The Taibbi Plan

Matt Taibbi, one of the key members of the More Clever than Smart Club, has an essay on what he would have OccupyWallStreet demand. It’s making the rounds. Let’s go through it. I’ve almost finished reading The Big Short, a book you really should read to understand the recent financial crisis. So this will serve two purposes: responding to Taibbi and talking about what I learned from Michael Lewis.

1. Break up the monopolies. The so-called “Too Big to Fail” financial companies – now sometimes called by the more accurate term “Systemically Dangerous Institutions” – are a direct threat to national security. They are above the law and above market consequence, making them more dangerous and unaccountable than a thousand mafias combined. There are about 20 such firms in America, and they need to be dismantled; a good start would be to repeal the Gramm-Leach-Bliley Act and mandate the separation of insurance companies, investment banks and commercial banks.

I don’t entirely disagree with this point. I thought as much in 2008 when we were told we had to bail out companies because they were “too big to fail”. If that’s the case, we need to stop them from being so big. We’ve broken up monopolies before; I don’t see why we should stop now.

That having been said, I’m dubious that this will achieve anything. As Reihan Salam points out, other countries have done fine with the same system. This idea hinges one whether you accept the idea that companies are too big to fail. I’m not sure I do.

2. Pay for your own bailouts. A tax of 0.1 percent on all trades of stocks and bonds and a 0.01 percent tax on all trades of derivatives would generate enough revenue to pay us back for the bailouts, and still have plenty left over to fight the deficits the banks claim to be so worried about. It would also deter the endless chase for instant profits through computerized insider-trading schemes like High Frequency Trading, and force Wall Street to go back to the job it’s supposed to be doing, i.e., making sober investments in job-creating businesses and watching them grow.

Several problems with this one, which is a favorite of the Left. First, a transaction tax will never go away after it’s “paid” for the bailout (which is already mostly paid back). It will stay with us longer than the phone tax that was instituted for the Spanish-American War and was repealed in … 2006. Moreover, the biggest outstanding bailouts are Chrysler, GM and Freddie/Fannie. How is a transactions tax going to punish them?

Second, the big problem here was not high frequency trading, which is a minor irritation. It was the entire system acting stupidly with mid- to long-term investments. Credit default swaps and collateralized debt obligations were sold with the anticipation of years of risk-free revenue. Howie Hubler didn’t lose $9 billion on high-frequency trading; he lost it betting on huge CDO’s.

Which brings me to a point that Taibbi doesn’t address at all — the ratings agencies. Michael Lewis makes it crystal clear that the ratings agencies — S&P and Moody’s — had no fucking clue what was going on. They would give ratings to mortgage bonds without bothering to find out what was in them. In fact, they specifically told their employees not to look. The result was that tranches of triple-B mortgage bonds were put together into CDO’s that they rated AAA. People — investors who were interested in “making sober investments in job-creating businesses and watching them grow” bought these, thinking they were as safe as Treasury Bonds. They clearly weren’t. And not only did the ratings agencies not suffer for their massive failure, Dodd-Frank strengthened their control of the market.

The primary influence of Wall Street on the financial crisis was that high-stakes mid-term gambles brought banks to their knees and they “had” to be bailed out. But perhaps an even greater influence was that the mortgage bond market created an upward suction on the mortgage market. People were making billions off of mortgage-based securities. To feed that money engine, more mortgages were needed. This created not only immense pressure but immense profits for mortgage brokers who sold people houses they couldn’t afford, sold them on bad ideas like option loans and sold no-document loans. The mortgage sellers didn’t care if the loans were good because they were selling them right to Wall Street. Wall Street didn’t care because they were selling them to each other.

Yes, there was pressure from the Community Reinvestment Act and ACORN. But that was a comparatively small effect. The tranches that did in the big banks and crashed the system were Alt-A: mortgages sold to people who had good credit scores. Everyone knew the mortgages sold to poor people were bad; it was the mortgages sold to middle class and wealthy people that broke the system.

A transaction tax does not address this problem at all. What would have addressed it was letting the banks go bust. People who bought bad mortgages suffered — they lost their homes, their credit rating and their savings. That’s what should happen when you let the bank talk you into doing something stupid. But the banks didn’t suffer.

Here’s a better idea that would replace Taibbi’s points (1) and (2). Rewrite Dodd-Frank so that any company that is bailed out in future has to fire their Board of Directors. Rewrite it so that companies that are bailed out will be eventually liquidated or broken up. Re-inject moral hazard so that companies see bailout as a last resort, rather than a first one.

3. No public money for private lobbying. A company that receives a public bailout should not be allowed to use the taxpayer’s own money to lobby against him. You can either suck on the public teat or influence the next presidential race, but you can’t do both. Butt out for once and let the people choose the next president and Congress.

I have no problem with this … if it includes agencies like ACORN that get loads of public money as well as public employee unions and public employees and government contractors (which would often include me). What Taibbi wants is to single out only some of the people sucking on the public teat; the ones he doesn’t like. Everyone else can go ahead.

4. Tax hedge-fund gamblers. For starters, we need an immediate repeal of the preposterous and indefensible carried-interest tax break, which allows hedge-fund titans like Stevie Cohen and John Paulson to pay taxes of only 15 percent on their billions in gambling income, while ordinary Americans pay twice that for teaching kids and putting out fires. I defy any politician to stand up and defend that loophole during an election year.

I sort of agree with this one. I see no reason why a businessman earning half a mil in salary should be taxed at twice the rate of a hedge-fund manager. The carried interest rule was a mistake.

However, I doubt this will actually work. People do not get rich by allowing the government to figure out how to tax them more. And the carried interest rule exists for a reason. Jim Manzi has pointed out that it would be child’s play for hedge fund managers to shift the funds so that they become capital gains or other forms of equity.

A better idea would be an overhaul of the tax system that keeps it simple and eliminates the complexities that allow income to be sheltered and fed the financial doomsday machine.

5. Change the way bankers get paid. We need new laws preventing Wall Street executives from getting bonuses upfront for deals that might blow up in all of our faces later. It should be: You make a deal today, you get company stock you can redeem two or three years from now. That forces everyone to be invested in his own company’s long-term health – no more Joe Cassanos pocketing multimillion-dollar bonuses for destroying the AIGs of the world.

This would be a huge mistake, I think. We have attempted this before and the result has always been bad Unintended Consequences. If you force them to get company stock, what’s going to happen? Well, precisely what happened in the 90’s — a stock market bubble. You’re going to have CEO’s deliberately or fraudulently inflating their stock so they can cash out.

The principle is also warped, in my opinion. If a company wants to pay bonuses to people before they do anything, let it be on their own head. We already have “say on pay” thanks to Dodd-Frank. As long as we don’t bail them out — or at least make bailout conditional on canceling bonuses — this problem will take care of itself. We don’t need to stop companies from being stupid; bankruptcy will do that for us.

This post and my response circles what I’m thinking about OWS. It is a typical liberal event. They have correctly identified the problem: big business has too much influence in Washington and vice-versa. But they are dumb as a bag of hammers when it comes to the solution. Taibbi’s proposal, lauded in liberal circles as “restrained”, would inevitably create another bubble, would create massive legal challenges that would tangle up the courts and would not address some of the biggest problems: the ratings agencies and the government’s willingness to cover up the stupidity of investors.

We turned down this road with TARP. Now is not the time to double down. Now is the time to work the problem.

Comments are closed.

  1. Seattle Outcast

    This idea hinges one whether you accept the idea that companies are too big to fail. I’m not sure I do.

    I know I don’t. Let them fail – once the scavengers are done we’ll be better off for it.

    How is a transactions tax going to punish them?

    It won’t, and they know it. This is merely a brazen attempt to grab more money.

    Credit default swaps and collateralized debt obligations were sold with the anticipation of years of risk-free revenue.

    Which makes me wonder – had any of these people ever been through a downturn before? I suspect not – I saw a lot of under 35 people that didn’t know that the stock market also went down.

    They would give ratings to mortgage bonds without bothering to find out what was in them. In fact, they specifically told their employees not to look

    To me that sounds less like being clueless and more like being bought off.

    This would be a huge mistake, I think. We have attempted this before and the result has always been bad Unintended Consequences

    On top of that, it’s none of anyone’s business how much someone gets paid to do a job. The only people that have a say are the stockholders. The various social commentators that jabber on about this sort of stuff are to be ignored. Not even Ben & Jerry’s, one of the left’s darling businesses, could make that work.

    Thumb up 2

  2. bgeek

    I would take Taibbi more seriously if he had spent some time holding government officials/politicians responsible for their roles in this. Tar and feathers are a proven deterrent.

    Thumb up 1

  3. Hal_10000 *

    To me that sounds less like being clueless and more like being bought off.

    That’s absolutely true. The ratings agencies were paid by Wall Street. They didn’t want to jeopardize their client base. The idea that they are some objective agency is absurd.

    Thumb up 1

  4. Poosh

    The OWS is a very obvious movement put together by the left, maybe even with Obama’s direction, to serve as a weapon for the upcoming election. It is very clever but come on now. If they were real they’d have been doing this YEARS AGO and not when the Banks have actually kept their heads down. The issue is “money translating into power” and these goons don’t care if that’ the case IF it helps them. Which is why they’re hypocrites and should NOT be allowed to be seen as legitimate – because they’re not.

    Some of you people need to put on your machiavellian glasses. At a time when so many people are correctly blaming a president who is simply out of his depth and should never have been elected, this movement will serve to lessen that belief by shifting the blame not just to bankers but all wealthy people in general. Class warfare. As is Obama’s tactic also.

    If memory serves it was Bush, and also Clinton, that tried to regulate parts of the banking system but were shot down – mostly by Dems.

    And I may be confusing the UK banks with the US, but haven’t the US banks PAID BACK all the bail out money, already?

    (I am always fond of lumping a big tax on bank-bonuses, but there may be reasons to not do that, I don’t know)

    Thumb up 0

  5. hist_ed

    Yes, there was pressure from the Community Reinvestment Act and ACORN. But that was a comparatively small effect. The tranches that did in the big banks and crashed the system were Alt-A: mortgages sold to people who had good credit scores. Everyone knew the mortgages sold to poor people were bad; it was the mortgages sold to middle class and wealthy people that broke the system.

    If I remember correctly, the Community Investment’s Act’s reinvention in the 1990s created the need for mortgages that could be given to people with bad credit. Since you can’t market a 2/28 ARM or stated income loan just to poor people, rich and middle class idiots started using these as well. Absent the Act, many of these products likely would not have existed and mortgages would have mostly remained traditional.

    Also, while Fannie Mae was a bad idea from the start, it was also in the early 1990s that it mission was ammended by law to try to get more housing to poor people. This created the pressure to mix crappy poor people loans with more reliable loans.

    As always, it was the government that fucked up the economy.

    Thumb up 1

  6. Poosh

    The one part which is agreeable is the idea of breaking up monopolies. This is consistent with capitalist and free-market advocates. Monopolies have a very negative affect on capitalism and the quality of life for human beings.

    However, because this person I assume is a good leftist, he has no problem with government monopolies, so, as usual, he’s speaking from bad faith.

    Thumb up 0

  7. hist_ed

    The one part which is agreeable is the idea of breaking up monopolies. This is consistent with capitalist and free-market advocates. Monopolies have a very negative affect on capitalism and the quality of life for human beings.

    Can you please cite a couple of non-government (supported or controlled) monopolies and the negative effects they have had?

    Thumb up 0

  8. Poosh

    Predictably I can’t name any, I suppose, cohesive monopolies, apart from Microsoft probably – I think they were taken to court at some point in the past. The company that I think pushes its luck is eBay who I have a lot of hatred for, they do have a monopoly of sorts, but then, if I had a billion pounds I’d probably find a way to set up some real competition.

    Under free market capitalism the way most capitalists envision it, monopolies are rare and do not happen. I can’t bring any others to mind. So long as cohesive monopolies are illegal and governments make sure companies do not engage in anti-competitive behavior, monopolies tend not to occur, until a government steps in.

    When a monopoly occurs and it deliberately uses money to enforce its monopoly rather than ingenuity etc, this will always have a negative affect. Microsoft do have an inevitable monopoly purely because of the nature of the computer industry, and this is why their Widows products are shoddy and consistently full of bugs. Blueray, DVD, also I believe have a sort of monopoly and quite frankly I’d like to have a choice betwe.. ok I admit it bought an HD player… but I’d like to have a choice between the medium I use as currently the maximum benefits of capitalism simply do not apply. The current price of a Blueray is £18. F*ck right off. If bluray and HD, I don’t knwo the exact details of this though, perhaps there is a logical explanation < though that is not an argument for forcible break up of these sorts of "monopolies". It is cohersive monopolies that translate their money into power to secure their monopoly that destroys any possible competition that is anti-capitalist.

    Thumb up 0

  9. hist_ed

    Predictably I can’t name any, I suppose, cohesive monopolies, apart from Microsoft probably

    So if I want a copmuter I have no options other than to buy Microsoft products? Nothing hip or cool that has an earned reputation of greater stability and functionality?

    I think they were taken to court at some point in the past.

    Yes they were taken to court for giving away a product for free that other companies wanted to charge for. Naughty, bad monopolists, always hurting the consumer.

    You stumbled around my eventual points. Almost all monopolies exist because of government coercion: utilities, medical care in some countries, and the beloved East India Company. The mythology of the monopoly started in the US during the progressive era. See these bad naughty monopolies were hurting the little people so government needed to ride to their rescue. The three biggest baddest naughtiest monopolies cited by the progressives were steel, oil and choo choo trains. The problem with their thesis was that the price charged by these three naughty monopolies had been steadily getting smaller for years. Between 1865 and 1900 the prices charged for these three goods (oil, steel and choo choo transport) had plunged around 90% (don’t have the exact figures at hand; no I am not going to look them up) while quality was higher. Yes there was enormous technological advances and yes, 1865 is the end of the Civil War so there was some effect there. But many of those technological advances created a huge increase in demand during those years (in 1900 we used hundreds of times more oil and dozens of times more steel than in 1865). So the basic thesis that monopoly always equals bad for consumer is wrong. What is correct is that government supported and/or created monopolies are generally bad for the consumer. No competition means no need to innovate or discount.

    Thumb up 0

  10. Poosh

    So if I want a computer I have no options other than to buy Microsoft products? Nothing hip or cool that has an earned reputation of greater stability and functionality?

    You may, but last time I checked, and correct me if I’m wrong, but all government computers in the UK use Microsoft; just about everyone uses Microsoft Office software. And it’s impossible for it to be otherwise for reasons of incompatibility. I can’t send an Open Office file to my faculty, for example, I must use a Windows Word file (and even that is a mine-field). Now this may be inevitable, I don’t know, but it sounds like a monopoly to me (though I don’t really know anything about computers).

    Merely because I couldn’t think of any modern monopolies does not mean there aren’t any. I could only name you a handful of companies even though there are hundreds of thousands, for example. There may well be monopolies that exist today that are not related to the government, even if they are only a few – or maybe there just aren’t any and you’re correct. I don’t think it’s prudent to use examples of monopolies 100 years ago as the world is different now and capitalism itself is an entirely different entity. The Knights Templar had a monopoly and were the first banking system, and did some great things, but I wouldn’t use them as an example. But the history lesson is appreciated.

    A monopoly today does not, and will not, pass on anything to the consumer. I’ll use eBay again who while they don’t have a real monopoly, they dominate the market and are an abomination, constantly abusing the fact that they have this dominance. Entirely driven by profit. Now if there’s competition that’s fine but there isn’t any, so the usual mechanisms that would benefit the consumer in the long run simply don’t exist. I could go through the whole list of insidious behavior eBay engages in. Sure they can do whatever the hell they like but the only reason they can and do – and make life uncomfortable for eBay sellers – is because they dominate the market. But they play by the rules, if they really are the only people who can do what they do then that’s life.

    I have no interest in protecting the greed of someone who wants a monopoly and would use money and cohesion to maintain that monopoly. If no non-government related monopolies exist then that’s great, but I have assumed there must be some. If there aren’t then that’s brilliant but probably testament to effective regulation rather than to capitalism. Oh and if memory serves Microsoft were using exactly the problem I suggested above to deprive other web browsers of a chance to enter the market: it is only because of the speed and ease of the internet today that other browsers are so widespread.

    Thumb up 0

  11. sahrab

    Can think of 2

    Cable providers? Only one licensed per county/area/region, unavailable where i live because i’m rural, but also have no other option for Cable Television (and internet nor phone). Capitalistic society would allow as many cable providers as the market could bear

    Verizon (residential)? While VOIP is availabe via Cable provider, if you can get service, the only option for Residential phone service is Verizon. To be fair, Verizon does incur the cost of infrastructure, but passes this back to the consumers. Because Verizon is the only option, the consumer HAS to pay for the infrastructure, and pay for infrastructure that is not even available to them. For instance, because of where i live, i do not get broadband (DSL/FIOS), but because i’m a Verizon customer i pay the infrastructure costs to upgrade others to DSL/FIOS

    Thumb up 0

  12. hist_ed

    Again, most likely those monopolies are because local government has granted them exclusive control over your area. I know that is the case where I live.

    Thumb up 0

  13. Manwhore

    Just buy the internet connection, cancel your cable and get Netflix, nfl season ticket and a PS3 to run it (or really just use your laptop).

    I’m finding that the cable box is getting old and trite, and considering all that it is is securing a stable network to stream video to you (the hi def numbers are inflated), subscribing to cable is getting to be an antiquated tradition.

    These days I’ve found the juiciest stuff is on internet channels, in live rooms on the internet, and besides, it’s where it’s all going. All of the gaming consoles, Apple TV, etc. want you to make them your cable provider, and I think they have a cheaper off as of right now.

    Sure, Netflix is having a hard time getting rights to the most current stuff, but is it really worth 100 bucks a month to say you watched it on the sunday it came out? Hi def will go the way of the do-do soon too, with 3d being the replacement. Sony’s already offering 3d capabilities for TV, phone cameras, and DVD. Not bad if they can get the price down to 3d the house.

    Thumb up 0