Since, I know most of my readers (hi mom!) will not read the whole memo, I will post the best parts below:
The President, in these last few days following the second revolution against big government started in Massachusetts, has come out swinging savagely against “banks” in numerous ways in numerous speeches. Let’s be clear. There are legitimate issues and reforms to be discussed. But my first question is why this exact moment? The answer is simple. When a failing government with authoritarian impulses needs help, it’s pretty standard strategy to call down a pogrom against an unpopular class of citizens. The bankers are nothing if not unpopular. Unfortunately for this President, he will, I hope, find the financial community not cowering from his Cossacks on a shtetl in the Pale of Settlement (Greenwich, CT), but meeting his accusations with logic and patriotism.
First let’s discuss the President’s recent rhetoric. Paraphrasing him, “we will get back all the people’s money.” And the applause line, “every dime!” OK, fine. But most of the banks, and in particular the ones in the headlines for paying large bonuses, have paid back all their TARP loans. This logic causes him no pause. Apparently, and we must read between the lines as this is the most transparent administration ever, he means all the money lent out to everyone through TARP not just to banks. So, loans to the car companies, and AIG, and FNMA/FHLMC, all must be paid back, but by the banks, who already paid back their own loans. Makes sense. Has this administration seen a human activity they don’t instinctively wish to socialize?
.......Now let’s talk about the narrative that’s been sold. We hear readily, from politicians of the President’s party, and his media choir, statements like “the bankers who brought us this crisis” as a lead-in to any discussion (sometimes about the weather). As one tiny example consider the New York Times editorial of January 13, 2010, with the Leftist dream title of, “Tax Them Both.” Early on they throw in the simple line “Let’s be clear, the crisis spawned by banks’ recklessness has cost the country…” Not the crisis aided by banks’ recklessness, but the crisis spawned by banks’ recklessness, no hint of caveat or nuance. The rest of us were just babes in the woods doing green jobs and singing Disney songs while birds danced on our shoulders, but the bad bank-witch made us eat her poisoned apples. This is one example but if you dare/bet me to come up with 10,000 more, I will win.
.......Government encouraged wild lending, virtually creating the sub-prime market, and up until the end our representatives swore the GSE’s were all ok (the fact that the President is flanked by Barney Frank while discussing how to ‘get’ the terrible bankers should alone make you turn the dial and watch cartoons). Government land use restrictions added more than a little oomph to real estate prices, particularly in areas where the bubble grew largest. In addition, government kept money easy (rates low) to grease the bubble’s wheels. Note, mixing metaphors is allowed when appalled in Greenwich. In New Canaan it’s frowned upon.
.......But the above, a world gone mad and all of us sharing blame, is not the “narrative.” The narrative is Wall Street gravely injured us all, to their sole shame, so now let’s get them! Why? Well, politicians certainly aren’t going to blame themselves. They aren’t going to blame individuals who, what’s that thing individuals do again, yeah, they vote. The press, certainly this press, with this government, mainly repeats the party line, sometimes with their legs tingling. So, who should they blame? Well, what better than casting sole blame on the evil bankers? Who likes a banker? I’m not sure I do and many are my friends. I’m not sure their wives or husbands like them. But that doesn’t make them guiltier than others. Every financial crisis, for at least our country’s history and probably way longer, has been blamed on bankers and speculators, and generally this has been one-sided, exclusionary of the many real culprits, and often dead wrong. The narrative once established is a powerful thing to fight, but fight it we must, as it’s simply not true. Bankers deserve their share of castigation, but no more than their share, and that inconvenient truth makes things a lot more complicated.
.....Although the stated reason for punishing banks is the false accusation that they wrecked the economy all on their lonesome, much of the populist resonance of this libel springs from the inconsistent argument that bankers are socially useless parasites skimming money from real transactions. This doublethink is very old. The belief is moneylenders and speculators are powerful enough to cause all our economic problems, but not useful enough to deserve a share of our economic successes. Where this power without usefulness derives from is never clear. In fact, highly skilled bankers (in the broad sense, including lenders, traders, asset managers and deal makers) are essential to an efficient modern economy and some of them will therefore earn very large amounts of money. What they create is as real as a shoemaker, as a modern economy would produce a lot less shoes if instead of banking we relied on something closer to the barter system. If you penalize these services, or legislate away the freedom to innovate and to get rich by doing them better than anyone else, you destroy both a fundamental economic freedom and a key component of economic growth.
......So, how do you fix too-big-to-fail? Well, this is complicated, give me a moment. I got it. You let them fail. There’s a famous episode of Happy Days (ok, by "famous" I mean I remember it) where Ritchie needs help against a bully. The Fonz (yeah, I went there) advises him to bluff, act like a maniac and the bully will back off. Ritchie does this and turns to the Fonz, with his back to the bully, and asks, “is it working?” The Fonz says no and Ritchie asks why? “Well”, the Fonz explains, “it turns out that for this to work, some time in your life you have to have actually hit someone.” Ritchie responds with those immortal words, “that’s a very important detail to have left out, Fonz!” Well our government repeatedly blinking and bailing out those who should have been allowed to fail (including the whole economy which occasionally should’ve been allowed to suffer more without a “Greenspan Put”) was a very important detail to have left out!
......We commonly hear that this crisis was a failure of regulation, but we rarely hear what exact regulation would have saved us, particularly from the real estate bubble that was most of the problem (most real-estate rules that changed in the last few decades were towards Left-leaning rules that exacerbated this bubble). Anyway, I don’t argue all regulation is bad, or that we couldn’t improve it, but I do argue that doing away with too-big-to-fail is way more important than tinkering with regulation, and in fact renders much of the tinkering moot. Also I’d note that the fixed income markets are far more regulated than the equity markets, which did not fail us this time or in their own meltdown in 2000. Better regulation might be part of the solution, but bad regulation was not the main cause of the crisis and good regulation cannot do much if we retain too-big-to-fail.
.......We should fix the system going forward but by making it more of a free market not less. Punish failure. Don’t institutionalize too-big-to-fail by accepting it and then try to regulate away large failures with telephone books of rules and coercive government interference. Cheer outsized rewards when they are the result of two-sided risk where skin was in the game, but castigate then eliminate outsized rewards when they are the result of one-sided risk where the government foolishly has the wrong end of the deal. Get the government out of social engineering and dictating to private individuals how to live, work, invest, and conduct commerce. Most of all, do not look for simple answers and scapegoats, particularly for political gain, it’s disgusting and beneath the dignity we should expect from our leaders.
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