Feeds:
Posts
Comments

Timothy Geithner has taken heat this week over his suggestion that tax policy toward upper income Americans reflect the “privilege” of being an American–namely, that these people pay a greater percentage of their income in federal taxes.  While the opinion page of the Wall Street Journal is best left undisturbed for fear of some frightening monster baring its gruesome fangs, Lawrence Lindsey’s piece appearing today, “Geithner and the ‘Privilege’ of Being American,” begs to be swatted out of the park.

The roots of the word privilege extend very deep, but in modern times its definition intersects very squarely with that of “right.”  In fact a privilege is synonymous with a right except that a privilege often goes:

beyond the usual rights or advantages of others; spec.  (a) an exemption from a normal duty, liability, etc.;  (b) enjoyment of some benefit (as wealth, education, standard of living, etc.) above the average or that deemed usual or necessary for a particular group [OED]

Q.E.D.

For those who may need more explanation of the validity and “constitutionality” of Geithner’s use of the term (I have Mr. Lindsey in mind), it is entirely self-evident that to be American is an immense advantage compared with being a citizen of any other nation on Earth.  I would assume Mr. Lindsey would not disagree with this.  To pull back the last curtain on his sophistry, I draw the reader’s attention to the fact that the definition of privilege is not concerned with the granting authority of the privilege, or that there even be a granting authority.  In conclusion: to be an American at the present is the very definition of privilege.  For those stuck on the idea of there being an entity to bequeath a privilege, I suggest that this is accomplished by the American people in concert with its government.

Under this system of a government by and for the people, being an American is the ultimate privilege.  Take it or leave it, Mr. Lindsey.

I can assure you that will not happen, but I’ve got to do what I’ve got to do.  Whether we like it or not, life in the twenty-first century is influenced in profound ways by decisions made from the other side of the globe.  And the financial and economic health of America and all the nations of the world profoundly influence our well-being.  If there was a great debate in art right now for which I could add my perspective, I would probably rather do that, however I believe that these stories I’ve been following are too big to ignore.

Many of the things that make the human experience impossibly rich are possible only when our basic needs are fulfilled.  Recession and financial peril threaten the things we love.  That’s true for anyone, regardless of origin or circumstance.

Yes, finance overlaps politics and policy and flouts boundaries that I’d prefer to stay away from in this forum.  But the die is cast: “too big to fail” should be a clue that it’s “too big to ignore.”

Make our market grow

Market maker should indeed be the catchphrase of the day in the Goldman testimony. Is it an adequate defense?  Does being a market maker for a financial product absolve one of all responsibility for the quality of that product?

Goldman was doing business as market maker for CDOs while its proprietary trading took positions against some of the products it was working with on the other side. Are the evident conflicts of interest in this situation outside the norm for an investment bank? These kinds of conflicts must be commonplace, and the ability to work with capital in these ways are part of the attraction to risk that is a hallmark of investment banking. Fees alone are not enough to support outsize bonuses and average salaries that push into the high six-figures.  The line between investment banks and hedge funds is very blurred with one frequently doing the other’s bidding, as was evident in Abacus.

The unfortunate problem of investment banks offering highly complex investment vehicles as institutional investments is that nearly everyone—including those averse even to the risk of fixed income—ends up becoming an unwitting investor.  Yes, IKB is a large and sophisticated investor, but they are investing with the money of many small and unsophisticated (and probably risk-averse) investors.  While Goldman’s legal responsibility is solely with IKB, its moral responsibility extends to the millions who invested in leveraged subprime debt because of the market that Goldman made.

They say: “We make the market.”  Investors at all levels should demand: “Make our market grow.”  When these markets are for products so abstract that even “sophisticated” investors (not to mention the people packaging them) are baffled, one must ignore the prestige of the market maker and turn to investments that are truly analyzable.  That’s the recipe for making the markets grow.

Social responsibility has nothing to do with it.  It’s about making money, as it should be. Michael Hirsch for Newsweek casts Lloyd Blankfein in the role of contemporary successor to J. P. Morgan and bemoans the general loss of conscience in finance. Banking and trading have always been about making money.  Social responsibility is a corollary that doesn’t reflect the reality of today’s hyper-efficient and hyper-connected markets. Finance at the highest levels today is in a place where morals and business simply cannot coexist.

I agree with Blankfein’s assessment.  Can regulation change this crisis in the culture of finance, a culture that clearly thrives on asymmetric information and the ironic poetry of selling someone a bad deal?

There is only one kind of regulation that could begin to modulate this behavior in America.  It would be a broad-based consumption tax that extends to online commerce of all kinds.  The greed of global finance reflects in concentrated form the obsessive consumption of the contemporary developed world.  The world economy is not driven by firms like Goldman; it is driven by the hard work and hard spending of people in the developed world.  As long as there is stiff competition for the output and consumption of these people, firms will do all they can to court them by working towards access to capital that only firms like Goldman can deliver in sufficient quantities.

People want and expect more, and the current system is the best yet devised for achieving that goal for the fortunate few—who already have significant earning power. But are people really getting their money’s worth?

As long as the calculus in the minds of the movers of the economy (remember, it’s the people) is that more consumption equals greater happiness, the path followed by international captains of finance will not waver.  More consumption has been proven not to increase happiness, but it is difficult to “settle” for less after having had more, even if one is happier with less.

Social responsibility begins on Main Street.  Maybe it should be called trickle-up economics.

The true aim of a new round of financial reform and bank regulation in America should be financial stability at all levels of commerce.  While such legislation should seek to strengthen the position of the U.S in the global economy, it must also consider that ripples in Thailand may become waves in Russia and a tsunami in Greenwich—remember LTCM?

The danger of enacting new rules that truly shift the balance into making the U.S. an unattractive base for some of the world’s best financial minds must not be ignored.  If Wall Street moves to the Cayman Islands where it will be able to continue crafting derivative investments for which no valuation estimate can be accurately derived and for which the risk is incalculable, there is no benefit to the U.S. or the global economy.  In fact America’s position will be weakened.

Such an outcome must not occur, and I don’t believe it will.  If the legislation can keep its focus achieving the big goals, the relatively smaller goals—like keeping Wall Street as the center of financial innovation—will take care of themselves.

Stephen Hawking recently stated the opinion that Earth should not attract the attention of likely extra-terrestrial life through intiatives such as active SETI.  While the possibilities he describes are frightening, is Earth a plausible target for space marauders?

I don’t believe it is.  Earth has little to offer to life that may possess the capability of intergalactic travel.  The advanced technology needed for this kind of travel would require the capability to harness huge quantities of energy that probably surpass what is delivered by the Sun we orbit.  It frankly wouldn’t be worth the trouble to life that can make it here.

In spite of disagreeing with the conclusions that follow from his disavowal of the search for intelligent extra-terrestrial life, I agree that active SETI is a foolish enterprise and that Earth needs a more tightly-regulated global outlook on this kind of intentional transmission into space.  Earth is a planet but also a space capsule for all of life as we know it, and we must take better care of it from within and from without.  It often takes the mind of a genius to help us recognize this.  In Hawking’s case, it’s the galactic perspective.

Goldman correspondence in the press today regarding its CDO investments extend beyond Abacus to Timberwolf I, a related investment that may have been funded with proceeds from Abacus.  According to Marketwatch, $300 million of Timberwolf CDOs were sold to Bear Stearns within one year of its collapse.

The intriguing subtext to most of the suppositions on the part of the media is that Goldman had 100% certainty that its positions were going to earn outsized returns. There is no question that risk was involved and that its bets, with a different set of circumstances, could have led it to a similar fate to Bear Stearns.  The media mythologizing of Goldman’s prowess is not an accurate representation of the facts.  Yes, Goldman may have been incrementally smarter than Bear, Merrill, Citi, etc., but there is no question that it was luckier.

While Timberwolf turned out to be a bad deal for its buyers, the comments currently being circulated from those on the Goldman side of the deal are not evident of wrongdoing.  Goldman could have been wrong about it being a bad deal for the buyer. The media appears to forget this, again contributing to the myth of Goldman outflanking the mortgage meltdown on its wits alone.

Back to material information: if Goldman withheld material information from the buyers of Timberwolf, this is serious wrongdoing.  If they truly knew that it was a bad (or misrepresented) investment, the gloves should come off at the SEC.  This investment was a wolf in wolf’s clothing, but they weren’t telling.

Follow

Get every new post delivered to your Inbox.