Thoughts on Wall Street 2.0

Check out the following passage.  Is it from the Onion?

No, amazingly, it is from the NY Times today:

During World War I, Americans were exhorted to buy Liberty Bonds to help their soldiers on the front.

Now, it seems, they will be asked to come to the aid of their banks - with the added inducement of possibly making some money for themselves.

As part of its sweeping plan to purge banks of troublesome assets, the Obama administration is encouraging several large investment companies to create the financial-crisis equivalent of war bonds: bailout funds.

The idea is that these investments, akin to mutual funds that buy stocks and bonds, would give ordinary Americans a chance to profit from the bailouts that are being financed by their tax dollars. But there is another, deeply political motivation as well: to quiet accusations that all of these giant bailouts will benefit only Wall Street plutocrats.

The potential risks - politically for the administration, and financially for would-be investors - are considerable.

The funds, the thinking goes, would buy troubled mortgage securities from banks, enabling the lenders to make the loans that are needed to rekindle the economy. Many of the loans that back these securities were made during the subprime era. If all goes well, the funds will eventually sell the investments at a profit.

But, as with any investment, there are risks. If, as some analysts suspect, the banks' assets are worth even less than believed, the funds' investors could suffer significant losses. Nonetheless, the administration and executives in the financial industry are pushing to establish the investment funds, in part to counter swelling hostility against the financial industry.

Many Americans are outraged that companies like the American International Group paid out many millions in bonuses despite crippling losses and multibillion-dollar rescues from Washington.

The embrace of smaller investors underscores the concern in Washington and on Wall Street that Americans' anger could imperil further efforts to stimulate the economy with vast amounts of government spending. Many Americans say they believe the bailout programs - and the potentially rich profits they could yield - will benefit only a golden few, including some of the institutions that helped push the economy to the brink.

"This is an opportunity to forge an alliance between Main Street, Wall Street and K Street," said Steven A. Baffico, an executive at BlackRock, referring to the Washington address of many lobbying firms. BlackRock, a giant money management firm, is playing a central role in the government's efforts and is considering creating a bailout fund. "It's giving the guy on Main Street an equal seat at the table next to the big guys," he said.

The new funds are still under discussion, and they are unlikely to be established for several months, if indeed the plans go through at all.

Throughout this financial and economic crisis there has been this lingering sense that those close to Wall Street believe a "recovery" is possible, that our economy and our behaviors will snap back to the pre-crash boom years when cash flowed, government regulators looked the other way and profits were extraordinary.  That those in charge need to channel this "populist" anger towards the Street, calm it down and things will settle back down to normal. 

I just don't think this is going to happen. 

First, economic elites have been deeply and dangerously out of touch with the American middle class this decade. For elites it was a time of boom, appreciating assets, cheap money, and a radical reduction in their taxes.  For those struggling to make it the Bush years were a very different experience - declining incomes, more without health insurance and in poverty, exploding debt and a sense of falling further and further behind. 

Both the intensity of the anger towards the banks and the steepness of our Great Recession can only be understood if one understands that the typical family was already in distress before the Recession began; that for them the economy turned tough years ago and those in power were unconcerned, did nothing about it and if anything told them in a terribly Orwellian fashion that contrary to their experience things were actually good.  This "anger" is not therefore ephemeral, and will not quickly dissipate.  It has built up over a long time, a time when those in power enriched themselves and offered to everyone else a modern version of "let them eat cake."  

Second, what ails the American financial system today is not a crisis in confidence but a crisis of trust; and I agree with Barack Obama that because our families were already in such distress, and have such unsustainable levels of debt the "voracious American consumer" is not coming back soon.  What this means in policy terms is that the Obama Administration should not be focused on saving discredited financial institutions and going back to the good ole days.  Brands like AIG and Citigroup cannot be saved.  Who in their right mind will do business with them given what has happened? What leaders in the developing world, so harmed by this American-led global economic crisis, will allow their citizens or their governments to put money in these wildly irresponsible American institutions?  The government should immediately begin dismembering these companies, selling off whatever valuable parts remain for like Chrysler they are no longer capable of surviving as independent brands. 

For our financial system to regain the trust of Americans and those abroad a much serious effort will have to be made to show that the lax regulatory system has been fixed and consumers better protected; those at the center of the global crisis expunged and damaged brands shut down (and not put in charge of fixing the system itself); and if in any way in this process of fixing everything a small number of elites get super wealthy all these reforms, this effort to build back global trust, may be for naught. 

As I wrote when I returned from my recent trip to Chile, I think the American financial community is in deep denial about the global loss of trust that has come from their reckless behavior.  To many the Masters of the Universe have now become reckless, greedy exporters of economic contagion.  Salvaging the once highly successful American global financial sector will require much more than the firing of a few CEOs or a few slap on the wrists while floating these very same companies trillions of dollars.  It will require first and foremost a rejection of the concept of "recovery;" and it will require a fundamental transformation of Wall Street, a Wall Street 2.0, a new, improved, different and chastened Wall Street, and the sooner we get there the better for all of us.