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Reform or Bust
But now that we've stepped back a few paces from the brink - thanks, let's not forget, to immense, taxpayer-financed rescue packages - the financial sector is rapidly returning to business as usual. Even as the rest of the nation continues to suffer from rising unemployment and severe hardship, Wall Street paychecks are heading back to pre-crisis levels. And the industry is deploying its political clout to block even the most minimal reforms.
The good news is that senior officials in the Obama administration and at the Federal Reserve seem to be losing patience with the industry's selfishness. The bad news is that it's not clear whether President Obama himself is ready, even now, to take on the bankers.
Credit where credit is due: I was delighted when Lawrence Summers, the administration's ranking economist, lashed out at the campaign the U.S. Chamber of Commerce, in cooperation with financial-industry lobbyists, is running against the proposed creation of an agency to protect consumers against financial abuses, such as loans whose terms they don't understand. The chamber's ads, declared Mr. Summers, are "the financial-regulatory equivalent of the death-panel ads that are being run with respect to health care."
Yet protecting consumers from financial abuse should be only the beginning of reform. If we really want to stop Wall Street from creating another bubble, followed by another bust, we need to change the industry's incentives - which means, in particular, changing the way bankers are paid.
What's wrong with financial-industry compensation? In a nutshell, bank executives are lavishly rewarded if they deliver big short-term profits - but aren't correspondingly punished if they later suffer even bigger losses. This encourages excessive risk-taking: some of the men most responsible for the current crisis walked away immensely rich from the bonuses they earned in the good years, even though the high-risk strategies that led to those bonuses eventually decimated their companies, taking down a large part of the financial system in the process.
The Federal Reserve, now awakened from its Greenspan-era slumber, understands this problem - and proposes doing something about it. According to recent reports, the Fed's board is considering imposing new rules on financial-firm compensation, requiring that banks "claw back" bonuses in the face of losses and link pay to long-term rather than short-term performance. The Fed argues that it has the authority to do this as part of its general mandate to oversee banks' soundness.
But the industry - supported by nearly all Republicans and some Democrats - will fight bitterly against these changes. And while the administration will support some kind of compensation reform, it's not clear whether it will fully support the Fed's efforts.
I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: "Why is it," he asked, "that we're going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?"
That's an astonishing remark - and not just because the National Football League does, in fact, have pay caps. Tech firms don't crash the whole world's operating system when they go bankrupt; quarterbacks who make too many risky passes don't have to be rescued with hundred-billion-dollar bailouts. Banking is a special case - and the president is surely smart enough to know that.
All I can think is that this was another example of something we've seen before: Mr. Obama's visceral reluctance to engage in anything that resembles populist rhetoric. And that's something he needs to get over.
It's not just that taking a populist stance on bankers' pay is good politics - although it is: the administration has suffered more than it seems to realize from the perception that it's giving taxpayers' hard-earned money away to Wall Street, and it should welcome the chance to portray the G.O.P. as the party of obscene bonuses.
Equally important, in this case populism is good economics. Indeed, you can make the case that reforming bankers' compensation is the single best thing we can do to prevent another financial crisis a few years down the road.
It's time for the president to realize that sometimes populism, especially populism that makes bankers angry, is exactly what the economy needs.
48 Comments so far
Show All"the administration has suffered more than it seems to realize from the perception that it's giving taxpayers' hard-earned money away to Wall Street"
Perception? What a stupid statement from a smart man.
"and it should welcome the chance to portray the G.O.P. as the party of obscene bonuses."
After the bonus's allowed by this administration, thats hilarious.
If a company, any company takes Federal money, then till they pay it back with interest, they are under Federal control. If they did not take Federal money, the government has no power to tell them to do anything, certainly noty the power to set level of pay.
You don't punish people for following the rules, you change the rules.
You and Henry8 need to check your dictionary. My Webster's New World gives "perceive" as "to grasp mentally; take note of; observe."
Krugman is an economist, not a labor organizer, and he's writing for the NY Times, not The Daily Worker. Within those parameters his remarks on Obama's unwillingless "to use populist rhetoric" are perfectly reasonable.
Right twice? The heavens are aligned!!! Just kidding Rich!
"He lets Obama off too lightly by merely observing"
Right. Frankly I'm thinking that everyone is letting him off too lightly. Can the media go too much longer without reporting realities? I wouldn't think so. It becoming embarrasing for some of them.
"Krugman's overly-light criticism is tantamount to defending Obama."
That seems to be prevelent these days.
"Actually, the problem is much deeper than that."
You are more than correct.
Instead, Engage POPULIST EFFECT.
Why do we need new regulations? Wouldn't it be better to just let the banks fail and enforce existing regulations?
A funny thing is happening out here in Tulsa and I'm starting to like it. For once, people are waking up and calling for big banks to fail but they are relying on Republicans and Blue Dog Democrats to lead the way. Normally, most people wouldn't care about banks sitting there and ruining people's lives thanks to obsessing about gun control and abortion but I'm starting to see more improvements nowadays from more people helping their neighbors to more people protesting the bank giveaways. I get a good feeling that we the people are becoming our own populists.
Peter Pike:
Since Phil Gramm pushed through the repeal of Glass-Steagal and Bill Clinton signed it into law while a beaming Alan Greenspan and Robert Rubin applauded, there are very few regulations still in effect. Glass-Steagal divided banks into two categories: Main Street banks who took ordinary citizens' cash and paid out in loans for this and that; and Wall Street banks, also known as investment Banks. Other legislation, stupidly in the wake of the great S&L collapse of the 1980s, broke down the wall between Savings and Loans and check-cashing banks.
You may remember a point about a decade ago when you suddenly couldn't walk into your local bank to cash or deposit a check without being accosted with a pitch to put your savings in some fund or other that the bank was selling. I started staying out of the bank and using the ATM from the point the clerks started perusing my checking account and, if I had more than a couple of hundred in it, urging me to put it in one of their funds that was "doing really well!" "Doing well" meaning before, of course, one deducted the various "loads" that inevitably came with having so many people earning commissions for packaging and selling the fund. I now wonder how many investors in supposedly innocuous funds sold by those banks lost everything mortgage meltdown.
I think that what Peter may mean and I hear this from some libertarians is this. There are more regulations in favor of big business and less regulations in favor of the people. Think of it similar to the upcoming health care fiasco bill that is being pushed through. There are far more rules that favor Big Insurance/Pharma against the people than vice versa.
Just to let you know, I favor a balanced approach so that small businesses can grow and compete as well. Libertarians generally favor no regulations but I side with those who choose to draw the line for the people instead of lopsidedly for the companies alone.
An excellent point about Phil Gramm and his bill to repeal the Glass-Steagal act which Bill Clinton signed. Without that action, none of this could happen in my opinion. There are others that have different lines of demarcation but I believe this was the big bang.
It was RR's removal of regulations before the S&L crisis that allowed that to happen and it was painful, but at least confined mostly to Texas and the Southwest where the largest offenders were located. It was more than painful for many friends.
Nothing would so contribute to social tranquility as some screams of anguish from the very affluent
JK Galbraith
Unfortunately, "the screams of anguish from the very affluent" seem more likely to have Congress handing over payoffs to fund their trillion-dollar bonuses. The resulting screams of anguish then follow from the population stirred up into decking themselves with tea-bags and crying for the heads of everyone BUT the affluent beneficiaries of their tax payments.
...it seemed inconceivable that bankers would, just a few months later, be going right back to the practices that brought the world's financial system to the edge of collapse.
----------------------
Seemed inevitable to me and probably most everyone on this board.
The only thing that was perplexing is why it took so long.
The bad news is that it's not clear whether President Obama himself is ready, even now, to take on the bankers.
Obama IS A BANKER.
Obama lumping together Wall Steet bankers, Silcon Valley entreprenuers and NFL players is not an accident: it's intended to mislead and protect Wall Steet. He used the same technique to equate UPS and FedEx with the Post Office, of course he left out the fact that the Post Office delivers all our mail, bulk and otherwise, successfully misleading the uninformed into believing they supply the same services.
Paul is the soul of diplomacy, but most of us know by now there's scarcely a prayer at reform from the Bamanator. Mark my words--he's going to ruin the Democratic brand.
Obama is into total terra incognita for Democratic Presidents. Neither Clinton nor Carter gave trillions to the bankers, expanded two illegal wars, and continued (or increased) policies which could best be called fascist, to mention just a few of his recent accomplishments. Next to Obama, they look like raving New Dealers.
Clinton even raised taxes on the rich, which he would never have done if he really worked for the bankers. Obama, by contrast, is almost a neocon.
I feel very Sad About the Young:
http://www.youtube.com/watch?v=A8CmY8818qk
I truly believe Obama will raise taxes (a little) on the rich. But, until the economy is on firmer footing this will not, and should not happen.
Whyever not?
The theory, I suspect, is that they will spend less and the economy will slow. However, were the government to fund things like healthcare, green jobs --- humane causes, let's say --- then the loss of rich-guy-pays-for-misguided-services is replaced by people working to solve problems.
The New Deal, basically -- only hopefully less halfhearted and better directed.
Or perhaps I should say "wishfully" instead of "hopefully."
That word has become unclean.
Krugman's surprise that Obama isn't willing to invoke populist rhetoric or act on behalf of popular interests is really a problem for Krugman. Obama is NEVER going to realize the political or economic wisdom of populism because he's not a progressive nor is he a populist. He's not even a liberal. Liberal Democrats cheered on Clinton for 8 years while he triangulated his way through. We should expect the same for as long as Obama is in office. That's why the conservative movement in this country is so much stronger -- they have leaders who actually agree with their base and are willing to stand up during a joint session and say so.
The good news here is that their 'base' are wacko whites. In looking at the demographics, I don't think their chances of expanding that base to any degree is all that great.
Sadly, the Repugs will likely gain ground outside their base unless the Dems decide to betray their sponsors instead of their constituency.
Also, you can expect the minorities to go Republican as enfranchisement becomes less a matter of race.
But worse is when you get a minority candidate in office, a Democrat who manages to convince his constituency that he is liberal, progressive, or centrist, then pursues Republican policies.
I believe you are making a mistake by thinking that Whacko whites form the base of the Conservatives in our country. If you view the evangelicals as the majority you'd be wrong. Their base cuts across ethnic lines though most are white (I think) They are expanding it as we speak....or this administration is.
I keep seeing here the suggestion that the opposition are just Whacko's and RW nutjobs, the vast majority are not. And our President is going to pay a heavy price for thinking the same thing.
I'm speaking of the "base" and I think my statement is correct. It is certainly possible that a great many outside the base could vote Republican in coming elections if the economy hasn't started creating more decent jobs.
Cicero: "Freedom is participation in power."
Why should these people outside the GOP base who will vote Republican in 2010 and 2012 expect Republicans to create any more jobs than even failed neo-liberal Democrats? The only thing the Republicans support is draconian spending cuts on top of the greatest economic suffering since the Great Depression (suffering that has barely begun to sink in its teeth), more tax cuts for the rich (and we've seen how many jobs that first failed to create and now continues to lose) and the passage of more "free trade" treaties that will offshore more better paying jobs just when the nation needs more and better paying jobs to increase consumer spending and demand the most.
This situation is ripe for a hyper-extremist like Benito Mussolini or Adolph Hitler who will promise the moon but only be able to temporarily deliver it by scapegoating racial (or other) cultural minorities, subjugating people into slave or prison labor, and ramping up our wars with a military draft to go out and steal more resources from additional countries. Perhaps they'll start a black market in the personal possessions of those they deport to the work camps, prison labor compounds and death camps and issue stock markets to the camp system operators the same way the SS did (for other SS and high ranked Nazis) in the Nazi camp system. Capitalism wins!
Because Obama and the Democrats didn't do as they should have.
I'd suggest that they will vote for a new cadre of Republicans, younger guys and expect them to rebuild our manufacturing base, correct our trade policies and get our kids out of these occupations, just as we expected Obama to do....which he didn't. He choose the idealogues path instead.
Cicero: "Freedom is participation in power."
This is a bigger pipe dream than military victory in Afghanistan and the Af-Pak border regions. Bush Sr. was a staunch supporter of the General Agreement on Trade and Tariffs that led directly to NAFTA and the WTO that were later signed into law by Clinton. Republicans dominate ownership America's corporate interests and they have zero motivation to rebuild a manufacturing base in the U.S. when they can get their labor dirt cheap without labor or environmental regulations elsewhere. At least the Dimocrats give occasional lip service to belatedly re-negotiating the "free trade" treaties to include labor and environmental protections. I've never heard a single solitary Republican--paleo-conservative or neo-con--ever mention such a thing. The Republican base is rock solid pro-war and would not tolerate an anti-war Republican candidate.
Yes, you are right. But remember that there will always be those who wish to make a pipe dream sound plausible. That's what propagandists for the republican or the democratic wing of the corporate party do.
Well said. Republicans are Democrats with less inhibitions. They're both part of the corporate party. Most people see this and will vote for neither of the corrupt wings of the corporate party. Those that don't are ignorant or complicit.
Concerning the Far Right base... you would be, but they are a small part of the Conservatives was my point.
Frankly, in my opinion they will vote for Republicans in 2010.
Krugman knows (and I believe rightly) that we are at least SUBTLELY better off with Democrats in power. This has been true at least since Reagan. At this time there is still no chance for a third party. Allowing right-wingers and Republicans to pummel Obama without a murmur from the left is unconscionably stupid. On the left, we need a somewhat balanced approach of criticism and praise for our 'centrist' President.
0's not centrist.
He has escalated Cheney's wars, renewed torture and cover-up of torture, redoubled the payola to banks, renewed the coal industry, opened bases in Columbia to threaten populist movements in Latin America, presented us a Trojan Horse of a health insurance bill, and continues to expand the debt with nothing-nothing-nothing to show for it.
That's not centrist, that's rightist.
It's not even clear that McCain, working with a Democratic House and Senate, could have wreaked so much damage.
"It's not even clear that McCain, working with a Democratic House and Senate, could have wreaked so much damage."
Interesting....something thats crossed my mind lately.
Cicero: "Freedom is participation in power."
Be careful what you wish for.
McCain or someone to the right of him will be the likely GOP pick to run in 2012, and the Republicans are poised to regain Congressional seats in 2010. The nation is already in an increasingly insoluble mess because of neo-liberal and neo-conservative policy collusions that have undermined this nation throughout Clinton, Bush II and Obama. Clinton's and Newt's "free trade" offshoring of tens of millions of middle-class high paying industrial manufacturing jobs coupled to Team Clinton's and the GOP far-right's deregulation of the financial industry (that only in the very short term helped lead to an operational budget surplus) was piled on by Bush's soaring spending on multiple wars (and a bloated Dept. of Homeland Security) coupled to his tax cuts for the super-rich. This is all being compounded by Obama's insane increase in non-stimulus spending directed at transferring even more wealth to the corporate banking/investment class; his perpetuation of Bush II's oil/pipeline wars; his failure to present a plan to significantly reduce American dependence on foreign oil; his failure to reform health care costs to increase positive health care outcomes vs. the amount spent to deliver that health care; his continuation of a neo-liberal/neo-conservative national education status quo that is making our citizens less able to compete with foreign workers, etc.
The devastating costs of open ended wars, wealth transferral to the richest 1%, economic collapse in the real economy in an environment of rising ultra-right-wing extremism and ideological drivel across the official political spectrum are all factors that are leading many historians and older activists to compare the situation in America to Weimar Germany immediately prior to the rise of Hitler. All the Republicans need to find is another fascist creep like Bush II or Cheney who can mask his creepiness with enough charisma long enough to get him or herself into office. Sarah Palin, anyone?
With vehicle gas mileage standards finally being raised, we have the first step in decades to make a difference in oil dependence. More high-speed rail is in the pipeline. Obama is beginning to make a difference in this area. Sure, I know, we all want more and we want it now.
Cicero: "Freedom is participation in power."
The crucial difference is between the policies that make a difference and the ones that make a significant difference. Obama ran on a platform of galvanizing change not glacial change.
Trying to step away from an un-won war has always been difficult in America. The banks own most of our politicians. That's just the way it is. Even as bad as coal is, it's still highly difficult to just end our use of it. Obama has at least taken a couple of decent half-hearted steps in Honduras. Yes, the health insurance bill will likely be a huge let down, but we may still get some real improvement. The expansion of the debt has helped several people I know because of the government stimulus package. The expansion of the debt has most definitely not been a "nothing-nothing-nothing."
We keep going around and around the same stupid circle:
Frankly, the banksters own our government.
The managers they hire to run the government they own, like BO, are not tasked w/reforming those who hired them - they are tasked with doing everything and anything possible to protect and increase the bottom line.
It would be like Krugman doing an expose on the corruption at the NYT - the story would be killed and PK would be out of the op-ed biz.
Plus, we're talking about a tiny group of uber-shysters who already have dozens, if not hundreds, of 'legal' ways to hide their unearned obscene riches, and a handful of them will surely write the legislation anyway.
CEO pay caps, bankster bonus rules - dead issue. Will never happen. Period. And we all know it.
"it seemed inconceivable that bankers would, just a few months later, be going right back to the practices that brought the world's financial system to the edge of collapse"
Why? It's not like this were the first time. This happens after every single crash, to whatever degree someone else does not regulate.
.
". . . But now that we've stepped back a few paces from the brink . . ."
Mr. Krugman, who is "we" here?
Unemployment continues to rise. Mortgages continue to fail. The deficit continues to grow.
" . . . Mr. Obama's visceral reluctance . . . "
0bama is paid to be reluctant.
The "inconceivable" part is that after this near depression and the truly massive bank bailout, we've yet to do ANYTHING to change the system. Something will eventually get done, although almost certainly, not enough. As Krugman has said, the stimulus should have been bigger. That would have helped a bit more with unemployment and mortgages. The deficit should grow at this time. Cutting the deficit would make everything worse for a lot of vulnerable people. When things pick up, then we need to focus on the deficit.
sierra7
We have now made a historical, fatal error.
We now have institutionalized the theory of, "Too big to fail"
It is now a proven fact.
It is now part of our institutions, however flawed.
It will be used again and again until it is debased completely like our currency.
And, the FED continues to thwart all attempts for an "internal audit" of its recent practices.
We had the opportunity to "change" the system, even within the system, for example to break up the banking conglomerates. That alone would have had enormous impact on downsizing our economic future to manageable proportions.
We've lost the opportunity.
Cicero: "Freedom is participation in power."
Meanwhile, back in the real economy, the first big wave of unemployed starting last November are quietly going through their federal unemployment benefits. Around next April and May they'll have exhausted their federal UI benefits and will start using up their state unemployment benefits. By next July they will have exhausted all federal and state unemployment benefits. The bulk of them will either already have or will soon thereafter run out of possessions worth selling off to try to make ends meet. Then, for the vast majority of them, comes homelessness.
And every month thereafter for the foreseeable future, like a monthly national alarm clock going off, somewhere between 300,000 and 700,000 more Americans will also run out of both federal and state unemployment benefits to face the oncoming ordeal of homelessness. This includes entire families out in the street, sleeping in cars and minivans, or in already packed homeless shelters or in tent cities--even as the U.S. has the largest glut of empty housing (and commercial real estate that could be converted into housing) IN WORLD HISTORY. The world's richest predominantly "Christian" nation.
The Fawning Corporate Media spews the Big Lie that "the recession is over" and paints the jobless numbers as a "lag" in economic recovery dependent on an impossible return to anything remotely like consumer spending levels in 2007. In fact the "lag" is the time running out on Team Obama to plan and implement the creation of MILLIONS of New Deal type government jobs. I've heard no mention of the urgent need for this anywhere in the official political spectrum and especially silent on next years looming pile-up of the homeless are the atavistic degenerate Libertarians and Republicans.
That said, the increasingly despicable fact is that most self-labeled "progressives" in this country are also too silent and disorganized to effectively address this problem. I despise these insular "pwogs" almost as much as the idiotic centrists and cannibalistic right.
In 2010 Amurka really will get the Christmas it deserves.
sierra7
Cicero:
You're right on target....When the "Cash for all Clunkers" including new homes subsides along with the safety net parts you talk about it will be dire times indeed!
I love the popular expression of the major business media (picked up by all the other ditto-heads):
"This will be a 'jobless recovery'"
HUH????????
Newcastle, Pennsylvania has decent 3 bedroom, two bath houses on sale from $40,000 tp $120,000. There are more expensive homes out in the suburbs. I think things are changinging quite rapidly across the USA. I just saw a 2,100 sq.ft. ranch in Athens, Texas on 5 acres for $141,000.
There are great opportunities for potential home owners.
Since Obama's "...visceral reluctance to engage in anything resembling populist rhetoric..." obviously follows from his prior lack of intention to take anything resembling populist action, I think Krugman himself rhetorically pussyfoots by not stating this causality more honestly.
To the extent that Obama has called on The People to help him push through his campaign-alluded-to reforms, this same smart Barack knows full well that he must first proactively use his presidential rhetoric to help The People define that which he claims he wants them to help him push through.
Obama also knows full well that his failure to proactively initiate such presidential rhetoric, is in large part what is preventing a diffuse popular demand for reform from coming to actionable focus on this and most other issues.
Krugman seems to think that Obama's chief problem lies in his insufficient use of presidential rhetoric, instead of in his insincerity.
I think that one of Krugman's chief problem lies in believing such superficial nonsense.
Paul Krugman ...
Still a day (months) late and a dollar (trillions of $) short ...
I couldn't even finish this article, it is such an obvious pro-Fed apologist bunch of nonsense. For a smarter article, read Dean Baker's article here on CD today. He rightly points out that the Fed is a major part of the problem and will continue to be unless something is done about it.
Reading through the responses, it is the same old same old partisan divide. Time to put partisan differences behind and look at the horrible reality of our situation. We have gone through an economic collapse. Why? Too much of our national economic activity has been controlled by too few Wall Street giants. As a recent article pointed out correctly, now after trillions of bail out money, there are even fewer Wall Street giants controlling our national economic activity. Goldman Sachs, for example, is the same old, same old Goldman Sachs still engaged in exactly what caused the economic collapse - white collar crime.
Krugman is 100 percent on target in pointing out the desperate need for actual REFORM. We need to learn from our recent collapse and take strong measures to prevent it from happening again.
The bottom line is if a Wall Street giant is too big to let fail, then it is simply too big and needs to be broken up into component parts. We are too dependent on too few giant corporations and the dependency needs to stop. After such component companies become NOT too big to let fail, we need to let the fail next time and go into bankruptcy - a healthy process for reorganization plus we get to go after the assets of the CEO and executive teams that mastermind economic collapse.
And if they persist with the obscene salaries and bonuses, how about taxation at a 90 percent level. Its time to go beyond simply getting mad - we need to get even.