What does Goldman Sachs do, exactly? How does it make its money?
You can and should read Matt Taibbi's take on the investment bank, but let me simplify. These days, Goldman Sachs makes money by moving money from Spot A to Spot B to Spot C, all across the securities world, and at every point skimming something off the top. It creates and trades securities so complex that they are incomprehensible to the leading minds on Wall Street; these derivatives are ultimately worth no more than Confederate money and pose continuing systemic risk to the economy. But while the band plays on, Goldman makes its fees. With the general economy still deeply wounded, the firm made $12 billion in revenue in the most recent quarter for a profit of $3 billion. Goldman has so far set aside $16 billion -- that's with a B -- for executive bonuses. Of course all this has been made possible by the massive taxpayer rescue of a financial system whose collapse Goldman helped create, along with the Fed's zero interest rates and opaque lending "facilities" that have been a gift to Wall Street.
Something is so sick in America. The "healthy" sector of the economy makes nothing at all. Gone are the days when the capital markets were primarily concerned with marshaling capital to fund productive work. They now make money off of money in a colossal Ponzi scheme that cannot have a good ending. Take the case of Simmons Bedding, being forced into bankruptcy after being flipped seven times by private equity hucksters. Each deal was done with borrowed money. Each new owner would try to squeeze more out of the company. The long-term health of the company was sacrificed for short-term profits that went to a few. Top executives were lavishly compensated while average worker wages stagnated. Now a thousand Simmons workers and counting have lost their jobs. This has been happened at thousands of companies across the economy for years. And the cause was not merely private equity or neo-Michael Milkens -- it is the way the markets work now.
When the capital markets aren't making money from money -- lately your tax dollars and future living standards tied to national debt -- they make money by breaking things. This takes an ongoing toll on the American companies that actually still produce things. In other words, doing mergers that generate lots of fees to the bankers and lawyers, but inevitably result in the loss of huge numbers of jobs. How else can these deals pay for themselves and generate a quick return to the players? With Wall Street's unsustainable demands for ever higher profit margins, and an executive corps with no loyalty to any city or even nation, most every company is always on the block. Outrageous executive compensation, regardless of a company's performance or long-term health, adds to the pressure. Employees are expendable, and their wages have been stagnating for years even as their benefits are being taken at an ever quicker pace. But the ability for top bosses to loot the corporate treasury -- why that's the new American way.
It would be nice at this point to break away and discuss the good things that private equity does, the risk-spreading benefits that can come from custom derivatives, Wall Street's general commitment to prosperity on Main Street, how the heart of the banking sector remains in, well, banking. It would be reassuring to note that the shareholders who benefit from the sky-high profit demands of the capital markets are as likely to be average Americans as the super-rich. But those would be the comforting lies we tell children -- or an infantilized nation.
That doesn't stop the "conservative" meme that the "free market" owes nothing to society or to the nation -- only to its corporate shareholders. This originated with Milton Friedman, darling of "conservatives," who ironically made his name as a real economist dissecting the botched response to the 1929 crash, another speculative bubble gone mad, and who spent his career in an academia endowed precisely by corporations and business leaders who believed they had an obligation to more than the narrow and short-term appetite of shareholders.
And who are these shareholders? Data showing the worst income inequality since the eve of the Great Depression if not the Gilded Age indicate that the winners are the very rich, the "super high net income customers" sought by firms like Merrill Lynch -- which was once bullish on America -- and the capital markets players such as Goldman who profit from the sea of money loose in the world. Average folks consistently lose at the Wall Street casino -- something that has forced the largest pool of Americans over 65 to enter the job market since statistics have been kept. The promise of a Shareholder Nation, where average Americans would get the same chance to build wealth as the Rockefellers...the promise that helped encourage Americans to give up their unions, a government that would prevent industry consolidation and regulate economic predators...that promise has turned out to be a sham.
And so here we are. Goldman and its ilk are using your tax money to lobby against a return to sensible regulation of a financial system that can tank the economy and force repeated taxpayer bailouts. Their transnational corporate customers are in control in Washington, blocking and gaming everything from a real stimulus, to real health care reform, to meaningful action to stop the looming catastrophe of climate change. Unsustainably low tax rates protect the super-rich while schools languish and jobs are eliminated. The huge consolidated industries, with no loyalty or even common sense beyond next quarter, keep growing -- with the crumbs from Wal-Mart and the many electronic toys being tossed out to keep the proles in their mind fog.
There has always been greed and corruption in America. But never have the scales been so off-kilter. All must go to the great shareholder gods. A decent education for every American? A 21st century transportation system? Rebuilding a productive economy so we're not left like Britain after World War II? No. Nothing must interfere with the mysterious capital markets. None of these things that built America, that created the greatest middle class in the history of the world, "pay for themselves." So much better to make money from money -- at least for the winner elite. So much better for America to make its name with "financial engineering" while China does real engineering.
When does the time come to ask whether our present economic system is anti-American?
It is American as American can be. We have a long history of taking -- just ask Spain, France, Mexico, any central or south American country, Canada, any of the 500 native tribes, Haiti, the Philipines, Cuba, Dominican Republic, Granada, etc. etc. etc. If there is a way to profit at someone's else expense, an American will figure out a way to do it.
Posted by: eclecticdog | October 26, 2009 at 12:16 PM
The most stunning part of Michael Moore's "Capitalism" movie was the revelation of a 2005 Citibank internal report on the global economy. It was stunning not for its contents, which would come as no surprise to anyone paying a modicum of attention, but for its brazenness. The report declared that the U.S, UK, and Canada are now "plutonomies" - meaning that their economies are so controlled by the wealthy top 1% that the serf's don't even matter. It went on to outline "risks" to the glorious New Gilded Era, which were mostly the fact that the peasants can still vote and that workers may start demanding protectionism.
Posted by: Donna | October 26, 2009 at 12:46 PM
Broken record here;
If Americans are not clamoring for change, it hasn't gotten bad enough yet. My view of our history is that we have a consistent habit of changing only at (or after) the last minute.
Jon, and others, need to keep talking about it so we'll have some choices when the lazy majority finally sees it time for real change.
Posted by: Buford | October 26, 2009 at 04:43 PM
The irony here is that when change comes politically, it's likely to drive this nation even further to the right. Unemployment won't get better anytime soon, so the party out of power benefits - even if that party's dogma and policies caused the problem in the first place.
We are deeply deluded as a nation but there's a reason for that. The right made a project out of capturing the media. In the process, they managed to even slur the idea of empirical reality. Now, journalism is a dying profession and newspapers will be entirely gone in a few years. It's not likely that democracy, degraded as it is, will survive the right's stranglehold on the electronic media.
The liberal project has to involve the idea of a civic antidote to concentrated power and wealth. Only government can serve as a vehicle here. As our national crisis worsens, the argument will make itself. How this message breaks through the wall of right-wing noise remains to be seen. But it will be made. It has to.
Posted by: soleri | October 26, 2009 at 05:16 PM
Mr. Talton's post is a superior commentary, even for a writer who habitually exceeds the average competence by a wide margin. The reader comments thus far are also perceptive. It is thus difficult to improve upon.
Posted by: Emil Pulsifer | October 26, 2009 at 06:59 PM
What about corporate governance? Or, simply put, what in the world has the board of directors been doing to discharge their responsibilities for oversight?
Ken Dayton was one of Target's progenitors, who wrote extensively about his concerns for corporate governance. He almost always saw coming events in a clearer light than his Ivy League educated peers.
Cronies, toadies and empty suits have graced the pages of our Fortune 500 annual reports. And where is their accountability? Where are the class action suits?
Posted by: Jim Hamblin | October 27, 2009 at 08:30 AM
One point which I wished to develop, simply by way of concurrence (though I lacked the online time to do so yesterday evening) involves this important detail from an Associated Press article headlined "Next Asset Bubble Could Come Sooner Than You Think":
"Over the last 30 years, the value of financial assets — such as stocks, bonds and bank deposits — grew to be four times larger than annual global gross domestic product. . . . Mckinsey Global Institute estimates this measure of wealth peaked at $194 trillion in 2007. And while it fell back to $178 trillion at the end of last year, it is still dramatically larger than the $43 trillion in 1990 or the $94 trillion in 2000."
http://www.google.com/hostednews/ap/article/ALeqM5gKP6ISKbUaLQd0nINgrgqrOSqr2wD9B75BN81
Financiers will counter that such funds provide "much needed liquidity"; but even financiers should be prepared to admit at some point that financial liquidity, so far in excess of anything that could be supported by investment in the productive global economy, must necessarily constitute excess liquidity; and the growth of such funds, via compound interest and similar mechanisms, far outstrips the growth of the productive global economy.
It's important -- in fact, critical -- to remember this, because to those for whom the question "How much is enough?" has no satisfactory answer, idle money must always be used to make more money. A reserve of idle money four times in excess of the world's productive economy cannot be invested in economic production: therefore it must be invested in speculation, except in dire times when the comparatively low returns of government bonds and cash deposits are acceptable. Such speculative ventures serve primarily to multiply financial wealth over and above productive economic activity; and what is this except a source of funds whose flow swells investor bubbles?
In recent years such funds, flowing in great, inexorable waves, went first to inflate the dot com bubble of the 1990s and then the real-estate and oil-futures bubbles of the 2000s.
Inevitably then, with economic recovery, such funds must seek outlet in similar speculation.
At present, bank lending, which formerly was driven by real-estate speculation (and the equity based underwriting of consumer credit which derived from it) has little outlet in traditional lending, since consumers are over-leveraged and markets which might otherwise increase the equity positions of consumers, such as housing, are collapsed; and regular corporate loans currently constitute only about 15 percent of bank lending, "with large corporations bypassing the banking sector to raise huge sums in the bond markets"; while commercial real-estate loans, another mainstay of traditional banks, have also tanked.
http://online.wsj.com/article/SB125530562684479215.html
So, investment banks (e.g., Goldman Sachs) which have the cash reserves (thanks to the bailout) and the legal flexibility to invest in the junk bond market, are once again profitable.
Commercial banks, faced with the prospect of continuing foreclosure losses and the unappealing option of repeating recent loose-lending mistakes at the bottom of a recession, sit on their cash reserves while attempting to make money from predatory fee increases on credit cards and other financial services, insofar as the current regulatory environment permits this (e.g., prior to new legislative start dates).
The broader, more systemic problem remains: where will the tidal wave of global excess liquidity flow next, and which economic shores will be flooded as a result?
Obviously, limited legislation aimed at individual banker compensation in that portion of the domestic (U.S.) sector which has received but has yet to pay back TARP funds, is inadequate to address this problem.
Note, however, that even a tiny tax on wealth, or even financial trading, on the order of 1/1000 of 1 percent, could raise large pools of funds for critical international projects such as carbon emissions reduction. Just 1/1000 of 1 percent of $178 trillion, for example, would raise $178 billion (U.S. dollars). A unitary (1 percent) surtax would raise a nearly unimaginable (by government standards) $1.78 trillion.
Ideally, such a tax would be internationally coordinated, so as to maintain a level playing field which does not drive capital out of one country and into others thereby.
If a side effect of such a tax would be to decrease excess liquidity and the speculative bubbles which are inflated by it, then well and good.
In any case, some mechanism must be created whereby not only excess global liquidity, but the growth of such liquidity (far outpacing productive economic growth) threatens to undermine the global economy with either bubbles and subsequent collapses (with recession/depression) or else to feed inflation as the beneficiaries of this paper wealth seek to spend some unsustainable portion of it on the purchase of actual goods and services.
Posted by: Emil Pulsifer | October 27, 2009 at 08:52 PM
A shameful correction: $178 billion is 1/1000 of $178 trillion (U.S. measure), not "1/1000 of 1 percent" as I erroneously wrote.
Speaking of Austin Powers type errors of magnitude, allow me to apologize to general Rogue Columnist readers for the following "secret message" (the first and hopefully the last):
"Dear Mr. Bob's Big Boy: Sorry you were spooked. The book isn't nearly so scary as you seemed to imagine, if you will only research the title. It doesn't really matter if so-and-so is pictured on the cover."
Posted by: Emil Pulsifer | October 28, 2009 at 10:56 AM