The Arrogance of Fallen Gods

It is high time we started insisting that Wall Street traders are human beings and not gods who deserve the first fruits of the earth. Wall Street had to be and was "reassured" by the reappointment of Ben Bernanke as Chairman of the Federal Reserve Board.

Reappointing Bernanke means approving of the $1 trillion in money supply offered to the banks and guaranteeing to Wall Street a continuation of the subsidies, payoffs and profits they have received or been promised over the past year -- and these are enormous.

Take Goldman Sachs, for instance. The firm paid $1.1 billion for the use of the TARP money that it recently paid back. But it got, in addition, an otherwise cost-free insurance on its $1 trillion balance sheet and on hundreds of billions worth of off-balance sheet liabilities that might otherwise have paid pennies on the dollar.

The deep guarantees that Bernanke gave to the entire financial sector mean that these firms can take enormous risks, "earn" above market returns and never worry about the downside. This is called "moral hazard:" your risk is covered by someone else so you take the risk and any gain and someone else pays any loss.

This means that Wall Street has an incentive to leverage, that is, borrow without limit, gamble wildly with other people's money, rake in the profits and otherwise repeat the scenario that brought on the crisis and recession we are now suffering through.

In the process, these masters of the universe screwed up everything they touched, except their own salaries and bonuses, as they brought the world to a near financial collapse and kicked off a recession of once-in-a-century proportions.

Along the way and in clear violation of our antitrust laws, Goldman Sachs, AIG, Citigroup, Bank of America and their brethren became "too big to fail." Actually, since their very existence threatens the stability of the system, they should really be too big to be allowed to exist. In the past 50 years, and with Fed approval, the 10 largest US financial institutions increased their share of financial assets from 10 percent to more than 50 percent.

That growth led to a real rip-off. In the last 40 years, the financial industry increased its share of GDP from 2 percent to 8 percent. Part of this might be just a naturally changing economy. Except that even after those gargantuan salaries are taken out, the industry still takes for itself 30 percent of total US profit. That 30 percent share of profit is basically theft because they do nothing that merits it.

The industry, of course, argues that its returns are commensurate with the contribution it makes to the economy. What nonsense! Fifty percent of the trades on the New York Stock Exchange are "programmed trading" which takes place without human intervention. And for that they received billions of dollars.

The largest salaries are paid for making “flash” trades at 1000th of a second faster than someone else. The traders receive salaries in the tens of millions while contributing no improvement whatsoever to the economic allocation of resources. All the money they receive is by definition misallocated and therefore undeserved.

These firms, with a little help from their government friends, are reporting record profits and obscene salaries and bonuses. They did not learn from the Long Term Capital Management crash nor the dot.com bubble nor the housing bubble and not even the near meltdown of a year ago.

In the meantime and in crisis, Bernanke broke every rule in the book and certainly at least stretched a lot of law to bail out the banks and the rich. He left the poor mortgage holder to lose his house.

Bernanke also set precedents in regard to contract and ownership law. He nationalized financial firms like Fannie and Freddie and AIG. He threatened to remove the management and board of directors of Bank of America if they tried to get out from under his protective wing. He was a partner in the seizure of the auto companies where contracts with workers and bondholders were voided without all the niceties of bankruptcy law.

You would think someone on Wall Street would hear the wake-up call. Instead, the Obama administration’s "re-regulation" of Wall Street was lobbied down to nothing.

Goldman Sachs, former and present, has a tight grip on government financial policy. They reappointed Ben Bernanke. They decide who gets bailed out. They decide what value will be put on assets. And they always look out for themselves first.

People who say they want their country back should be picketing Goldman Sachs, J.P. Morgan, Bank of America and that crowd, not the poor fumbling Congressmen and Senators who are, like us, trying to understand what comes next.