Wall Street, Tuesday Noon
by Levi Asher on Tuesday, September 16, 2008 02:08 pm
Like many software developers in New York City, I've done my time in the financial district. I was working on the 17th floor of the JP Morgan bank on 60 Wall (the building is now occupied by Deutsche Bank) when I started LitKicks, and I often used to write about life on Wall Street in those days. Since then I've left downtown Manhattan to develop websites for magazine publishers, record companies, television networks and litigation consultants, yet somehow these days I find myself back again in the skyscraper jungle on Manhattan's lower tip. I'm writing this from an office a couple of blocks north of Wall Street, where (in case you hadn't heard) they've been having a hell of a rough time.
From my vantage point as a Java coder in a cubicle, I can't tell what's wrong with Lehman Brothers and Merrill Lynch and the entire industry. I listened to televised sound bites last night from John McCain (who says America's economic structure is fundamentally sound, but charges that an "alphabet soup" of regulating bodies has the credit industry confused) and Barack Obama (who says we need better and more effective regulation). It's not because I work here, but rather because I have common sense, that I know Obama's answer is better than McCain's. We are dealing with the classic tradeoff between laissez-faire deregulation (McCain) and governmental oversight (Obama). Investment banks are collapsing due to bad loans, and I'd rather strengthen the regulating bodies than criticize them.
Why do banks make bad loans? Because loans are a source of profit -- both long-term profit (interest) and immediate profit (fees). As long as banks are issuing loans for long-term profit, they are likely to make good decisions. The problem arises when the short-term reward -- the money that changes hands whenever a deal is made -- becomes more of a motivation than the long-term reward. In recent decades, the USA's banking industry has moved significantly beyond sensible, earthbound business practices towards an unprecedented emphasis on perpetual growth and unnatural profit. The problems this trend has created transcend politics, and will not be easily solved. But at least Barack Obama's statements identify and address the problem. McCain's notion that our economic habits are fundamentally sound and that the problems can be solved by "cleaning up" governmental regulation rather than increasing the level of regulation amounts to complete denial that there is a serious problem that needs to be fixed.
2. Richard Wright, who played sublime keyboard solos and sang harmony vocals for Pink Floyd with a placid smile on his face, has died. Wright's proudest moment may have been the composition of "The Great Gig in the Sky", Pink Floyd's most heavenly song.
3. Frank Mundus, a Long Island fisherman who inspired the character Quint in Peter Benchley's novel Jaws, has also died.
6 reponses to "Wall Street, Tuesday Noon"
Whatever happened to the Cherry Orchard?
Hah. I found out I couldn't support two blogs, so everybody will have to suffer with my blathering on non-literary issues here.
McCain's notion that our economic habits are fundamentally sound and that the problems can be solved by "cleaning up" governmental regulation rather than increasing the level of regulation amounts to complete denial that there is a serious problem that needs to be fixed.
This is a fundamental problem of Americans, I think, conservatives and liberals, Republicans and Democrats. We believe ourselves to be a nation or system of government fundamentally near-perfect or without major flaws. The vast majority of Americans, even those critical of the government, still think we have the "best" system of all the others. Very few Americans begin with the notion that our system and nation are fundamentally flawed. Instead, most think things just need fixin' - that Obama can roll up his sleeves and fix what Bush broke, as if such deep and serious problem can develop from nothing to full-blown crisis in less than 8 years.
A perfect illustration of this w/r/t Obama can be found in his positions on Iraq and Afghanistan: simply put, he wants to pull out of Iraq and beef up US forces in Afghanistan. Obama (and most of his supporters, it seems) believe our invasion and bombardment of Afghan territory was justified by 9/11, and that the fundamentally strong political philosophies of America ought to be expanded to bad, backward countries like Afghanistan. Further justifications sometimes include the Afghan/Muslim record on human rights (especially the rights of women and homosexuals), but all seem based around this bizarre idea that we are somehow "right," no matter the evidence to the contrary.
In my view, which is as you know decidedly cynical, McCain is the perfect man to lead this blind, arrogant, dimwitted, TV-addled nation. (Not that I'm voting for either of these corporate-approved choices.) He picked the ideal woman to help him as well: pitch-perfect proud of her ignorance, insanely devoted to the idea that she is right (no matter the evidence to the contrary), She Who Must Not Be Named represents this country better than the Statue of Liberty ever did.
Just when you thought it was safe to go back in the water, too...
This whole sub-prime loan thing is an example of where government oversight is needed in banking. The banks decided to lend to sub-prime borrowers, i.e. people that might not be able to repay the loan. They did this because they could charge a higher interest rate. Then they packaged the risk and sold it off to funds, who bundled high risk loans with low risk loans to create a "blended" rate of return that was more attractive than a "boring" but safe investment. A lot of French banks added sub-prime elements to their funds, as did British and German banks. The risk was commoditized. It worked ok until the high risk borrowers couldn't repay their loans. Then the loan repayments dried up, and to make matters worse, the assets backing the loans - the houses that people bought with subprime loans, along with all other houses in the region, lost value.
The crisis has had a global effect, because of the above mentioned European banks buying into the subprime concept.
In my view, if there were government regulations in place on the subprimes, like what percentage of subprimes could be originated vs. conventional loans, and if the banks had to have a certain amount of capital set aside to cover their exposure to subprime loans, perhaps we wouldn't have had the crisis, or it wouldn't have been so bad. I don't know what regulations were in effect because I was out of the country when this started. But I suspect there were damn few.
I know it is fashionable in some circles to say "the market will take care of it", but when you are talking about peoples homes, and especially about people with litte money who try to buy a home at a high interest rate, with a high potential for failure, this is where we need government oversite. Lehman Brothers can fail, and some other companies will buy up the assets. But Joe Blow who buys a house at the height of the real estate market with a subprime loan, and then is forced to re-finance but can't, and can't sell the house for enough to cover his loan balance because in the mean time house prices have dropped like a stone - Joe Blow suffers real pain - loss of his home, damage to his credit rating to mention just a few of his problems.
The past eight years have been ones in which business has gone unfettered - the Republican's dream. But look at the results. And then the big companies hurt by their own greed go to the government for a bailout, which fortunately they didn't get.
Do you want another four years of this stuff? Hell no! Vote for Obama.
Its the American Way. Privatize profits and socialize losses. Meanwhile, everyone on the brink loses their homes and the CEO of Merrill Lynch just worked out a giant payout for himself because he managed to keep them out of bankruptcy. All the laissez faire capitalists (Ben Stein, Larry Kudlow, all republicans and most democrats) who can't pat themselves on the back any harder on the way up start screaming for regulation and taxpayer fueled bailouts on the way down.
It is a cute theory for these companies that they grow themselves without regard to risk to the size that they think is "too big to fail," then pay themselves a fortune and wait for the government to step in. Must be nice.
'Privatize profits and socialize losses.'
That's sums it up pretty good, I'd say. There's a new documentary film called I.O.U.S.A. that's making it's way around the country. I can't wait to see it.
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