And yet, life goes on… Week 2

Some loose thoughts, tidbits and sound-bites

Let me be clear – there may be serious, even devastating repercussions from this crisis in the financial sector for average people. But I do not think it has been adequately explained what those repercussions might be, and whether they would be inevitable or a case of banks, corporations and financial institutions passing on costs and losses to shore up their profits. It also seems possible that those repercussions have been engineered or exacerbated precisely to make a bailout seem necessary.

When I say “life goes on” I am thinking of all the ways in which a collapse in the Dow or stock market prices more generally in many ways does not represent a real change in the world. There is as much food as there was on before the Dow nose-dived, as many houses, as much oil, as many Rubik’s Cubes floating across the Pacific in cargo containers, the same number of bicycles…

This is made even more apparent when the causes of the “credit crisis” and the plunge in stock prices are discussed: fear and panic.  Lenders are afraid to lend, brokers and traders are selling out of fear of what might come. The resulting curtailment and drop in stock prices are really the main aspects of the current crisis – beyond the underlying issue of all the bad loans financial institutions made.  The language used makes it clear that to a large extent the problem is one of perception, to a large extent – about people’s fears – rather than about anything concrete that has actually happened.  If a prototype for a new gadget that is crucial to a company’s business fails, or a clinical trial of a new drug shows it to be ineffective or dangerous, then a company’s stock price might go down for concrete reasons.  Right now, it seems to me, stock prices are going down because traders are getting scared and selling off their stocks. But perhaps I am failing to understand the situation fully.

Consider the language used to discuss this situation. The San Francisco Chronicle devoted its whole front page last week, after the failure of the bailout to pass the House, with the banner headline “Now What” under a picture of a grim-visaged collection of Congressional leaders, led by our own Nancy Pelosi. The blurb leading of the first article announced “Wall Street panics after defeat of bill investors hoped would ease credit mess.” When you read this, consider who is panicking, and why: investors, because of a “credit mess.” The lead article itself (“Markets”) began, “Washington wobbled Monday, and then Wall Street cracked.” Neither Washington nor Wall Street really exist, not in the sense they are used here, as personages who feel and act.  These anthropomorphises serve to cloud the issue, in part by making us fail to consider the particular needs and motives of the real individuals who make up “Wall Street” and “Washington.”

I read a statement in the paper this morning by a professor at one of the big business schools saying that he had heard of small business unable to meet their payrolls because they could not get credit.  Obviously, this would affect average people, as opposed to investment bankers and stock brokers, but you have to wonder which small businesses regularly rely on credit to meet their payroll commitments.

In The Chronicle today the bill that just passed in Congress is called “the biggest bailout of the banking system in U.S. history.” This is the banking system that has been raking in record profits in recent years, and engaged in risky lending practices precisely because of the profits they could make that way, and now needs to be rescued from the consequences of those profit-seekign practices. They ran wild in the deregulated free-market financial sector, and now the chickens are coming home to roost – but we can’t let it happen, even if the bailout is only going to be of limited value:

No one promises that the bailout will stop the recession that is now clearly under way. The hope is that it can prevent a widespread collapse of economic activity and millions of job losses. Its aim is as much psychological as substantive – to restore confidence. But it will not by itself stop the decline in housing prices at the root of the crisis.

During the week, Congressional figures appeared on TV to discuss how they would change the bailout bill to get it through the house.  Two of the “sweeteners” that were widely discussed were raising the insurance levels on bank deposits – above the dangerously low $100,000 current limit – and a cut in capital gains taxes.  Neither of these seem like “sweeteners” for “main street.”  I heard a lot this week about the $100,000 insurance on bank deposits

In BBC News

Speaking after the meeting at a joint news conference, [French President Nicolas Sarkozy] said the four had agreed that the leaders of a financial institution that had to be rescued should be “sanctioned”.

Now, that might have served as a “sweetener” to the House bill for some of the Representatives who voted against the bill at first not out of concern for people with more than $100,000 in bank accounts, but rather out of a commitment to people who had been burned by the financial crisis – such as shareholders in WaMu – or who saw the bailout as coddling failed corporations – corporations that lived high on the hog when the free market was running their way, but didn’t want to pay the price when things went bad. Consider

Washington Mutual Inc., the nation’s largest savings and loan, Wednesday posted an 8% increase in second-quarter earnings and said it would quit making certain risky loans to borrowers with blotchy credit…. Seattle-based Washington Mutual said growth in retail banking and credit cards helped push profit to $830 million. [July 2007]

So WaMu made large profits even when the subprime mortgage problems had started to emerge, and then tried to get out that business, but I guess waited too long.  It made massive profits all through this period, profits that got bigger and bigger. Back in 1996 this was the picture

The consumer bank reported Tuesday that first-quarter profit jumped a strong 32 percent…. Washington Mutual said it earned $59.5 million, or 74 cents a share, in the quarter ending March 31…

So profits rose by a factor of ten over that ten year period in which the subprime mortgage practices were in play.

Maybe one way to fund the bailout would be to ask the financial institutes to fork over some of these profits, or ask some of the corporate executives to repay some of their salaries.  The WaMu executive salaries have drawn fire as particularly egregious –

WaMu’s new CEO, Alan Fishman, might go down as the ultimate showcase of executive greed if he doesn’t do the right thing in the next few days. After just 432 hours on the job — during which time he presided over the complete collapse of the company — Fishman stands to collect more than $19 million in pay.

That’s right: $19 million for 18 days work, or an annualized rate of $385 million. $1.05 million per day. $44,000 per hour. More money than most people will make in several lifetimes, all to watch one of America’s largest banks spiral into failure. [March 6, 2008]

The bailout proposal originally contained a few provisions to address executive compensation {LA Times]. But what was in the final bill?

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