The further to the left or the right you move, the more your lens on life distorts.

Tuesday, January 12, 2010

Gordon Gekko—Redux

I just read that Oliver Stone, the iconoclastic director of many controversial movies, is working on Wall Street – II, no doubt a continuation of his 1980s epic about greed on Wall Street and the utter corruption of the masters of the universe who are denizens of the financial community.

Alan Blinder comments on Wall Street’s lead character and draws parallels to our recent economic debacle:
When economists first heard Gekko's now-famous dictum, "Greed is good," they thought it a crude expression of Adam Smith's "Invisible Hand"—which is one of history's great ideas. But in Smith's vision, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call "asymmetric information" (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and—when relevant—protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.

Plainly, they all failed in the financial crisis. Compensation and other types of incentives for risk taking were badly skewed. Corporate boards were asleep at the switch. Opacity reduced effective competition. Financial regulation was shamefully lax. Predators roamed the financial landscape, looting both legally and illegally. And when the Treasury and Federal Reserve rushed in to contain the damage, taxpayers were forced to pay dearly for the mistakes and avarice of others. If you want to know why the public is enraged, that, in a nutshell, is why.

In the run up to the economic crash, the media representation of George W. Bush was that of a dummy—too foolish, lazy, and disconnected to make good decisions, too gullible to notice that he was being lead astray by evil fascists like Dick Cheney. In the aftermath of the economic crash, the media representation of Barack Obama is that of the smartest guy in the room—brilliant, very focused, and so perceptive that he can sort through the good advice being provided by his advisors, who are also the smartest guys in the room.

It’s interesting, therefore, to note that after a year in office, the administration has done virtually nothing to reign in the Gordon Gekkos who still inhabit Wall Street. Regulations to control the types of financial instruments that lead to the crash have no teeth. Major banks and investments houses that were saved by TARP money (our money) are paying obscene bonuses as I write this. The same Democratic leaders who presided over the Senate banking committee prior to the crash are still in their positions after the crash.

Stated more generally, Barack Obama got so focused on healthcare, a reasonably viable system that needed only incremental reform, and forgot about the financial markets, a system that is in need of significant reform. The result—nightmarish healthcare legislation and no real regulation of our financial markets.

Defenders of the President might argue that he has a lot on his plate. All true. But the smartest guy in the room is supposed to be good multi-tasker, who can prioritize actions based on immediate need. After spending 1.5 trillion dollars of our money (well, actually it’s the Chinese’s money, to be paid back by our children and grandchildren) and watching unemployment top 10 percent, you’d think Wall Street reform might have a bit higher priority for our President

Instead, Barack Obama, Harry Reid, and Nancy Pelosi wasted six months worrying about a “public option.” The true public option is that close to 55 percent of the public doesn’t want what they’ve crafted. But I’ll bet that 80 percent wants controls that will limit the damage when the next generation of Gordon Gekkos gets crazy.

I know, I know. The smartest guy in the room has it all under control. Those of us who are not members of the educated class just don’t see the big picture. Or do we?