Recently, President Obama went to New York and spoke to the Wall Street bankers. He admonished them for their role in the financial crisis that gripped the country a year ago.
He said the bankers owed the taxpayers and should not shirk their "obligation to the goal of wider recovery, a more stable system and a more broadly shared prosperity." He exhorted Wall Street to help families, small business owners and communities with financing and loans.
Oh my. I think the president has spent too much time in the classroom or on the campaign trail and not enough time on the trading floor. I learned long ago about Wall Street when a salesman took me aside and said "Jeffrey, this ain't church."
The Wall Street banks are not charitable organizations. They aren't out to save your soul. They just want to make money. And, you will be their friend as long as you make that happen.
This may sound terribly cynical to some. Sorry, but my experience is that you can't shame these guys; hitting them in their wallet is the only way to get their attention.
Goldman Sachs is one of Wall Street's biggest firms and the recipient of taxpayer bailout funds, which it quickly repaid after the crisis waned. It received other subsidies from the government as well. The firm is now rolling in dough, partly because other competitors have fallen by the wayside.
Rolling Stone magazine deliciously skewered Goldman as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." It's not far from the truth!
Policymakers are now struggling to rein in the bankers and "redesign" our financial system to prevent future crises. They want to improve the safety and soundness of banking. One idea is a new "council of regulators" who will identify looming crises and do something about them.
I'm skeptical that this will work. Where were they the last time around? Why would we believe that these "experts" are any better than the last group?
Forecasting is difficult, especially when it's about the future! Throughout history we have been subject to financial crisis and panics. They keep happening. Manias range from tulip bulbs in Holland in the 1630s to dot.com stocks in America in the 1990s.
It is hard to rein in the animal spirits of investors. We humans are subject to greed and fear, euphoria and despair, along with the inevitable boom and bust. That old adage about history not repeating but rhyming is true.
What we do know is that leverage -- too much debt -- can often lead to ruin when the markets turn. Policymakers are right to require banks to hold more equity capital. These reserves will cover losses and stop banks from going overboard during the boom times.
We don't want Wall Street betting with taxpayer money or subsidized deposits either. We have discovered that the banking system is too important -- like a utility -- to the smooth functioning of our economy.
Some have gone as far as describing the big banks as utilities with casinos attached. We should reinstate the Glass-Steagall legislation that once separated plain vanilla commercial banking from higher-risk investment banking and trading. Regulate the banks like a utility and let the brokerage operations stand on their own like the old days.
Finally, we must address the too big to fail question. If bankers believe the government will be there to soften the fall they will take more risks than is prudent. That is the consequence of "privatizing the gains and socializing the losses." If our politicians get to pick winners and losers they will favor the big systemically important losers. The result will be a zombie economy.
If an entity is too big to fail then it is too big in my books. We should work to break up these highly interconnected and still undercapitalized banking giants. Oligopolies are seldom good. Only oodles of competition will keep Wall Street honest. Well, at least in check.
Jeff Pantages is an investment adviser who lives in Anchorage.
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