President Obama has given the nation hope, but is it enough? Indignation remains widespread because Wall Street has failed its public trust and politicians have yet to find ways to counter outrages with real justice. “Heads need to roll,” proclaimed Moneycentral’s Jim Jubak recently, for if we fail to punish wrongdoers we are bound to repeat this disaster (“Why the CEO salary cap is a joke,” Feb. 10). Likewise, MarketWatch’s David Callaway declared on Feb. 5 that the lack of transparency on Wall Street is so appalling that someone ought to “throw a grenade into the tent” (metaphorically). Now, just two weeks after his last call for justice, Jubak seethes again in a brilliant article: “5 ways for us chumps to fight back” (Feb. 24).
Here’s what Jubak declares: “Those who were financially responsible don’t have a lot to show for it, but folks who took big risks are getting bailouts. ...[T]he worst is that you see people all around who behaved like fools, people who lied on their mortgage applications, who piled on debt like there was no tomorrow or who ran their companies into the ground and who are now getting bailed out by the federal government. WITH YOUR MONEY [emphasis mine]. You know its not fair. You’re as angry as hell. You want someone to pay the price. You want the good rewarded and the evil punished.” Should someone put that sentiment in a song?
Jubak is busy formulating ideas about how to fight back. And he is asking for suggestions from members of his audience. Good! But in finding answers let’s remember that this sordid affair did not happen overnight. As early as Nov. 7, 2004, Scott Burns (Moneycentral.com) wrote that a revival of “Devil’s Island” (a penal exile colony) might be the only way to arrest an unprecedented epidemic of ethical turpitude and corporate fraud. Too bad America didn’t listen. Maybe we should listen now as Burns resurrects that argument in the context of Madoff’s desecration of human decency.
The problem is much bigger than Madoff and his ilk. Moral illness is systemic in the financial sector, with contestants in white hats no longer the clear majority. As James Skillen, President of the Center for Public Justice explains, there is a growing sense that fairness is ruptured profoundly. Due to Wall Street’s greed, people in every walk of life are being dumped into the world of the unemployed where the average government unemployment check comes in under $300 a week. It looks no better on the real estate front. While “home prices slide at a record pace,” prices in many desirable parts of the nation remain inflated 40-70% above where they were five years ago. This phenomenon — a consequence of financial sector greed — makes home ownership a perilous venture for newcomers (Moneycentral.com, Feb. 24).
Americans no longer know who to trust. Irwin Kellner, chief economist for MarketWatch.com, argues that “statistical evidence is mounting to suggest that the worst of this recession may soon be past”. Nevertheless, readers who recall Kellner’s big investment with Madoff may wonder if he is beating a recovery drum in the hope of reinvigorating his own investment portfolio. After all, Kellner’s recent sanguinity about producer price increases and a soaring money supply can be read as a big investor’s preference for an inflationary crisis over a deflationary depression that knocks leveraged investors out of their assets. Likewise, Mortimer Zuckerman’s headline declaration in this week’s USN&WR is that there is “no time to lose” in concocting “the most aggressive policy responses imaginable” to the financial crisis. “Speed is crucial.” A “vast program” is needed. “Many other lending bubbles [are] in danger of bursting.” Government “is the only solution.” Keynes’ vision of the “animal spirit” must be revived (March 2009 Personal Finance Issue, page 80).
Some people no longer trust Zuckerman. The silver platter on which he serves ideas is tarnished, especially after the revelation of his investment with Madoff. What are his motives in urging Americans to act before alternative pathways are considered? Does Zuckerman provide a coded endorsement of global government in which the U.S. loses its economic autonomy? What would be his role in a new elitist regime? Does he put the value of his vast commercial real estate empire ahead of the public good? Or is he an admirable media statesman with the public interest at heart? People don’t know what to think.
David Weidner argues like this: “Americans are beginning to absorb the sobering reality that the country’s financial system is falling under government control.” This realization is occurring at the same time that investors “have no faith in their existing leaders.” People know there will be winners in this landscape, but they suspect the winners will consist of Wall Street’s “private equity” elites, not the general public. Increasingly, people see the handwriting on the wall as they watch government prepare to increase its $150 billion stake in AIG due to AIG’s counterparty liabilities.
In his declaration today that there are no zombie banks, Ben Bernanke explained that the Fed has “very strong supervisory oversight” over the banks and can do “whatever is necessary to [help them] become profitable again”. If so, what was the Fed doing in the decade preceding the banking crisis — the decade in which aggressive banks catered to the “masters of the universe”? The same question can be asked from another angle — an angle explored by MarketWatch’s Paul Farrell in developing an argument by economist Henry Kaufman. Why is it that we can land men on the moon with pinpoint accuracy but cannot manage our key economic institutions with justice and proficiency? (Feb. 23). Is it merely that we are incapable of developing sound economic methods, as Kaufman suggests in part? Or is something hidden in our failure to develop an honorable financial architecture for capitalism? If Madoff could happen, is it possible that seeds of errant economics have been sown craftily by some elites in order to produce capital markets that can be gamed more effectively?
Wherever we look responsible people are getting dumped on. Little wonder, then, that Jim Jubak is urging thoughtful people to find better places to put investment capital. For some of us this means getting capital out of Wall Street’s muddy hands. In so doing we must move beyond precious metals as defensive plays. It is time to start investigating the productive value of investments, not merely the return on investment. The Wall Street category of “socially responsible” investments is a start. But Wall Street is still the middleman. What else is there?
One person thinking outside the box is Moneycentral’s Jeff Schnepper. In a Feb. 18 article entitled, “Use your 401(k) to start a business” Schnepper explains the accounting technicalities of legally retrieving assets from Wall Street without having to pay the 10% early distribution penalty. Recovered assets can be used to capitalize endeavors under people’s own control. While this option is most feasible for people with good business sense, it doesn’t hurt anyone to understand the idea as an alternative. Indeed, with no time wasted we must give alternatives to Wall Street much closer attention.