Lonesome Hobo Economics: Should the bankers be hanged?


7-21-09, 9:59 am

...Kind ladies and kind gentlemen... Stay free from petty jealousies Live by no man's code And hold your judgement for yourself Lest you wind up on his road...

Bob Dylan, JWH, Lonesome Hobo 1967

Should the bankers be hanged? Their reckless betting of other people's money turned a cyclical economic crisis into a near meltdown not seen since the Great Depression.

One of Franklin Roosevelt's first acts after becoming President, to halt the crash was to declare a Bank Holiday. Close the banks to stop the run on the banks, to save some remnant of a financial system. It gave him a breather while he figured out how to reopen them gradually under new and little understood principles of financial regulation. The recovery was grim, and uneven until World War II consumed everything, including the Great Depression.

Seventy years later those rules have broken down, and crashed. The Fed rushed in and spread uncountable sums of cash quickly. They say a complete meltdown has indeed so far been averted. Its true we don't know what it will ultimately cost, or if the investments we make now will pay off in a future escape from this hell-and-getting-hotter crisis. Will the investments lay the ground for creating a more perfect society, or for a more unequal, more divided, poorer nation?

Commercial lending has not really resumed, and the finance capital survivors have emerged even more powerful than before. The staggering news of Goldman-Sachs, and JP Morgan Chase's profit reports should perhaps not be surprising, even though it comes on the heals of hundreds of billions in direct and indirect public subsidies. Most of these profits were made on trades, on selling 100% US backed bonds, not on making loans to individuals or businesses.

This violates the FIRST, iron rule of true reform: ALL THE BETTERS HAVE TO HAVE 'SKIN IN THE GAME'. If high-priced investment bankers invest your money, they should put some of their own on the same bet.

It also violates the SECOND iron rule of true reform: IF ITS TOO BIG TO FAIL, ITS TOO BIG. Easy way to do this: Return Goldman's and JP Morgan Investment banking services to PARTNERSHIPS – NO PUBLICLY SOLD STOCK – like they used to be before Glass-Steagal. In partnerships every partner's well-being requires full disclosure of all partner's strong and compromised positions. Commercial banking and exchange and insurance operations should remain quasi public organizations – that is we should hold onto the huge shares we now own as taxpayers and use it to provide stability to the partly 'public utility' operation of matching borrowers to savers.

The penalty should fit the crime! An eye for an eye! Evictions, forgone health care, homelessness, unemployment and idleness. Many will lose their lives as a consequence of this depression before its over.

But I must provide disclosure, kind ladies and kind gentlemen, before sentence is passed, and I too pass on for another week. I am an ardent supporter of financial innovation who derived substantial benefit from it.

Venture capital instruments, for example, played an important role in each major wave in the high-tech industry. And it would be wrong, IMHO, to characterize this marriage of finance and technology as parasitic. If one in ten would survive primary funding, it would payoff all investors. It worked. Paying options to employees to attract talent at lower start-up salaries unleashed a whirlwind of legendary-high-motivated workforces. The tech boom became a bubble – but it created real lasting value along the way. The mortgage/real estate/credit bubble, however, showed the giant Ponzi schemes that can result when folks are allowed to bet with other people's money – the product can be entirely fictitious.

And I believe society must indeed permit risky adventures to proceed with only limited liability for possible large costs of unforeseen consequences in exchange for innovation. Society continues to pick up the tab for transforming losers into a new round of winners. We demand only obedience to the iron laws.

I guess that means no hangings, for now. A few of the Ponzi's are off to jail. But without passing the iron laws into real law, the road to hell will get steeper.