Wall Street is supposed to be a support function -- helping CEOs come up with cash to make investments. But since Ronald Reagan, Wall Street has become the tail that wags the economic dog.
Today, Paul Krugman highlighted this by pointing out that in the 1960s, Wall Street accounted for 4% of GDP -- a figure that rose to 8% by 2007. Reagan began a process of deregulating Wall Street and in 2004, the SEC let financial institutions borrow way too much. The result is an unprecedented economic catastrophe, including an American International Group (NYSE: AIG) bailout that will cost another $1.6 trillion.
This is why I am grateful to New York Attorney General Andrew Cuomo, who seems to be the only government voice not to be cowed into submission by the promise of enormous Wall Street campaign contributions. He's moving beyond the outrage over AIG's $218 million in bonuses and focusing on what I posted was the bigger issue: AIG's payment of $105 billion of taxpayer money to cover derivatives "losses" for Goldman Sachs Group (NYSE: GS) -- which got $12.9 billion from this deal -- and a posse of European banks. Cuomo is launching an investigation into why these banks got 100 cents on the dollar -- rather than taking a "haircut" as ordinary investors must.
Meanwhile, AIG has $1.6 trillion in derivatives still on its books that have yet to be "wound down." Are you wondering who will pay to wind down those contracts? If so, I suggest you walk to a mirror and take a look. The reason that taxpayers will pay is that the counterparties on those derivatives trades are none other than the biggest Wall Street banks. And they have a chokehold on the U.S. government, which will force us to cough up the cash to pay them.
Krugman points out, as I did a year ago, that deregulation and too much faith in securitization have led us to this situation. As I said then, I think securitization should be banned but the U.S. now seems determined to revive it. Unfortunately, the arguments being used to get hundreds of billions of taxpayer money are based on fear rather than facts. And it will take more people like Cuomo, who appears willing to force Wall Street to put some numbers on its claims of catastrophe absent a bailout, to get government to act in America's interest -- rather than Wall Street's.
At the Federal level, the myth of Wall Street invincibility lives on. And this will make it hard to cut back its power enough to put it in the support role that it should occupy. To revive the economy, it is not enough merely to cut back on Wall Street's power. We must create something better to replace it. In particular, more needs to be done to encourage technology-based innovation -- which in my humble opinion is the economic engine that should be attracting the most talented minds to drive the U.S. economy forward.
Until that shift occurs, Wall Street will remain the enemy within that sucks the marrow from America's economic bones.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns AIG shares and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 1)
3-27-2009 @ 2:30PM
anonymous said...
After a week of outrage from all quarters in government about the bonuses, everything cooled down. Wall street will eventually will go back to their own ways of doing things and lawmakers will be happy by getting their share of political contributions from these firms. Public gets to watch this drama once in a while but other than that nothing will change fundamentally.
3-27-2009 @ 7:13PM
winslow said...
This proves that strong government regulation is needed. You can't let the kids go wild in the candy store without adult supervision. Unfortunately, from Reagan on, the kids weren't told to behave.
3-27-2009 @ 7:06PM
rpgpa said...
"that deregulation and too much faith in securitization have led us to this situation"
and you teach??!! wow. No actually sir as long as political contributions and lobby exist, it will remain the same. Its the fox watching the chickenhouse. do some homework. Look how much Barney Frank received in contributions from the very banks hes trying to scold in front of the camera. Its no deregulation or whatever excuse you want to make it. the best advice any student can be taught is if your looking for answers always always follow the money corruption and greed, and that my friends will save lots of time!!
3-27-2009 @ 9:02PM
william lindblad said...
rpgpa - Barney does not know what the hell is going on. I agree, that he and the entire the entire Senate And House committees on banking and finance members all received election contributions - from those that they are supposed to oversee. I used to feel that they were subject to influence, until I listened more carefully to some of the hearings. It would be better if they were bought off but it is more aptly, my opening line - and it applies to all of them. Don't even wonder why we are where we are.
Back to the blog-
Peter, I think we both stated that this would be in the trillions a long time ago and the only difference was how many? I would like to point out that we were both wrong as it is going higher all the time. It seems like all are looking for buck passing answers. Let's have some more regulation? The Europeans like this idea and are going for it. ??? Beats the crap outa me? The U.K has a single overseer and did not do them a damn bit of good. The continent has J.C., Trichet I mean, and, although I think he saw this coming, could not do much either! How the hell do you regulate human nature? Cuomo, Blumenthal, et.al. are all acting in hindsight. Hindsight is 100% - ALWAYS. Where were they one year ago? It is always easy to take action when the act in question is could be identified by the general public as either undesirable or criminal in nature!
So much for our watchdogs - dogs they are.
4-04-2009 @ 8:46AM
Irish said...
winslow said...
This proves that strong government regulation is needed.
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The government can't regulate what it doesn't control. Wall St. and the banks control the government - they dictate the rules.
As for rpgpa's comment - huh? You repeated what the writer spoke of - perhaps you should learn to read before hurling an insult to the person's thoughts you copied.