Tuesday, February 5, 2013

Michael Lewis on Goldman Sachs

Michael Lewis certainly needs no help from me to become more famous and I have an almost religious aversion to linking to something from The New Republic, but this review from some supposed chastened Goldman Sachs insider asks some interesting questions.  So I have cut to those questions.

Now some very good arguments can be made that NONE of the activities of Goldman Sachs are remotely necessary for the community's survival and that it would be good to just put them out of business.  Some of my long-time readers insist this is true.  I am tempted to side with them except for one belief of mine—we institutionalists are convinced that an institution as big and powerful as Goldman Sachs would not exist unless it fulfilled some useful function at some level.  Now maybe GS is only socially useful 2% of the time but in an institution so large, this is still a lot of activity.

For example, I know a guy who went through some seriously rough economic times over the past fifteen years.  He went through an ugly divorce and then a wife who died of cancer.  All this was happening while he tried to start a business out of a small buyout settlement from a downsizing employer.  The one thing that got him through this string of disasters was his house in a nice neighborhood that was mostly paid for when all this started.  You know those "liar" loans that got packaged by the crooks?  Well his paper was in that pile.  He should have never been given those loans according to traditional banking standards and yet, they probably saved his life.  Yes he still has a lot of debt on a house that was once almost paid far, but his current mortgage is still less than 4% and I'm pretty sure it is not under water.

I understand most people got scammed during the housing bubble and are much worse off because of it.  But "loose" lending standards were probably not the problem and are not the big dilemma with the current economy.  Yes the hard-money austerity ghouls would like to make it the problem—they even use the term "moral hazard" un-ironically.  But they are wrong—the biggest problem facing the economy is the absurd costs of the 98% uselessness of Goldman Sachs and the rest of the banksters.  The real economy simply cannot afford these to-big-to-fail creatures.  Not only must they be broken up as Lewis suggests below, they must be scaled down to the costs of providing the services they claim we need.  The rest of us would be more forgiving of Goldman Sachs if they cost $0.02 on the dollar they cost us now.

The Trouble with Wall Street

The shocking news that Goldman Sachs is greedy

Why I Left Goldman Sachs: A Wall Street Story
By Greg Smith
Grand Central Publishing, 277 pp., $27.99

[BIG snip]

In the end, the reader puts down Why I Left Goldman Sachs a little mystified. Why exactly did Greg Smith leave Goldman Sachs? What did he hope to achieve? If it's change he is after, his particular story comes too late. If, say, back in 2004, someone such as Greg Smith had stepped forward and explained to the world what was going on inside Goldman, he might have spared us all a lot of pain and trouble. But today's insider confessions feel like vain and useless acts. And what would he have us do, four years after the Great Collapse, to fix the system, or to change in any way his former employer's behavior? The dystopia often imagined in the world of artificial intelligence—in which computers somehow take on a life of their own and come to rule mankind—has actually happened in the world of finance. The giant Wall Street firms have taken on lives of their own, beyond human control. The people flow into and out of them but have only incidental effect on their direction and behavior. The firms may not be intent on evil; they aren't intent on anything except short-term profits: they're insensible. If anyone attempted to seize control of one of these strange machines and impose upon them a clear moral direction, the machine would hit its own button and he would be ejected.

Stop and think once more about what has just happened on Wall Street: its most admired firm conspired to flood the financial system with worthless securities, then set itself up to profit from betting against those very same securities, and in the bargain helped to precipitate a world historic financial crisis that cost millions of people their jobs and convulsed our political system. In other places, or at other times, the firm would be put out of business, and its leaders shamed and jailed and strung from lampposts. (I am not advocating the latter.) Instead Goldman Sachs, like the other too-big-to-fail firms, has been handed tens of billions in government subsidies, on the theory that we cannot live without them. They were then permitted to pay politicians to prevent laws being passed to change their business, and bribe public officials (with the implicit promise of future employment) to neuter the laws that were passed—so that they might continue to behave in more or less the same way that brought ruin on us all. And after all this has been done, a Goldman Sachs employee steps forward to say that the people at the top of his former firm need to see the error of their ways, and become more decent, socially responsible human beings. Right. How exactly is that going to happen?

If Goldman Sachs is going to change, it will be only if change is imposed upon it from the outside—either by the market's decision that it is no longer viable in its current form or by the government's decision that we can no longer afford it. There is a bizarre but lingering aroma in the air that the government is now seeking to prevent the free market from working its magic in the financial sector-another reason that the Dodd-Frank legislation is still being watered down, and argued over, and failing to meet its self-imposed deadlines for implementation. But the financial sector is already so gummed up by government subsidies that market forces no longer operate within it. Could Goldman Sachs fail, even if it tried? If someone invented a cheaper way to finance productive enterprise, would they stand a chance against the big guys?

Along with the other too-big-to-fail firms, Goldman needs to be busted up into smaller pieces. The ultimate goal should be to create institutions so dull and easy to understand that, when a young man who works for one of them walks into a publisher's office and offers to write up his experiences, the publisher looks at him blankly and asks, "Why would anyone want to read that?" more

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