
"Jobs, 54, holds 5.5 million shares of Apple's stock. He has not sold any shares since he rejoined the company in 1997, nor has he been awarded any new equity since 2003."
"In 2008, the value of Jobs' stake in the company he founded was cut in half as investors worried Apple's pricey gadgets might not fare well through the U.S. recession. But shares of the maker of iPods, iPhones and Mac computers gained about 42 percent during the 2009 fiscal year that ended in September, and at the close of trading Wednesday, when Apple's stock reached $202.10, Jobs' holdings were worth about $1.1 billion."
As I wrote, no one fairly earns eight figures or above and seven is case by case (todays dollars). All bubbles and Ponzi schemes eventually blow up. However, if one is in the right place, at the right time, and possesses certain skill sets and moral failings then one can get very wealthy by participating in these bubbles and schemes, if ones compensation is paid annually. Note that the folks who almost blew everything up are still wealthy. No risk and the possibility of huge short term gains is a prescription for disaster.
As I have also stated in previous threads, I see no problem in structuring capital gains taxes in a manner that rewards true wealth creation - 10 year restricted stock for example. I believe either Paul or Maximos have suggested, returning investment banking to the unlimited risks of partnership as opposed to the free ride of incorporation; this is also a good idea. And regulators have got to get a handle on leverage.
Posted by al | January 12, 2010 3:42 PM
It is. In fact, making incorporation harder would probably be better for every industry provided that the states and federal government were committed to making the legal system simpler, far more consistent and predictable by the average person who wants to start a small business. Of course, our society would benefit greatly from having a thorough refactoring of our entire legal code and all legal processes. It's really a kludge.
Posted by Mike T | January 12, 2010 4:09 PM
Paul, small t after the John.
Posted by johnt | January 12, 2010 4:45 PM