Banks Blowing Up the Economy

I read two interesting thoughts last weekend. The first is from legendary 18th-century economic god Adam Smith -- father of free-market thinking -- who wrote this on the topic of regulating banks:

exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.

The second came from JPMorgan Chase (NYSE: JPM  ) CEO Jamie Dimon's annual letter to shareholders, which says a skill he strives for is the "Ability to face facts."

Amen to both
The outcome of banking gone wild is now well-known. Less obvious are the dramatic changes banks underwent since the 1980s that concluded with the collapse of 2008.

By looking back over the past 25 years, it's easy to highlight Smith's point of banks running roughshod over everyone else. And we can show this with cold, hard facts Dimon appreciates.

The three facts that put our current financial system in perspective are charts of profit growth, compensation growth, and relative size of today's biggest banks. I owe credit for the inspiration of these charts to a presentation in March by former International Monetary Fund chief economist Simon Johnson. Let's look at each.

1. Money for nothin'
Every business, every corporation, and every consumer relies on banking in one way or another. That makes it a special industry, and it's why banks receive special treatment like backing from the Federal Deposit Insurance Corp. It also makes it an industry that should be at least somewhat anchored to the rest of the economy. When the economy does well, banking does well; when the economy does poorly, so do banks.

That's roughly how it worked for most of the post-World War II period until the early 1980s -- profit growth among banks hugged close to the businesses they lent to. Then something strange happened:






























Source: Bureau of Economic Analysis, author's calculations.

Let me explain this chart a little more. The Bureau of Economic Analysis tracks total corporate profits by industry going back to 1947. I took total financial profits, and total profits from all other industries, and calibrated both groups to "1" in 1947. So what this chart shows is the relative profit growth of banks compared with everyone else.

From 1947 until the mid-'80s, financial profits and all other profits were fairly correlated. Then in the mid '80s ... snap! ... financial-sector profits left everyone else in the dust.

There are two explanations for this. One, we've had consistently falling interest rates since the '80s, which is great for most businesses, but banks especially. Two, the '80s were deregulation central. As Simon Johnson and James Kwak explain in the book 13 Bankers:

[A broad] deregulatory trend begun in the administration of Jimmy Carter ... transformed into a crusade by Ronald Reagan. The eventual result was an out-of-balance financial system that still enjoyed the backing of the federal government --- what president would allow the financial system to collapse on his watch? -- without the regulatory oversight necessary to prevent excessive risk-taking.

Two big innovations that came from this were an explosion of derivatives, and the securitization of debt. As the past two years taught us, both products can be great in moderation yet deadly when used in excess -- which they usually are.

The reason excess within financial products became standard is simple: Bankers were getting fat and happy off these things even when clients lost money. That brings up chart No. 2.

2. Lifestyles of the rich and fortunate
There was nothing glamorous about banking for most of the post- World War II period. The leaders made fortunes and gained power -- as leaders of all industries do -- yet the lower workers were just average Joes making average wages.

As with profits, that changed abruptly in the '80s:






























Source: Bureau of Economic Analysis, author's calculations.

In 1959, the average finance employee made $4,880 a year, while the average in all other sectors made $4,560. By 2006, the average finance worker made $82,200 compared with $52,800 for everyone else. Nice.

The practice of paying bankers ungodly sums just for showing up isn't the historic norm. It's really something that sprung up in the '80s with the advent of financial engineering and the outburst of subsidized profits.

Another thing we've become accustomed to that isn't historically ordinary is the size of the largest banks. That brings up chart No.  3.

3. What too big to fail looks like

































Source: Capital IQ (a division of Standard & Poor's), measuringworth.org, author's calculations.

This is the combined total assets of the four big commercial banks -- Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , and JPMorgan Chase -- as a percentage of gross domestic product. In 1992, the combined assets of these four banks amounted to 5.2% of GDP. By 2009, that number had increased tenfold, to 52% of GDP. The big jump came in the late '90s with the repeal of the Glass-Steagall Act, which allowed commercial banks to merge with investment banks. A second surge came in 2008 after surviving banks purchased their fallen neighbors.

This chart is particularly revealing because it thoroughly wrecks the claim -- made mostly by bank CEOs -- that megabanks must not be broken up because large companies like Apple and ExxonMobil absolutely need banks of today's size to conduct business. Eyeball the chart for three seconds and you realize how ludicrous this idea is. Big companies didn't struggle to raise capital in 1992. Or 1995. Or 2000. Or 2006. In fact, they thrived like never before. To suggest that reducing the size of big banks relative to GDP to where they were in, say, 1998, would somehow asphyxiate big businesses is comically refutable.

Don't shoot the messenger
These three charts don't tell the whole story, of course. You can gab away about how the Fed, Fannie and Freddie, China, the Democrats, the Republicans, the media, and whoever else you detest created the financial collapse. And please do.

What I hope they do is provide perspective. There's a growing group, without naming names, that acts like even the slightest smidge of financial reform will send us into a Socialist Stone Age. But when you see how dramatically and quickly the financial system skewed, you see how even significant reform would simply revert it back to where it was only a handful of years ago -- a time that was demonstrably more stable, produced higher growth, and, to the irony of all, represented the "old America" so many reform opponents want back.

Some say banks are making lots of money and paying themselves accordingly, but that's their right. That's capitalism. We encourage it. We cherish it. But as Adam Smith mentioned more than 200 years ago, it isn't capitalism if the misbehavior of a few bankers "endanger the security of the whole society." And that's exactly what happened in 2008.It wasn't capitalism. It was banks blowing up the economy. And a few of us are praying it'll soon end.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Apple is a Motley Fool Stock Advisor recommendation. The Fool has a disclosure policy.


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  • Report this Comment On April 13, 2010, at 4:46 PM, unsond wrote:

    Good article. Now, how about superimposing Volker, Greenspan's and Bernanke's tenure on all the three graphs. If you add the tenure of the Presidents also then you will see the Fed Chairman is the key. Please revise your article with the Fed Chairman included in your graphs and analysis. Thanks.

  • Report this Comment On April 13, 2010, at 4:48 PM, TMFHousel wrote:

  • Report this Comment On April 13, 2010, at 5:33 PM, shovel99 wrote:

    Excellent article. And a good comment request to show the Fed chairs: Volker reigned in stagflation with gutsy 20% rates. Greenspan and Bernanke systematically reduced rates from 10% to 5% (Greenboy) and then from 5% to 0% (Beryanke), creating the money flood and Dot com and real estate bubbles. And don't forget repeal of Glass Steagall Act Nov 4, 1999, which had effectively protected the banking system from Wall Street crooks for 66 years. And also, that Barney Frank and Chris Dodd forced Fannie and Freddie to ramp up 50% of their portfolios into subprime loans in less than 2 years. There is blood on the hands of some Republicans, but the Dems are drenched in it.

  • Report this Comment On April 13, 2010, at 6:07 PM, stieny wrote:

    I'd need a logarithmic plot to be sure, but it looks looks like the accelerated growth of financial profits relative to other industries started back in the 60s not the 80s.

  • Report this Comment On April 13, 2010, at 6:15 PM, sapereaude1 wrote:

    Everyone responsible should be behind bars. Period. There's absolutely no reason why any hard-working middle-class American should risk his or her neck fighting Al Qaeda or anyone else merely to enable these parasites to enrich themselves further. Either they go behind bars, or middle America takes off the uniform (but does not disarm) and the rich can protect themselves.

    That's how it works, over the long term. Either economic democracy or class war, and the gentlest class war should put these Wall Street vermin behind bars.

  • Report this Comment On April 13, 2010, at 6:18 PM, PALH wrote:

    By far the best article I've seen from Motley Fool. The idea that Republicans, as shovel99 says, are barely touched by this scandal, which began with Reaganism (leading to the first, unnoted financial debacle of the S&L failures) and flourished with Republican lockdown control of the White House and Congress (and Supreme Court) for most of the last 30 years is, as noted in the story, comically refutable. Glass Steagall was knocked out by Phil (``Stop Your Whining, Middle Class'') Gramm and Jim Leach in the dead of night in '99 and your precious GOP had eight years to put it back in place any time they felt like it (and they're blocking it now). Pinning the subprime loans on Dodd and Frank is also a joke; Bush pushed as hard as he could to keep the bubble inflated by taking off all the restraints from the loan industry and putting a feckless goof, Chris Cox, in charge at the SEC. And that meant the derivatives party was in full swing through the last years of Bush-Cheney. Some party. Deal with it; the ratio of blame is exactly the reverse of what you said it is.

  • Report this Comment On April 13, 2010, at 7:03 PM, 7footmoose wrote:

    I would just like to remind you Fools that there is more than one kind of banker. The young lady or young man who sits in the local branch patiently waiting for you to come in to open and account or to get into your safe deposit box is very, very different than the quant on Wall Street who drove up the cost of a barrel of oil to $147.00. He or she, in the local branch of "Any Bank", makes and average salary of less than $50,000 per year and if he/she is lucky they get a bonus equal to 15 to 30% of that salary. These people are the real "bankers" the others are something else.

  • Report this Comment On April 13, 2010, at 7:04 PM, poppawheeler wrote:

    sapereaude, I couldn't agree with you more.

  • Report this Comment On April 13, 2010, at 7:34 PM, derfberger wrote:

    actually Mr. PAHL and Mr Shovel you are both 100% correct.

    Both sides are to blame.

    Unfortunately we are the ones who suffer and the guilty go free

  • Report this Comment On April 13, 2010, at 8:22 PM, causal wrote:

    A couple adjustments to the plots would make this article a lot more meaningful.

    1 - Show percentage growth in plot one rather than absolute. I.E., if the increase from 1947 to 1948 was from 1 to 1.05, then plot 5% in 1948. Likewise plot the rate of increase in '49 over '48 rather than the absolute amount. As is, the plot doesn't really show anything about what's happening before '67. The suspicious might think you're hiding something.

    2 - In plot 3, were those four banks the biggest four back in '92, or only more recently? If a different set of banks was biggest, the plot is disingenuous.

    Nice ideas, would love to see more meaningful plots!

  • Report this Comment On April 13, 2010, at 8:24 PM, PositiveMojo wrote:

    Some of the articles on Motley Fool are nothing but foolish drivel - but this one is right on target. Your quote of Adam Smith is priceless. The Wealth of Nations should be required reading in ANY financial course.

    Regarding regulation... If football was an "anything goes" sport without rules and referees, those who participated would be subject to great harm. The game of finance requires rules by which it should be played - but the government should never get in the business of owning the teams and establishing the rules. This is a terrible conflict of interest. Fannie Mae, Freddie Mac, AIG, GM, etc. are all violations of ethics.

  • Report this Comment On April 13, 2010, at 8:33 PM, JustinSeine wrote:

    Nothing for the masses will change for the better so long as getting elected to State and National office is impossible without special interest money. "Money Makes Money and the Money Money Makes Makes Money" --- The Greed Creed

  • Report this Comment On April 13, 2010, at 9:07 PM, Darwood11 wrote:

    Your "corporate profit growth" chart is great. Shows the largest wealth transference in my lifetime. My investments got trashed, but the banks prospered. I think they took me to the cleaners. Now my savings are fueling additional wealth in the banking sector.

    Let's invite the French and re-invent the guillotine.

  • Report this Comment On April 13, 2010, at 9:30 PM, bulletzz wrote:

    The entire story is not revealed. In late 2007 I had dialog with several senators on excessive housing inflation and risk-taking by homebuyers. I was told their constituencies had whined about the beginning upturn in foreclosure rate, stating that government should never bail out those few derelict buyers. By then savvy home investors had sold rental homes to their own renters – an easy sale. When I saw a guy come to an open house in a cab to place an offer, it was time to sell housing. The quality of the homebuyer had really degraded like nothing ever seen in the past.

    A year later when the foreclosure rate really ramped up, the senators’ constituents were then screaming to do something to keep their home valuations from declining. What a switch! The Mega-housing bubble was now deflating.

    Fast forward to last presidential election where both candidates were bad-mouthing the banks. After all banks don’t vote. Of course, no candidate would ever want to blame a voter. This is key about focusing on the real cause of our massive financial problem.

    But first go back to the bursting of the Internet bubble. Nearly every monitory advisor then urged investors to be substantially into housing. In Silicon Valley buildings were finally up for rent again, but housing never stopped rising in value. Look under mortgage brokers in any 2007 phone book and you will see a nearly endless list. Try hard enough in those days and anyone could get a loan. People fudged their pay stubs; they did not declare various other loans, child support and alimony. Just do anything to qualify for your cash-cow home investment. People would go broker after broker until they got their loan.

    Realize that every buyer signed a promissory note in obtaining their big home seeing a huge potential profit. Don’t worry about a mortgage you really can’t afford. Just refinance at a new teaser rate and enjoy the extra money. Many persons who did this eventually depleted the banks. And today the politicians are here to tell us it’s the bank’s fault. No one wants to blame people anymore.

    The problem is that no one on earth knew just how many people gambled on housing to such an extent that they would ultimately default -- and in such vast numbers to bring America onto her knees. This is shocking outcome to every professional I polled. No one had a clue. But how could anyone really know who would default and how many would do this? It’s really very private information.

    All that is needed in the future is a 20% down payment on every home loan at fixed rate with no exceptions. Even a quarter of the loans could be at 10% with PMI. But Democrats will never accept these conditions. They want 0% to 5% down for poor people who can’t budget and don’t hold steady jobs. They got this under Clinton and they don't want to give this up.

    Again, people always make problems and this housing problem started with gambling homebuyers and it will only end when they are mostly flushed out. Money has been wasted on cutting the existing homeowner’s interest rate, and with many of them again defaulting; So now the principle is being reduced with a proposal to use the TARP funds already paid back by most banks.

    Look at the Great Depression (GD). That started with a 10% margin rate on stocks later fixed by a 50% margin rate. Back then stocks could be sold in a few minutes, except for the bad days. Next the banks went down, so now we have FDIC insurance with a government backup as the fix. So a meltdown can never happen again.

    Wrong! The margin rate on housing got as low as 0% (no money down) and everyone could buy housing vs. only more wealthy people buying stocks in the GD. Stocks can be sold in seconds today, but liquidating a home can take over a year nowadays.

    Look at the nice charts in this great article. The first thrust for low interest rate and minimal down payment occurred under Carter for poor homebuyers. That was greatly expanded under Clinton, who also instilled Democrats in the GSAs persisting through Bush’s term with Democrats still wanting an easy barrowing situation today. And now Obama keeps propping up housing via money as our debt crisis goes ballistic. These people are the problem until they substantially exit government. Not every person should own a home.

    The loan rate boosts previously mentioned beginning with Carter parallels the author’s charts.

    Sadly America’s foreclosure rate still runs at its peak level without any sign of abatement despite $1.5 trillion having been pumped into housing. No one tried to prop up the Internet bubble, but the politicians want to do this for voters' homes.

    It’s not over until the fat lady sings after bond rates soar and/or after the dollar gets debased.

  • Report this Comment On April 13, 2010, at 9:42 PM, eekthecat wrote:

    sapereaude1, hell yeah!

  • Report this Comment On April 13, 2010, at 11:18 PM, oldetoad wrote:

    Firstly, can you block " asjdhkjasd" from future commenting?

    Now Bravo for making this simple enough for all to agree with, as americans, many of which do not pay attention outside their immediate condition are going to need convincing regarding who is to blame.

    The historical account for FDR's stimulus programs did not bring us out of depression- the economic effects of WWII did, beginning with increasing exports. What it did do is get FDR re-elected. More recently, 32 years of welfare programs did more harm than good-

    Americans need to know what to vote for in the future and demand candidates vow to follow the "what changes" we need enacted. If this doesn't happen - we loose, and are forced to heel by this very same government we keep electing. Asking these elected officials to make changes is not working, nor has it worked in a long time.

    If the media would spread this article (including the suggestion that the tenures of leaders be added)-

    along with a list of changes that outline the "what actions are required"- maybe this country could recover.

    It depends on the WILL of the people being clearly spoken across the land. What few of us realize is how this will end for main street if it continues. It's not just the hyper inflationary risk, is not just the high probability that conflict will be initiated, though that will account for our loss of "life". IT IS the severe loss of liberty, and the loss of opportunity to succeed for future generations due to gov. debt that will break our spirit.

    Its interesting the "vampire squid" is not included.

  • Report this Comment On April 14, 2010, at 1:58 AM, Glycomix wrote:

    Chuck Schumer, Barney Franks and the radical "borrow-and-spend on the poor" Democrats destroyed the economy and are doing further damage as we speak.

    The evidence from Schumer's own press clippings:

    - 2007 August 15, Schumer defies the regulators and the Bush administration to demand that Fannie and Freddie's caps be lifted further so they will provide more money for subprime loans.

    Here's a direct quote:

    “August 16, 2007

    Schumer: if Bush regulators won't lift Fannie and Freddie mortgage portfolio caps, congress must act instead.”

    http://schumer.senate.gov/new_website/record.cfm?id=280933&a...

    Schumer does more, he further increases the caps of Fannie and Freddie's lending to subprime borrowers in 2007, battling President Bush and the regulators to destroy the American banking system with subprime loans.

    "2007 Oct 11. Strengthened Measure Would Lift GSEs' Portfolio Caps By 10 Percent for Six Months—With 85% of Increase Devoted to Subprime Refinancing… “Democrats in Congress are coming together to take steps the administration won’t.” … Schumer, Frank and other Democrats also proposed a substantial increase in federal aid to housing nonprofits [ACORN] that perform homeowner counseling for at-risk borrowers.”

    http://schumer.senate.gov/new_website/record.cfm?id=286460&a...

    What brings about this assessment, that they joyously destroyed the banking system.

    The banks were in deep trouble in 2007, but Schumer sent 40 banks that made subprime loans letters telling them "keep on loaning" or else.

    http://schumer.senate.gov/new_website/record.cfm?id=281155&a...

    A November 27, 2007 report puts probable bank losses at $400 Billion.

    "Deutsche Bank analyst Mike Mayo warned today that losses spawning from the declining value of subprime assets could be as high as $400 billion, eclipsing previous estimates made by the Fed which hovered around $100 billion." http://www.thetruthaboutmortgage.com/analyst-warns-of-400-bi...

    Schumer was trying to get the GSEs to bail out is poor decisions, but Fed. governor William Poole had already written in May 2007 that the GSEs were bankrupt by $1.8 trillion in January 2007. (1)

    Why is that a big deal? At that time, the Adjusted Gross Income for every person in the US was $8 trillion.(2) At that point, Fannie owed more than everyone in the the US earned! We couldn't charge it off because we couldn't afford it.

    (1) http://research.stlouisfed.org/publications/review/07/05/Poo...

    (2)http://www.irs.gov/pub/irs-soi/08fallbulintax.pdf

    Fannie Mae's executives were forced to meet "affordable housing goals" (loans or rent loans for poor people who couldn't afford either) in their new charter rewritten by Gonzalez in 1992.

    The legislation is very clear. They MUST loan money to the poor

    http://www.law.cornell.edu/uscode/search/display.html?terms=....

    Fannie and Freddie's had Housing Groups at FHA that set "Affordable housing Goals" for them.

    In 2007 these goals required them to give 100% of their money to buy loans from the poor or blacks.

    HUD required % of dwellings purchased GOALS for Fannie and Freddie

    TO: poor or moderate income: from 50% in 2000 to 56% in 2007

    Underserved housing loans: from 31% in 2000 to 43% in 2007

    Special Affordable housing: from 19% in 2000 to 27% in 2007

    SEE Tables 1& 2 on ‘Huduser’ (pp. 4-5)

    http://www.huduser.org/por©tal/datasets/GSE/gse2007.pdf

    What was the result of this interference in the US's financial system?

    See for yourself:

    On 6 July 2009, the Truth About Mortgages.com reported the following:

    Standard and Poors "now expects the default rate on subprime loans issued in 2005, 2006, and 2007 to be 11 percent, 30 percent, and 49 percent, respectively. Schumer and the Democrats' actions forcing the regulators to do the wrong thing made matters worse.

    The Daily Reckoning beautifully describes the meltdown in August 2007 in two sentences,

    " The bad debts were stacked up like poisoned berries gathered by a poison-crazed squirrel during the housing bubble of 2003-2006. Going bad - fast - in summer '07, they threatened to wipe out consumers, investors and businesses everywhere in a slow-motion replay of Japan's "zombie" banking deflation. At least that's how the credit markets saw the subprime meltdown in August."

    http://www.dailyreckoning.com.au/goldman-sachs-2/2007/10/19/

    THE SUBPRIME DEMOCRATS CAUSED THE CRISIS TO WORSEN

    Subprime loans originated in 2006 and 2007 have performed particularly poorly as home prices peaked around that time and then fell precipitously, leaving many with negative equity and highly unaffordable mortgages that couldn’t be refinanced once credit markets locked up"

    http://www.thetruthaboutmortgage.com/subprime-default-rate-a...

    Pressure to lend led to sloppy loans and more subprime defaults. on 16 July 2008, 50% of subprime mortgages that were rewritten or "modified" were still defaulting at 50%.

    http://www.housingwire.com/2008/07/16/subprime-arm-defaultin...

    Greenspan warned Schumer that Fannie and Freddie were a systemic Risk and needed to be decreased from 23% of the Mortgage Market to 5% of the Market on 6 April 2005 and got fired for his trouble.

    http://www.federalreserve.gov/boarddocs/testimony/2005/20050...

    What happened? PORK, BREAD AND CIRCUSES ARE GETTING POLITICIANS REELECTED

    Chas. Schumer will kill to keep his power and that's why he emphasizes these loans.

    However, they'll destroy the US economy by destroying banking. There will be no one to lend to entrepreneurs who come up with new ideas.

    Politicians who make unsustainable promises get reelected. The only trouble is that they destroy our economy. Politicians like Boston and Cambridge's, Michael Caputano, like these "free" loans to their constituents, who will elect them as long as theyh get their money. Caputano said that he'll threaten anyone who wants to cut back on Fannie and Freddie's Goals for individual housing loans for the poor.

    http://www.c-spanvideo.org/program/292675-1 [1:19:00-1:22:00]

    The problem is not too little regulation of the Banks, it's too MUCH regulation that forces Banks to make unsound loans to the poor.

    That's what Yaron Brook said in his Forbes commentary: The stick of Federal Reserve Supervisor's insisting on CRA goals, insisting that fiscal soundness rules were discriminatory, and the carrot of Fannie and Freddie Mac's buying subprime mortgages caused the problem.

    Over-regulation in the cause of a "social justice" is turning into injustice for everyone. If we are pushed into a hyperinflation by these political hyjinks, the middle class will become poor and the poor will starve as they did in Germany in 1923, in Japan in the early 1950s, and as they have been starving in Zimbabwe since 2000 because of hyperinflation.

    Argentina had beaten it's hyperinflation by implementing market reforms and selling all of its government banks to private corporations. However, it made a fatal mistake. In 2001, Argentina's finance minister, Domingo Cavallo, tried to over-regulate the banks to force them to make unsafe loans and to reduce their liquidity (As Gethner wishes to do now). The banks failed and the country went bankrupt in 2002.

    I have never been a banker and have no stock in banks. However, I don't want my country to be thrown in the ash heap of poverty and powerlessness because some greedy demagogues decided to borrow to spend money that the nation cannot afford. I don't think that every politician or lawyer should NOT be allowed to take office until he's read Robert Heilbroner's "Worldly Philosophers." All of my friends read it in the tenth grade.

    Franks is the only politican in this group that knows he's destroying the country. The rest of them are totally at sea. Schumer and Dodd (and Frank, discreetly) are so full of themselves that they think they know better than the Federal Reserve. There are too many politicians like Michael Capuano who speak well, but ignorantly, about the "good" that Fannie and Freddie are doing in making loans to the poor..

    Their mild positive side are offset by the devastation that they are causing this nation and its people.

    The only program that works for the poor are microloans pioneered by Muhammad Yunis. Five women entrepreneurs get together in a cooperative and nominates the first person who is to get the loan and pay it back with nominal interest. Then the next person the group feels has the best chance gets the loan and pays it back. The continues until they all get the loan.

    http://en.wikipedia.org/wiki/Muhammad_Yunus

  • Report this Comment On April 14, 2010, at 2:11 AM, ceb004 wrote:

    The underlying problem behind all of this is that the act of getting elected to public office in the US has become so twisted and expensive that a) if it doesn't outright corrupt those who seek public office, it at least saps their time and ability to be effective once elected, and b) discourages the best and brightest from even trying. What we get are people who like to win popularity contests and don't really think too well. If these people had to add value themselves, the whole government would collapse, so they hire staffers to do most of the mechanical work. These staffers must primarily please their boss, rather than do a competent job -- any proposal or law draft must please the staffer's popularity- and reelection-seeking boss before it goes anywhere.

    In high school we knew who these people were -- they became homecoming kings and queens, organised the prom, held all the cool parties to whom only the "best" were invited. All this chicanery was OK, as long as they didn't get in the way of those of us who wanted to study and move on. Welsir, they're getting in our way now.

    Eliminate these abuses and corupting influences in the electoral process, and you enable addressing all the other derivative issues that are symptoms such as the financial crisis. Address the symptoms only, then you expend a lot of time and effort going not much of anywhere at all.

    The "WILL of the people" be what it may, it will not be spoken clearly across the land as long as this crowd of people elected on a basis that does not bear inspection retain the bully pulpit.

    In other countries in the past, dire things have come to pass when such a skew between the agenda of the electorate have set in over the long term. This things range from immense apathy to revolution, return to monarchies or despots, or worse. Despots clearly have issues associated with them, but one advantage they bring is that they reduce the overhead of government, and increase responsiveness (at least to issues on which their ascendancy was based).

    Another contributor here already suggested class warfare as a solution. I don't see why it has to come to this. Just make the electoral process such that it's attractive to competent people, and they don't have to spend all their time feeding the machine once elected.

  • Report this Comment On April 14, 2010, at 9:29 AM, MPov wrote:

    It's official - Morgan hates banks; at least it sure appears that way from looking at his last few columns.

    I am in favor of smart regulation, forcing banks to do a better job of analyzing risk and setting aside capital to meet those risks. I am also in favor of new regulation that makes it easier to wind up failed institutions. But I don't like the idea of breaking up a bank simply because it has reached some arbitrary size limit set by some bureaucrat in Washington. In this country we are not supposed to penalize people (or companies) for being too successful, as long as they got there legally.

  • Report this Comment On April 14, 2010, at 10:27 AM, showmethefacts wrote:

    It's important to understand WHY these Dems and Repubs orchestrated changes in federal laws and regulations that led to the crisis. Why did they repeal Glass-Steagall? Why did they push easier and easier terms for people to buy houses (when obviously, now, some people just need to be renters)? And why, why, why did the SEC, Fed and Treasury Depts during BOTH Dem and Repub administrations refuse to regulate the derivatives markets and the non-bank lenders when these sectors started growing so fast that they began to pose "systemic risk?" The answer is clear: because the political system we have, and have had, allows the greedy people decried here in post after post to essentially bribe their way into being protected by the politicians of both parties. Yes, there may have been a few Democrat ideologues who foolishly thought home ownership was for virtually everyone (leading to the loose policies pointed out by conservative posters here) . And yes, there may have been some Republican ideologues who equally foolishly thought all regulation was "bad" that government was the enemy and that "free markets" would always correct any imbalances... Yeah, right! So AIG should be allowed to sell as many Credit Default Swaps as it wanted, even with no reserves to pay in the event the buyers of those insurance policies against bond defaults ever presented a claim??? But rigid ideologies didn't drive the changes in law; money did. Big Bank money is forestalling needed reforms as we read this. Today's bad guys are Republicans doing the bidding of Ciit, JP Morgan, B of A, Wells and the Wall Street profiteers who hope for more gambling, more bubbles and more insane bonuses right up to the next collapse. A bare 5-4 majority on our Republican-dominated Supreme Court just rules last year that money = free speech, so it is hard to stop the bribery that harms 99.9% of us for the benefit of a tiny elite. Our only remedy is at the ballot box. Until we find a way to elect politicians of both parties (or hopefully, some beholden to neither) who refuse to follow the wishes of the no-regulation, no-rules profiteers, who see that requiring some sensible rules for down payments and loan eligibility, and who understand that their constituents are the 99.9% instead of the fat cats with the money rolls, we will see the whole process repeat again.

  • Report this Comment On April 14, 2010, at 10:48 AM, jfenlon wrote:

    Excellent article and responses. Kudos to all. The basic problem is lack of awareness by the body politic regarding commercial and consumer finance. Listen to the stupes who call in to Dave Ramsey looking for a magic bullet to bail them out of their irresponsible spending habits. I don't recall who referred to economics as "the dismal science" but I am convinced that finance in general is poorly understood by most Americans. Well written books and this site are not the answer because the choir is writing for the choir. I don't know how you solve this as the average young person is so anesthetized by their text message habits that they can't think critically. I have no hope for formal education as the teacher's unions and politicized university faculty have an agenda from which they cannot separate themselves. Margaret Thatcher's admonition that the problem with Socialism is that sooner or later you run out of other people's money would fall on deaf ears if the academic community ever heard it. If you assembled 100 college students from any university in the country, spread across the various disciplines, and asked them to explain how printing money with nothing to back it contributes to inflation, how many would even agree that it causes inflation? What I would like to see is a debate on national television between Thomas Friedman and any of you guys on economic policy.

  • Report this Comment On April 14, 2010, at 2:15 PM, funkyduane wrote:

    As Pogo so wisely revealed "We have met the enemy, and the enemy is us!"

    Who is the government? Us

    Who elects our representatives? Us

    Who colludes/enables the so called bad guys on Wall Street and Banking? Us

    The blame game is soooo much fun! I never have to be responsible for my actions and inaction to cause and create what I say I want in life. I always have a handy justification/excuse that leaves me a victim of "them."

  • Report this Comment On April 14, 2010, at 2:26 PM, jrod87 wrote:

    "printing money with nothing to back it contributes to inflation" It dose? I think you'ed have to present a Pre WW2 movie of Germany with People from Valentines Day Movie staring in it for most of them to even know....There was a World War 1?....I thought there was a Great world war before that right?

  • Report this Comment On April 14, 2010, at 3:40 PM, PALH wrote:

    showmethefacts:

    you hit it straight on the nose. I wasn't trying to suggest earlier that Democrats weren't at fault at all, rather that if one had to fill in a pie chart, most of the blame has to be apportioned to the Republican party because it had unchallenged control of the economy, top to bottom, in the lead-up to the debacle we're now in. It is their philosophy that holds sway, still, in all economic moves including those made by Obama. It's the same philosophy that drives other commenters such as the one above with his copious linking to ignore all but the facts that fit his premise, leaving out any mention of unregulated megabanks tieing up massive amounts of capital making bets on bad loans while obsessing on the push to create programs (ill-considered for sure) for subprime loans.

    But overlaying everything in that pie chart is the pernicious influence of corporations, which have their fingers deep into the Democratic Party as well as being in compete control of the Republican Party. Corporations which have now been granted rights as individuals by a corporation-adoring Supreme Court majority.

  • Report this Comment On April 14, 2010, at 4:27 PM, YouHeardItFirst wrote:

    The average person doesn't know what the Federal Reserve actually is. They also don't know that Bernake has the authority to print physical dollar bills.

    The public doesn't know and doesn't want to. They just want someone else to 'fix it' so they can go back to watching Lost (insert irony here).

    Personally, I don't think that will change unless there is a complete economic meltdown. It's a shame, but it takes a 9-11 level event to get the general public to pay attention - and that only works when they have a clear target for their outrage and it doesn't require them to think, just react.

    Anyone see a chance of that happening in the economy? Didn't think so...

  • Report this Comment On April 14, 2010, at 9:54 PM, rockysan wrote:

    Throughout all of this where was the accurate and concise reporting we should expect from the main stream media. They have all degenerated to level of the tabloids. Incrementally the media could shine some light on what is going wrong in this country. Hopefully before everything blows up in our faces. I wonder if any banks would buy time during those segments?

  • Report this Comment On April 16, 2010, at 1:44 AM, oldetoad wrote:

    In looking at the comments, I was particularly grabbed by one that seemed to answer or speak to the others if you will. My hats off to funkyduane for contributing this:

    As Pogo so wisely revealed "We have met the enemy, and the enemy is us!"

    Who is the government? Us

    Who elects our representatives? Us

    Who colludes/enables the so called bad guys on Wall Street and Banking? Us

    The blame game is soooo much fun! I never have to be responsible for my actions or inaction to cause and create what I say I want in life. I always have a handy justification/excuse that leaves me a victim of "them."

    Me again.

    I think if we can collectively take the blame for our part in this, we can bunch all the scoundrels together and not get overly distracted by them. They all have to go, and so does the money flow to our elected government officials coming from $340mil in lobbying last year.

    And the rascals get to keep it too. Most of us would choose to get in on this deal if we could, wouldn't you agree? So maybe its not that hard to see what needs to change. We've allowed this , and its grown to the point government is answering to the those that provide "the benefits", not the people. If we don't sever this influence,

    we will loose it all , right under our noses.

  • Report this Comment On April 16, 2010, at 2:17 AM, oldetoad wrote:

    And to read that the Supreme Court just upheld and further loosened the rules of lobbying.

    Gives you an idea of the extent of the problem that main streeters face if they want to clean up this festering problem.

    if 3/4 of the States agree any Federal law is unconstitutional , its no longer a law. Now there is an opportunity for us. Get them to vote on 5 or 10 key laws and the game changes. I doesn't remove the damage already done, but preserves our chances of getting back up from it.

    We need to recognize both political machines are deeply comprimised and we are up against the most powerful imaginable, but guess what- we can for change again, and again, if only we could agree of what were voting for.

  • Report this Comment On April 16, 2010, at 10:49 AM, Boomerchef wrote:

    If you want this story in picture form, see Michael Moore's "Capitalism, A Love Story." He's an unpleasant person, in both manner and appearance. He's crass, crude, and annoying - LIKE THE TRUTH. As a theologian, I see him in the direct line of the Old Testament prophets. Note: "Prophet" is never spelled with an "f".

  • Report this Comment On April 16, 2010, at 10:49 AM, Boomerchef wrote:

    If you want this story in picture form, see Michael Moore's "Capitalism, A Love Story." He's an unpleasant person, in both manner and appearance. He's crass, crude, and annoying - LIKE THE TRUTH. As a theologian, I see him in the direct line of the Old Testament prophets. Note: "Prophet" is never spelled with an "f".

  • Report this Comment On April 16, 2010, at 12:08 PM, gregmrobb wrote:

    Michael Lewis ("The Big Short") thinks the main problem that allowed the wall street banks to ruin the economy was absentee ownership in the form of shareholders. All but a few wall streeters didn't understand the risk of the complicated products wall street created.

    The companys went public in the 80's, then betting shareholder's money, they proceeded to "game" investors and the rating models of S&P/Moody's to make billions.

    I think people playing the wall street game with other people's money is like playing the game "Monopoly", the money's not real.

  • Report this Comment On April 16, 2010, at 12:19 PM, deviltopay wrote:

    Nothing is more dangerous than unfetterd capitalism. I am sure that this is not original, all credit is due to those who have used it before. It is too bad that Ronald Reagan ignored that thought and acted as a shill for the captialists who elected him.

  • Report this Comment On April 16, 2010, at 11:52 PM, WalterMiddy wrote:

    So much of this is over my head, but I have learned a lot from Michael Lewis's articles since the Fall of 2009 and his recent book, The Big Short. A couple of observations, to which I'd love to hear anyone's reactions:

    1. Lot of blame for the financial disaster but assuming greed is a natural instinct, as well as aversion to unacceptable risks, Lewis tries to see where the checks and balances failed. If I understand his thesis, I think it was with the ratings agencies, Moody's and Standard and Poors. Sure you're going to have con men trying to do things like package bad loans, and then leveraging those packages even more. But the "smart guys" apparently were allowed to delude their customers because the riskiest bonds (bonds based on loans almost guaranteed to default) were rated triple A. The "smart" guys were pretty stupid, but since the bond issuer paid the ratings agencies, there was probably a disincentive on their part to really scrutinize what they were rating.

    2. Is there anyone besides Lewis exposing the culpable guys in this mess (apparently the SEC is finally going after Goldman Sachs for fraud)? Is it just too difficult for the media to explain in sound bites?

    3. It was probably necessary to do what they did to save the financial system, but another of Michael Lewis's theses is that there was and is no responsibility for screwing up. I don't begrudge the "heroes" in his book, the ones who shorted the crappy bonds, with their enormous profits. They were smart, they took huge risks (when everyone thought they were crazy) and if they had been wrong, they would have lost huge amounts.

    But I don't understand why we have allowed the stupid ones, the ones who lost billions, to walk away with their enormous profits. I was young in the 70's but wasn't there something like a windfall profits tax back when oil companies made enormous profits as a result of the oil embargoes? Again, just because you made a killing doesn't justify a punitive tax. Capitalism rewards intelligent investment decisions. I'm talking about a tax on stupidity: If you raked in millions in salary from transactions that lost your business and your clients beaucoup money, can't we at least tax those bonuses...significantly?

    Probably much too simplistic. I look forward to the poking of holes.

  • Report this Comment On April 17, 2010, at 1:21 PM, irlizzard2 wrote:

    YOUHEARDITHEREFIRST

    YOU ARE THE ONE WHO HAS NO CLUE WHAT AN AVERAGE AMERICAN KNOWS!

    THIS AVERAGE AMERICAN KNOWS YOU ARE A FOOL!

    (NOT IN THE MOTLEY FOOL WAY)

    YOU THINK YOU ARE SO MUCH SMARTER THAN THOU.

    IF A GROUP OF MIDDLE CLASS AMERICANS ASSEMBLE THEY ARE CALLED RACIST OR RADICAL!THAT'S WHY THEY SIT IN SILENCE. HERE COMES THE TEA PARTY! WE ARE PUTTING AMERICA ON NOTICE, "NO MORE AND WE ARE SICK OF IT"

  • Report this Comment On April 18, 2010, at 4:25 AM, ET69 wrote:

    I love all this "hang the capitalists" talk and "the enemy is us" is good too... But what are you going to do about it? Write your bought and paid for congressman a letter? At the end of the day if you vote for any Republican or Democrat then YOU are the problem.Actually the way the system is shackled and manipulated voting is a farce in this country.

    So you like Adam Smith ..well if you are really serious then you ought to read Karl Marx---yes THAT Karl Marx .In fact, I dare you to read Das Capital and tell me he wasn't right about a LOT of things back then and NOW.

  • Report this Comment On April 19, 2010, at 4:46 PM, seaindy wrote:

    Time to separate the investment and commercial banks again.

  • Report this Comment On April 23, 2010, at 7:15 AM, wright4ulg wrote:

    Blowing up the economy is an understatement!

    ]

    WHERE IS MY LOAN MODIFICATION BANK OF AMERICA?

    If it walks like a piggy, talks like a piggy, by golly it’s a PIGGY!

    BofA and it’s CEO Brian Moynihan reminds me of that song by John Lennon and George Harrison titled "Piggies" I invite you to listen to this song on youtube and see if it appropriately fits.

    http://www.youtube.com/watch?v=NTmeHM-Hojg&feature=relat...

    Have you seen the little piggies

    Crawling in the dirt

    And for all the little piggies

    Life is getting worse

    Always having dirt to play around in.

    Have you seen the bigger piggies

    In their starched white shirts

    You will find the bigger piggies

    Stirring up the dirt

    Always have clean shirts to play around in.

    In their ties with all their backing

    They don't care what goes on around

    In their eyes there's something lacking

    What they need's a damn good whacking.

    Everywhere there's lots of piggies

    Living piggy lives

    You can see them out for dinner

    With their piggy wives

    Clutching forks and knives to eat their bacon.

    John Wright vs. Bank of America Lawsuit at:

    http://www.topix.com/content/prweb/2010/03/united-law-group-...

    When I filed my lawsuit against Bank of America, myself and United Law Group thought of the many others out there in the same situation. It was then that we decided to educate the public on what these piggy banks are doing, as well as unite us all together as one voice. Please help me turn this David vs. Goliath modification process, into a Goliath vs. Goliath.

    Please stand with me and United Law Group and send an email to Bank of America that states that we will no longer tolerate their potentially illegal, fraudulent, irregular and abusive business methods.

    Divided we might have fell America, but united we must stand!

    Please send your email directly to Bank of America and include the following:

    1. Your name

    2. Your complaint concerning your experience with Bank of America.

    3. Please end your email “I support John Wright vs. BofA Lawsuit!”

    4. Please send a copy of your email to johns-wright@hotmail.com

    5. Please send your email to both BofA link below and the CEO email

    CEO Brian Moynihan:

    brian.t.moynihan@bankofamerica.com

    BofA Linked Email:

    https://www3.bankofamerica.com/contact/?lob=general&cont...

  • Report this Comment On June 01, 2010, at 5:49 PM, Morpheus2010 wrote:

    This makes me think about things more. Thanks for the info. Please keep them comming.

    When will recovery begin in your findings, Morgan Housel?

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