We receive submissions from Bail readers on a pretty regular basis. The following is one of the best pieces of honest analysis I've seen anywhere. The author is John Gallo.
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Amidst the current debate about bailouts, bonuses and bursting debt bubbles, I was reminded of a discussion at Christmas dinner with my 26-year-old nephew, when in the middle of the day, he just looked at me and said, “You know, it’s all your fault”. I asked him to be a little bit more specific, since I know there are many things in life for which I need to assume responsibility. He said without apology that the economic decline that we have lived through for the past two years was the fault of my generation. I thought for only a second, and simply responded – “you’re right, it is”. For it is hard to avoid the reality that my generation, the baby boomers who are now approaching retirement, have caused the greatest collapse of the world economy since the 1930s, and in the process damaged this country in ways we are now only beginning to understand.
My own thought is that with the possible exceptions of the Civil War and World War II, there has never been a time when we as a people were as uncertain as to where our nation was headed. Before I go further, let me confess to being a 53-year-old yuppie – Brooklyn born, East coast raised and educated, and an unapologetic moderate Republican. I have no personal understanding of the fears our nation experienced in 1930 or 1940, but I would like to think that I have a moderate understanding of where we are today. And this is the first time that I have been so angered by incompetence and greed in government and Wall Street to express publicly my own thoughts. In simple terms, what has dawned on me is that my generation, the “Baby Boomers” between the ages of 45 and 65, has emerged not as not the most significant or talented generation in our history (as we thought we were), but rather as the most self-absorbed and reckless. Because ours will be the first generation in the history of this country to leave to its successors a nation in worse shape than that which it inherited; put differently, we will be the first generation in this nation to have taken from our parents and stolen from our children.
Looking back more eighteen months after the first signs of distress in our economy appeared, it seems that leaders in Congress and Wall Street have erred in a manner never before witnessed in this nation. In the process, they have conspired through their collective arrogance, greed, and ignorance to damage the economy of the country (if not the world), make many themselves rich beyond the imaginations of most Americans, and in the process commit the greatest financial rape of the American public in the history of the country. And if that does resonate, then either you have not been paying attention for the past two years, or you have received your paycheck form Goldman Sachs.
If one thinks about this conclusion, one could argue that we were destined to implode. For ours was the generation that from its inception wanted to believe that it was “special”. We saw as we proceeded through life that pursuing one’s self-interest was rewarded just as often than doing what was right, that morals were relative, and that there would be no consequences to bad behavior. It became de rigueur to assume that our parents (and their lawyers) would save us from our bad behavior. Those who did not share these enlightened values of moral relativism and tolerance were deemed hyper judgmental and undeserving of public respect. In short, criticizing the sinner became worse than the sin itself. We have since graduated from the notion that morals were relative to the notion that spending money that was not ours was good, and that again, there would be no consequences to irresponsible behavior. And on an even larger scale, the most recent incarnation of our commitment to the notion that we need not assume responsibility for our actions appears in the government decision to bail out those who made bad bets with our money – in other words, if you screw up badly enough, the government will come to the rescue and save us - in economic terms, money is now free – which is why the Fed Funds rate today is just north of zero.
When one transfers the learned behavior of selfishness to the world of economics, it is east to see how we got to the world of adjustable rate mortgages, thirty-to-one leverage, credit default swaps, and thirty year hedge fund workers acting as is million dollar paychecks was an otherwise normal entitlement. If it felt good, it was therefore right – and by all means, don’t rock the boat. And what we are witnessing today in Washington and Wall Street in response to our economic crisis is nothing but a conscious and willing decision to pass off to the next generation the cost of our mistakes. Our nation’s leadership has accepted the postulate that if it feels good (i.e., if we print more money than has ever been printed in the history of the planet in order to hide the damage that we have caused), that this is a better course to pursue than to accept responsibility for our own behavior. That it is better to push the proverbial can down the road rather than allow failed institutions to fail and give the next generation an opportunity at economic revival. At this moment, our nation has one of the highest ratios of debt to GDP on the globe (surpassed by Japan, Lebanon, and Zimbabwe). There has never been a country in the history of the planet that has been able to spend its way out of a recession into prosperity, and yet the very people who created this crisis (read “financial community”) has convinced the economic power brokers in Washington that more debt and more spending is the only way to cure the problems caused by too much debt and too much spending. The notion that those same actors who created the crisis are now proclaiming that they have a sound and wise solution is as arrogant and false as their past behavior that brought us here today. The problem is that if the Geithners, Summers, Greenspans, Rubins, and Paulsons, whose decisions helped get us to where we are today were as smart as they think they are, then we would not be having this conversation today. The problem never would have occurred.
What needs to be understood by everyone in the financial community is that the behavior and practices that made the investment bakers fabulously rich is now over. The financial system as we have known it over the past 15 years will never occur again in our lifetime, and to the extent that we will never see 30-year-olds making $2 million per year for simply punching keys on their computer screen generating paper profits for themselves and others, then ours will be a better country. And by arguing that that the seeds of economic revival lie in the reconstruction of the financial system as it was two years ago is to reject one of the fundamental principles of capitalism – namely that bad actors need to fail.
Perhaps what is most alarming about where we are today is that we think it is our obligation and birthright to avoid pain, when in fact the only responsible action that we as a generation can now undertake is to allow our failed economic institutions to die, accept that the unwinding of these failed institutions and the rebirth of new strong institutions to take their place will take several years, that unemployment will rise from its current level, and that our collective standard of living as a nation will not increase for the next few years. The nation will not die; to the contrary, it would become stronger if we permit free markets to work, and allow the next-generation to live unburdened by our mistakes and arrogance.
There are a few steps government can take to clear the decks in order to begin anew. First and most foremost, the Congress needs to institute a modernized version of Glass-Stegall and separate commercial banking from investment banking activities. What we have seen in the abolishment Glass-Stegall (please thank Mr. Rubin formerly of Goldman Sachs) is the creation of federally subsidize casinos masquerading as publicly traded financial institutions. They kept profits from over-leveraged bets and were kind enough to pass their losses onto the taxpayers. Second, Congress needs to repeal legislation (Gramm-Leach) that allowed financial institutions not only to leverage in ways previously not permitted, but which also granted banks and financial situations exemption from federal gambling laws. Third, and this is where moral outrage hits home to those on Wall Street, we cannot live in a country in which any company is allowed to manipulate the levers of government in such a way as to make itself obscenely rich at the expense of the public. I am not so naïve to believe that President Obama would offend his largest financial contributors, but I would love to see him prohibit hiring within the Executive branch from within the ranks of Wall Street unless and until all toxic debt has been removed from the books of those who still hold it. There are bankers in Texas and North Carolina (I hope) who know their business well, and who never over-invested in credit default swaps or mortgage backed securities. Again, if the captains on Wall Street were smart as they think they are, we would not be having this conversation. There are thousands of intelligent people of this country who do not work at Goldman Sachs, and who do not confuse trading for one’s own account with doing “God’s work”.
Finally, the administration should demand (I know it won’t) that Goldman Sachs return the approximately $13 billion it received in backdoor payments through AIG when AIG received $180 billion in bailout money. That $13 billion belongs to the taxpayers of this country, and the decision to allow Goldman to receive that money perhaps stands as the greatest moral outrage of this entire sordid affair. For as most people know, Goldman proceeded to take that 13 Billion plus the additional monies it received in government life support to do what it does best – trade for its own account and in the process record its largest and most profitable year ever. And if the President had the courage of those convictions he uttered on the campaign trail while he sought his office, he would demand that Goldman devise a reasonable timetable to repay that money. But I know that’s naive; Goldman is only the largest corporate contributor to the Obama administration, and there is no likelihood that this White House would anger its “BFF” just to benefit the American people.
I still hold to the belief that ours is the most inspired and gifted country in the world, but I also understand that the only way we got there was through hard work and a fundamental commitment to fair play. Capitalism remains the best economic system on the planet, but when those who have profited handsomely seek to socialize losses caused by their errors, then those in power in Washington have a moral responsibility to demand an accounting. Our anger comes from the fact that our leaders have failed in their public obligations at the expense of the interests on Wall Street, and in the process created the greatest social divide that this country has seen in the past 40 years. Ours is a nation where people will sacrifice for the common good, but not under circumstances in which those who damaged the country have been allowed to prosper by their mistakes. It is not “populist anger” to demand that our leaders in Washington hear us and understand that their solutions are feckless and irresponsible. Those who believe that Wall Street should be held to account for their profligacy are not tea baggers as some might suggest; we’re just citizens committed to the notion of fair play and to belief that we as generation cannot pass off to those who stand in line the price tag for our mistakes.
John Gallo
Hastings-on-Hudson, NY