Fairness

“What cannot be accepted are financial rescue operations that benefit the unworthy and cause losses to other important groups – like taxpayers and wage earners. And that, unfortunately, is the perception held by many nowadays, particularly in the United States.”

That’s Brad DeLong (regular blog here) in Project Syndicate (hat tip Mark Thoma).

But Brad, is it just a perception, or is it real? I think DeLong is saying it’s real, but I’m not certain.

“Officials cannot say that a global recession has been avoided; that they ‘bailed in’ the banks; that – with the exception of Lehman Brothers and Bear Stearns – they forced the bad speculative actors into bankruptcy; or that the government made money on the deal.*

“It is still true that the banking-sector policies that were undertaken were good – or at least better than doing nothing. But the certainty that matters would have been much worse under a hands-off approach to the financial sector, à la Republican Treasury Secretary Andrew Mellon in 1930-1931, is not concrete enough to alter public perceptions. What is concrete enough are soaring bankers’ bonuses and a real economy that continues to shed jobs.”

I agree that the banking-sector rescue was better than nothing; whether it was “good” requires a consideration of the alternatives, which is beyond my scope here. But I think that it is true–as DeLong strongly implies–that it benefited the unworthy and caused losses to other groups (at least relative to other possible options). And on a political level I think that President Obama has to go beyond just feeling people’s pain.

We had a family discussion about Obama yesterday. He has gotten a bad rap for not accomplishing more in the past year. To me, the real question is whether he simply couldn’t get more done because of Congress, and it was actually a wise strategy for him to sit in the background and let Pelosi, Reid, and Baucus (and Lieberman??!!) take the lead, or whether he could have gotten more done by pushing harder and more publicly. I have no basis to know what the right legislative strategy is for health care, which is an intensely divisive issue where more Obama might have backfired. When it comes to financial reform, however, I think he clearly has not done enough. The public overwhelmingly wants reform; they just don’t know what reform should look like, and Obama and his team haven’t done a good job of showing them what it should be. As a result, they have not capitalized on the strong anti-Wall Street sentiment, and the result has been a classic interest-group battle on Capitol Hill.

* James here: The government at times tries to say it made money on the deal, which is true of some individual TARP investments, but it’s a much harder case to make for the rescue as a whole.

Update: Brad DeLong answers below.

27 responses to “Fairness

  1. James: “But Brad, is it just a perception, or is it real? I think DeLong is saying it’s real, but I’m not certain.”

    It is NOT a perception: it is real.

    But reading DeLong’s piece, I conclude that he just means perception.

    But what else to expect from someone who writes:
    “Perhaps the best way to view a financial crisis is to look at it as a collapse in the risk tolerance of investors in private financial markets.”

    Clearly, that was NOT the case this time. Easy money, greed, opacity, fraud had hidden the risk. As the CEO of Goldman Sachs said — after the crisis unfolded: Wow, there were only 3 AAA companies and 18,000 AAA financial products. How could this ever be?!

    Most investors never tolerated huge risks, but they were lied to. It is not that their risk appetite collapsed, but their trust in financial statements.

    Obviously, if one gets the cause wrong, one comes up with the wrong cure.

  2. Asset prices – of stocks and houses – are still way above their long-term averages, when measured in a simple and robust way such as % of GDP. Instead of rescuing asset prices from falling too low, we have held them too high. That they were at even higher levels recently, levels unprecedented in history, is not an indication that today’s somewhat lower levels are normal.

    What was an emergency rescue operation for the economy has been hijacked to perpetuate unnaturally high asset prices forever. This is damaging to our economy, allowing continued over-investment in the wrong economic activities, and it rewards the wrong people who utterly failed to see that the recent asset price bubble was a lot more than the normal upcycle.

  3. (a) The rescue operations caused gains but not losses to other groups…

    (b) But a lot of the gains to the bankers–and certainly the losses to the government–were not necessary in order to get the gains for the public as a whole…

  4. I suspect Brad’s views do not differ greatly from James’s or Simon’s…

  5. [more-or-less reposted from my own blog]

    My sense is that Obama sees politics primarily as deal-making among the powerful.

    And now, live from Washington DC, it’s Barry Obama’s Let’s Make a Deal!

  6. > Asset prices – of stocks and houses – are still way above their long-term averages, when measured in a simple and robust way such as % of GDP.

    i don’t think you’re right about that.

  7. I can only ask, where would we be now if we had elected one of the other candidates president?

  8. Take, for example, the following data on equities from the Federal Flow of Funds report:

    1. “nonfarm nonfinancial corporate business corporate equities liability”

    2. GDP

    From 1946, the ratio of 1 to 2 varies at year-ends between 40% and 110% (with a few exceptions like 1999). It’s currently around 90%, a level it reached only once before 1996, at the peak of the stock high in 1968.

    OK, your turn to bring solid data.

  9. on obama

    i think he is missing in action

    he is there but his presence is not felt

    i see obama (he looks presidential),

    i hear obama (he sounds presidential).

    but i don’t feel obama, i don’t feel his presence

    i felt george bush, bill clinton, (didn’t feel gw – felt baker), regan, carter, nixon, johnson, kennedy

    i don’t feel obama’s presence

    maybe i expected more and i am disappointed

  10. PatR: “Asset prices – of stocks and houses – are still way above their long-term averages, when measured in a simple and robust way such as % of GDP.”

    Is % of GDP robust right now?

  11. Remember Obama’s history as a community organizer. That involves conflict resolution, facilitation, and deal-making. Also, as editor of the “Harvard Law Review”, he balanced the interests of quite different viewpoints. It’s like Henry Clay finally got to be President.

  12. I, for one, believe that the “bail-in” was warranted, but not in the way in which it occurred. Knee-jerk politics is always the worst, and Henry Paulson took serious advantage of the knee-jerk in Congress at the prospect of what he preached as pending catastrophe. So they acted in knee-jerk fashion and took rash and ill-conceived action. And, Paulson didn’t do what he said he would. He just gave away billions to his friends. I agree that he “saved” the banks, but, in doing it the way in which he did, he actually created a larger, longer lived monster than had already developed. NO STRINGS ATTACHED!!! So, let’s see, first the government, in cahoots with big finance, creates a casino, and then gives them an unlimited credit line to play craps and roulette. AND, WHEN THEY BECOME GAMBLING ADDICTS, WE PROMISE THEM THAT REGARDLESS OF WHAT THEY DO IN THE FUTURE, WE’LL KEEP SPONSORING THEIR DESTRUCTIVE HABITS — NO NEED FOR REHAB OR COUNSELING, JUST STAY AT THE TABLES, WE GOT YOUR BACKS, AD INFINITUM. And the toxic derivatives live on and won’t have to be disclosed or traded transparently, and the guarantees live on, and the low interest (almost no interest) funding continues.

    What did Eliot famously say: “This is the way the world ends, not with a bang, but a whimper.” And, folks, that’s all: 300 rich guys, 500 intransigent legislators, and 300,000,000 whimpering citizens. What a great country.

  13. If not robust, the weakness is in a direction that only reinforces PatR’s point. That is, the most likely error in “GDP” is that the present figure is inflated by a variety of factors. The factors include the inclusion of government spending as “productive” (when we all know that it’s just misallocative friction on the real economy) and the undue credit given to service sector jobs (particularly retail, legal, and financial sectors) as “productive”.

    Thus, if anything, the P/GDP comparison understates the present over-valuation of equities.

    Another interesting statistic is the P/(net cash flow) for the S&P 500.

  14. ..the financial expression of greed did not arise in a vacuum…we have created a culture of ‘I get mine’ and we are now seeing the tip of the iceberg insofar as the ‘whimpering’ is concerned…for long everyone thought it was the neighbor who was going to ‘pay for it’ and silently and efficiently the financial system put everyone but themselves in a position in which everyone ‘got it’ in the worst way…people were just not looking and now they are slowly coming to view the underpinnings of the culture as a whole,not just the financial system…wait till the next wave of ‘bonuses’ if you take issue with my assessment…as for the ‘bailout’, it was mostly a ‘bailin’ seeins as how those who had say of who-got-what belong to the same financial apparatus that got us into this mess in the first place…from their perspective, amoral at that (and that is the grave problem here), it was ‘ok’ to help their friends, and let us sort out the consequences to the public of such a decision…seeing this moral morass unwind itself, one may come to the conclusion, that Greenspan is the only actor in this play who finally understood the real cause of the problem when he seemed surprised that those doing the selling would have the best interests of the buyers in mind….

  15. ..the financial expression of greed did not arise in a vacuum…we have created a culture of ‘I get mine’ and we are now seeing the tip of the iceberg insofar as the ‘whimpering’ is concerned…for long everyone thought it was the neighbor who was going to ‘pay for it’ and silently and efficiently the financial system put everyone but themselves in a position in which everyone ‘got it’ in the worst way…people were just not looking and now they are slowly coming to view the underpinnings of the culture as a whole,not just the financial system…wait till the next wave of ‘bonuses’ if you take issue with my assessment…as for the ‘bailout’, it was mostly a ‘bailin’ seeins as how those who had say of who-got-what belong to the same financial apparatus that got us into this mess in the first place…from their perspective, amoral at that (and that is the grave problem here), it was ‘ok’ to help their friends, and let us sort out the consequences to the public of such a decision later on…seeing this moral morass unwind itself, one may come to the conclusion, that Greenspan is the only actor in this play who finally understood the real cause of the problem when he seemed surprised that those doing the selling would have the best interests of the buyers in mind….

  16. I’m reading a lot of well-thought-out reasoning, but it appears to be more from the ivory tower than the real world. Where are the promised jobs from this Administration? Every policy is, in actuality, a job killer in one form or another, in so far as the intended or unintended consequences of such policy will hinder or destroy job creation. Health Care, Cap and Trade, Card Check, and Amnesty; all will have perverse negative effects on employment. Ask any owner of a small or medium sized business to outline his/her future plans; he/she would be hard pressed to do so given the current and foreseeable future environment. Small business owners are smart enough to connect the dots; i.e. the connection between Government policy and their economic futures. They’re a frustrated, unhappy bunch at this point.

  17. When you gonna phone up your old buddy Larry Summers and tell him mortgage readjustment for those currently undergoing hardship is much more intelligent policy than throwing money at Fannie and Freddie executive salaries????

  18. I don’t know if anybody saw this study from the Ross School at the University of Michigan? From the abstract:

    A new study by Ross professors Ran Duchin and Denis Sosyura found that banks with connections to members of congressional finance committees and banks whose executives served on Federal Reserve boards were more likely to receive funds from the Troubled Asset Relief Program, the federal government’s program to purchase assets and equity from financial institutions to strengthen its financial sector.

    Further, their research shows that TARP investment amounts were positively related to banks’ political contributions and lobbying expenditures, and that, overall, the effect of political influence was strongest for poorly performing banks.

    So it’s worse than DeLong says (perception or reality). It’s not just the unworthy, it’s the unworthiest of the unworthy.

  19. (a) may be true, but only if you divorce the very short-term rescue operations from the preceding policy of deliberately inflating a real estate bubble that left people with crippling debt, and the subsequent resurrection of a rigged and plainly untrustworthy system that is not going to be able to improve employment by mobilizing capital for productive (as opposed to speculative) purposes.

  20. It is a great country, in a great deal of trouble. There’s a Spanish saying, Take what you want, then pay for it. Corporate power has been growing since the end of WWII, but 29 years ago with Reaganomics it took a great leap forward. There’s a word for what we have now: corporatism, which the online Oxford dictionary defines as “the control of a state or organization by large interest groups.” What is to be done? Among many other long-term, difficult tasks, work for major campaign finance reform.

  21. His hero, Lincoln, tried very hard to compromise with the South.

    I think it’s the sheep and wolves compromising over dinner.

  22. ??? Were is that based on?

    DeLong’s views differ greatly from Simon’s and James’.
    E.g. DeLongs description of the main cause of this crisis: a collapse in risk appetite by investors.
    Such nonsense is not found on this blog.

    Another example: DeLong pathetic attempt on his blog to try to undo the Taibbi article about Obama picking pro-Wall Streeters on the first day after his ‘change’ election victory, and still up to this day.

  23. Such a question is always for a parallel universe.

    However, on another blog a commenter wrote he wished McGain would have been elected, because we the people would never have accepted all those bailouts of bonus banksters from McGain.

    Obama, being tragically charismatic (from yet another commentor), still gets away with it; that is,… at least until now.

  24. Why is the United States the exact opposite of a banana republic? Answer: In a banana republic the government owns the banks.

  25. Great comment(s), carol! Reading comments like yours (i.e. someone who get it) is the only thing that gives me hope. It sure isn’t the liars in Washington.

    Trust has been destroyed, and the O hasn’t done anything to regain it legitimately. Unfortunately, it appears trust is the one thing that our leaders feel should just be another illusion, rather than real.

    RIP, Trust!

    “Goldman Sachs denies betting against its clients on CDOs”

    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6907640/Goldman-Sachs-denies-betting-against-its-clients-on-CDOs.html

    Uh-huh!

  26. Mr. DeLong,

    Are you suggesting that savers have not been materially damaged by the rescues? They made economic decisions not to speculate, as debt levels were too high, asset prices too high relative to incomes, etc.

    Is a loss in purchasing power not a loss?

  27. Let’s see Brad, financial sector collapsed in ’08 after years of profiting on garbage. (AIGFP made billions! Where’d it go)

    Bailout billions went to many financial firms, AIG, that global insurance company known for expertise in the business of insurance, and some large US auto manufacturers, all of which would be bankrupt had the US not taken action.

    And yes, I include those doing god’s work over at Goldman Sachs as those who’d be bankrupt without Paulson’s TARP.

    As soon as the ink is dry on the TARP legislation, American businesses start shedding jobs by the millions.

    Today, 25% of all mortgages in this country are underwater.

    25% of US employees are under- or unemployed.

    Retirement and college funds have been decimated.

    And those in AIG and Goldman Sachs and Citi and BoA are reporting large (biggest ever!) bonuses. And if the execs don’t get them, they’ll quit.

    The gains for the public as a whole – that not-quite-as-catastrophic collapse of the economy, thanks to the bailout, seem largely invisible compared to the bonus bonanza being reaped over there on Wall Street…