Dangerous Dealings on Wall Street (and Whose Fault It Is)

Conservatives frequently blame President Obama for the economic situation of the last three years: high unemployment, slow economic growth, many people losing their homes to foreclosure, etc. They have conveniently short memories because they are forgetting that the problems began in 2008, before Obama was inaugurated and in fact a few months before he was elected.

If you are looking for someone to blame, perhaps former President Bill Clinton should be a candidate. He signed a law repealing the Glass-Steagall Act. Glass-Steagall was a Depression-era (1933) law enacted to address some of the abuses of the banking industry that had led to the stock market crash of 1929 which in turn was the trigger for the Great Depression. The Glass-Steagall Act prohibited both regular (or "retail") banking and investment banking from being performed by the same company. With the Act's repeal, now the large banks trade in securities and thus act in their own interest, often to the detriment of their own clients, not to mention the detriment of the national and even the world economy. Thus the banking industry now is much less regulated than it  had been for six decades. This is a bad thing. It led to the financial crisis of 2008 – 2009, and the freewheeling of the banking industry continues--despite the enactment of some new legislation, which does too weak a job of regulating Wall Street and thus courts the danger of further troubles.

A four-episode program in the PBS' (the US's Public Broadcasting System) "Frontline" series entitled "Money, Power, and Wall Street" profiled three or four young people who went into Wall Street jobs upon graduating college. These people had degrees in mathematics and computer science, and began work in the highly sophisticated and automated trading of complex securities at the big Wall Street banks. Such jobs carried very attractive starting salaries of $150,000—perhaps three times what an average college graduate would earn—and could in a short time lead to incomes 10 and even 100 times that amount.

Yet these young people left their jobs because they had concerns that what they were doing in their jobs was harmful. These derivatives, swaps and other innovative financial instruments were being sold to individuals, cities, counties, and even convents of nuns in the US and even to national governments such as Greece. The risks of investing in these securities were usually very poorly understood by those who bought them. They went bad (to put it extremely simply), and this caused (just as a couple of examples) the bankruptcy of  Jefferson County, Alabama, and the financial troubles of Greece.

There are at the very least 1000 examples of buyers of these very risky investments; no one actually knows how many people or entities bought them.

And, for every individual like the three or four who spoke to "Frontline"'s cameras to testify to the harmfulness of their former employers' securities dealings, there are no doubt 1000 or 10,000 or many more who continue to do this work. Greed often trumps people's consciences. And the problem is not, of course, just the front-line troops who sit all day at their computers but the heads of these banks.

Copyright © 2012 by Richard Stein

Blame Obama?

The news today shows that President Obama and the Democrats have very low approval ratings. Also, people do not think Obama has improved the economy, and they also (by 90%, according to the polls) feel the economy is in bad shape.

It's a year and a half since Obama took office. When he took office, the U.S. and in fact the world economy was on the verge of total and disastrous collapse, as many economists and other scholars have said. Obama acted very quickly to enact measures (mainly the now infamous "bail-outs") that staved off that collapse that would have ruined us, as individuals and as a country.

It's true that not everything is rosey. There are mixed indicators of the state of the economy. Many economists say the economy is improving; it's growing, albeit slowly and not quickly enough to appease Obama's critics.

Obama is not to blame for the economic problems of our country. A year and a half should not be too difficult a period to remember back. Many problems were caused by (1) the banking industry, which had made loans ("subprime loans") to many, many people who could not afford them; and (2) by Wall Street, with innovative and overly complicated new investment vehicles (generally those called "derivatives"). (3) Lack of government regulation and oversight permitted (1) and (2) to occur. This deregulation of the financial sector was not Obama's doing nor even George W. Bush's, but went back through several presidential administrations.

No one should expect any miraculous turnaround in the time that Obama has been president. When the U.S. was in the grips of the Great Depression, President Roosevelt instituted many programs to stimulate the economy, but full recovery from the Depression did not occur until there was the stimulus to industry provided by arming for World War II.

Copyright © 2010 by Richard Stein