First, a brief update on the proposed tax cuts and why I'm so apopleptic about them. The current version of the bill before the Senate is split nearly 50-50 between tax cuts and stimulus spending. Is this the best the Democrats could do? Tax cuts simply, unequivocally do not yield the same return as federal spending. Mark Zandi, chief economist of Moody's Economy.com—hardly a liberal site—calculates that permanent tax cuts bring only about 30 to 40 cents on the dollar back into the economy (people tend to hoard tax savings or use it to pay off debt, which is not stimulative), whereas spending on things like unemployment insurance benefits or investing in infrastructure yields a return of $1.50-1.73 for each dollar spent. Don't we usually prefer a larger return on our investments and seek to avoid outright losses?
Even more frightening is the little-publicized character of the tax cuts being promulgated: the Republicans want to make Bush-era tax cuts to corporations and the wealthiest 1% permanent.
But the most egregious political failure right now is the inability of the Obama administration to tie the money given (and about to be given) to the banks to regulations with real teeth. Capping salaries at $500K is almost beside the point--although it goes toward satisfying populist schadenfreude, it just doesn't have anything to do with how the financial system actually operates and therefore does nothing to address the real problem. Attorney James Lieber gets to the origins of this mess in The Village Voice. In "What Cooked the World's Economy?" he relates hedge funds to their 19th century precursors, the "bucket shops":
Also sometimes known as "boiler rooms," bucket shops emerged after the Civil War. Usually, they were storefronts where people came to bet on stocks without owning them. Unlike their customers, the shops actually owned blocks of stock. If customers were betting that a stock would go up, the shops would sell it and the price would plunge; if bettors were bearish, the shops would buy. In this way, they cleaned out their customers. Frenetic bucket-shop activity caused the Panic of 1907. By 1909, New York had banned bucket shops, and every other state followed.
In the mid-90's, though, the credit-derivatives industry was hitting its stride and argued vehemently for exclusion from all state and federal anti-bucket-shop regulations. On the side of the industry were Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and his deputy Lawrence Summers. Holding the fort for the regulators was Brooksley Born, who headed the Commodity Futures Trading Commission (CFTC). The three financial titans ridiculed the virtually unknown and cloutless, but brilliant and prophetic Born, who warned that unrestricted derivatives trading would "threaten our regulated markets, or indeed, our economy, without any federal agency knowing about it." Warren Buffet also weighed in against deregulation.
But Congress loved Greenspan - a/k/a/ "the Maestro" and "the Oracle" - and Clinton loved Rubin. The sleepy hearings received almost no public attention. The upshot was that Congress removed oversight of derivatives from the CFTC and preempted all state anti-bucket-shop laws. Born resigned shortly afterward.
Now we see why the choice of Rubin and Summers for Obama's team is so, well, wrong. There is a tapeworm in our economy that has been draining the system for decades, and it is the unregulated rapacious greed of financiers—but our chief economic advisors are on the side of the worm.
Tapeworms are furtive creatures whose presence can go undetected for years. They exist by diverting a large portion of the host's diet to their own belly. (Think credit derivatives.) As the tapeworm grows in size it demands more and more of the host; no matter how much the host organism eats, it cannot gain weight. If the parasite is evolutionarily clever, it will tamp down its greed and coexist relatively peacefully with the host. But our worm got cocky and let its greed run roughshod over us (all those junk mortgages). Eventually the worm's energy demands are so great that the host begins to sicken and lose weight. We are that sick host. Simply pumping money into the banks will not work—it's merely feeding the implacable worm. The problem must be addressed at its root, and that means strict oversight and new laws to rein in rampant greed.
Sorry, did I say 'new' laws? Heck, even the old ones will do.