The Grand Illusion
Despite the various “Occupy Wall Street” and other grass-roots movements around the country, banks, bankers, and investment bankers really don’t seem to get it. Oh, they understand that people are unhappy, but, from what I can tell, they don’t seem terribly willing to accept their own role in creating this unhappiness.
It certainly didn’t help that all the large banks ducked out of the government TARP program as soon as possible so that they wouldn’t be subject to restrictions on salaries and bonuses for top executives – bonuses that often exceeded a million dollars an executive and were sometimes far, far greater. They all insist, usually off the record, that they feared “losing” top talent, but where would that talent go? To other banks?
Then after losing hundreds of billions of dollars on essentially fraudulently rated securitized mortgage assets, they took hundreds of billions of dollars in federal money, but apparently not to lend very much of it, especially not to small businesses, who are traditionally the largest creators of new jobs in the country. At the same time, they continue to foreclose on real estate on a wholesale basis, even when ordered not to by judges and states and regulators and even in cases when refinancing was feasible with an employed homeowner.
And then… there’s the entire question of why the banks are having financial difficulties. I’m an economist by training, and I have problems understanding this. They’re getting money cheaply, in some cases, almost for free, because what they pay depositors is generally less than one percent, and they can obtain federal funds at an even lower rate.
Mortgages are running 4-6%, and interest on credit card debt is in the 20% range and often in excess of 25%. Yet this vast differential between the cost of obtaining the product and the return on it apparently isn’t sufficient?
And that brings us to the latest bank fiasco. For years, the banks, all of them, have been urging customers to “go paperless.” Check your statement electronically; don’t write checks; use your debit card instead. Then, after the federal government tried to crack down on excessive fees for late payments, overdrafts, and the like, now several of the largest banks are floating the idea of a monthly fee for debit card use. Wait a second! Wasn’t this the banks’ idea in the first place? Wasn’t it supposed to reduce costs? So why are they going to charge depositors more to use their own money?
And the banks still don’t get it? With all those brilliant, highly compensated executives?
Or don’t they care?
It might interest you to know that much of the top talent consists of PhDs in physicists, mathematicians and computer scientists who would have been doing research if we still funded it. Finding a job as a PhD in those fields is somewhat discouraging: the ratio of quant jobs to other jobs requiring higher education is 5 to 1. If they weren’t here wrecking the economy they might just move to China.
Why don’t the banks get it? Well actually maybe they do. A small number of mainly financial institutions have disproportionate power over the global economy.
http://arxiv.org/PS_cache/arxiv/pdf/1107/1107.5728v2.pdf
For instance in 2007, the top 50 of the 147 superconnected companies were:
1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co
7. Legal & General Group plc
8. Vanguard Group Inc
9. UBS AG
10. Merrill Lynch & Co Inc
11. Wellington Management Co LLP
12. Deutsche Bank AG
13. Franklin Resources Inc
14. Credit Suisse Group
15. Walton Enterprises LLC
16. Bank of New York Mellon Corp
17. Natixis
18. Goldman Sachs Group Inc
19. T Rowe Price Group Inc
20. Legg Mason Inc
21. Morgan Stanley
22. Mitsubishi UFJ Financial Group Inc
23. Northern Trust Corporation
24. Société Générale
25. Bank of America Corporation
26. Lloyds TSB Group plc
27. Invesco plc
28. Allianz SE 29. TIAA
30. Old Mutual Public Limited Company
31. Aviva plc
32. Schroders plc
33. Dodge & Cox
34. Lehman Brothers Holdings Inc*
35. Sun Life Financial Inc
36. Standard Life plc
37. CNCE
38. Nomura Holdings Inc
39. The Depository Trust Company
40. Massachusetts Mutual Life Insurance
41. ING Groep NV
42. Brandes Investment Partners LP
43. Unicredito Italiano SPA
44. Deposit Insurance Corporation of Japan
45. Vereniging Aegon
46. BNP Paribas
47. Affiliated Managers Group Inc
48. Resona Holdings Inc
49. Capital Group International Inc
50. China Petrochemical Group Company
As we know, financial companies have further consolidated since, so the situation is probably even more skewed. Banks have vast entrenched power over national economies, and equally large debts. It will come falling down but most bankers are just trying to make a lot of money now, before the system collapses, so they & their families will be “safe” when it does collapse. Volatility helps them achieve their short term money making goals… just as lending to credit unworthy house owners made a previous generation of “top talent” money.
For instance, the reason European banks are terrified that Greece might default is not so much the money Greece owes them (40% of their assets) but the Collateralized Debt Obligations they will need to cover should Greece default (4x their assets). So instead they are bullying European Governments to bail Greece, etc out. The best thing for Europe would probably be a Greek default, but given the banks’ insidious power to disrupt the rest of the economy, the politicians don’t dare to let that happen.
Unfortunately the last time power was this concentrated in the hands of a few was in Europe in the 1930s. At that time, the analogs to the “Occupy Wall Street” were the communists, and the “Tea-Party” were the Fascists. Corporations supported the Fascists, just as corporations now back the Tea Party. Eventually, in Germany and Italy, the fascists won and communists were sent to concentration camps. Everyone had a World-War to distract them from what the banks had done. In Germany, a scape-goat was found (Jews). Today Muslims or illegal immigrants may serve that role. Based on history, I doubt the bankers will “get it” on their own. Instead, they’ll be looking for some way to distract us from what they are up to.
>>Unfortunately the last time power was this concentrated in the hands of a few was in Europe in the 1930s. At that time, the analogs to the “Occupy Wall Street” were the communists, and the “Tea-Party” were the Fascists.
>>
You are dead wrong in the second sentence. It’s a common mistake to ascribe the term “fascist” to the conservative side of U.S. politics. Fascists want the government to have nearly unrestricted power. Now, that’s more in line with the current liberal movement in this country. Jingoistic, free speech so long as it doesn’t offend me or provide an opposing “radical” viewpoint, sentiment is clearly being promoted today by the liberal Left.
It’s true that some conservatives may agree with that sentiment, if from their own desires to grab power, but the Tea Party are quite specific in their desire to see a clear lessening of governmental influence and control. The Tea-Party is not advocating a monolithic, oppressive government. Far from it.
I was referring to the fact corporations bankroll the Tea Party, as did the Fascists in the 1930s. I do see some other parallels. For instance, the Tea Party’s concerns about immigrants, homosexuals, abortions, muslims, etc:
“Fascists seek to rejuvenate their nation based on commitment to the national community as an organic entity, in which individuals are bound together in national identity by suprapersonal connections of ancestry, culture, and blood. To achieve this, fascists purge forces, ideas, people, and systems deemed to be the cause of decadence and degeneration.” ( http://en.wikipedia.org/wiki/Fascism )
Along these lines, I don’t see any of the Tea Party politicians concerned about the loss of civil liberties, the increased militarization, the loss of habeas corpus (eg the recent killing of a 16 year old from Colorado by a predator drone), and so on… Ron Paul excepted. Indeed Eric Cantor was railing against democracy (mobs in wall street) after calling for an uprising of the people to make their voices heard (the wrong voices responded apparently).
I also mystified by the supposed conflict between the Tea Party members and OWS members (not politicians). The problem isn’t the corporations OR government… the problem is the corporations AND the government. They’re working together. We don’t have capitalism, we have crony capitalism where the rules are distorted for the benefit of the select… Regulatory capture, lobbying, the fact you need insane amounts of money to compete in elections, the revolving door, all conspire to remove the “demos” from democracy.
Overall I would agree history won’t repeat itself identically to 80 years ago, but we are in similar straights, and I expect the various interested parties to align according to their self interest as they did last time. Last time it wasn’t pretty. I hope for all our sakes this time it will be less bad.
I would only note a couple of things that may add to the picture:
1. Bank behavior now apparently also includes hedge funds aka “shadow banks”, which also apparently have gotten into the business of taking long-term “deposits” and converting them into shorter-term “investments” by investing in CDOs and mortgage-backed securities themselves.
2. There was some indication by a recent commentator that American banks are full participants in the investment in not only Greek but also Spanish and Italian government (sovereign) bonds, and that this behavior started in 2008, when the American banks set up investment banking operations in this area to replace the old activities. This might explain the wide fluctuations in American stock markets depending on the status of Greek and other European bailouts.
By the way, I would not lump Vanguard in with the rest. Over the last 40 years, they have deservedly done well for themselves by driving down investor fees to 0.1-0.2% per year, while staying almost completely away from derivatives and other ultimately risky and destructive investment techniques. Their compensation scheme is, of course, too high at the top, so they’re not saints; but as folks who practice indexing just about exclusively, they exert no pressure on themselves or others to carry out the bad bank practices described.
My bank was one of the many that is imposing these new fees for debit card use. It is now my former bank. They charged $3 and lost a LOT more, because my money is now with a credit union that does not charge arbitraty fees. They seem perfectly willing to infuriate their customers — and all of us are free to take our money elsewhere.
Edit: as corporations did the Fascists in the 1930s.
The problem with the “banksters” is not that they don’t get it, it’s that they’ve been placed into an artificial environment where failure — literally — is not an option. Our political class has ensured that all of the largest financial movers and shakers are 100% insulated from their own malfeasance. Just as the airlines are protected, and the big auto makers, et cetera. This is not capitalism. It’s cronyism. If your business or your bank is big enough, and you have enough friends in Washington D.C. you are guaranteed a bailout any time you get into trouble. Thus none of the big corporations or banks have any incentive to change their practices, because Big Government will be along to sweep up the mess; and they’ll still get their golden parachutes and million-dollar bonuses.
If we remove the guaranteed bail-out, we subject ourselves to significant risk, yes, but I am not sure the current spiral of Big Government spending and banksterism will be corrected without re-exposing all of these cronyists to the harsh, glaring light of the free market. Small and medium businesses fail all the time. It should be the same for banks. As long as FDIC remains in place to protect the voting consumer, bank failure shouldn’t be a “meltdown” event. Yet the politicians are convinced that it will be a Depression-era meltdown unless they keep shoveling coal into the Big Bank steam engine.