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 It will stay with us longer than the phone tax that was instituted for the Spanish-American War and was repealed in … 2006.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.