Everyone talked about this already, so I’m late to the party.
I want to make sure that anyone who missed it before catches it now: Matt Taibbi on Goldman’s profits. I’ve had a rough draft of an essay trying to walk through the government subsidies in their profits all week, and I can now delete it. Regardless of what you thought of his big Rolling Stone piece this piece is spot on.
Just saying, we warned you about this, that instead of being a driver of the recovery, deciding to “save” the banking system would just give everyone excuse to loot everything in site. As interfluidity said (my god do we need him back more than ever):
It is worth noting that overcoming coordination problems so that diverse parties can collaborate on profitable ventures is precisely what the financial sector is supposed to be good at doing. Ideally, we would like the profitable ventures to be welfare-improving projects in the real economy, but there is little question that financial sector actors will gladly apply the same skillset to extracting transfers and rents when the opportunity presents itself.
Check out this video of a French analyst losing it and saying what everyone knows is true.
From the Fed’s stress test:
That’s risk-weighted assets. CIT is at ~$80bn, and from a latest stress test carried out by the government needs $4bn. (1) Any word on how that stress test was carried out? Was CIT able to use their own models on their own data, or did the Fed use theirs? Was it the same “adverse scenario” as the SCAP tests? If that data is public I’d like to see it. (2) If only CIT was another $40bn bigger, and carried more obvious counterparty risks, I don’t see how it would be much different that the banks above, who got into the stress test when the going was good. I bet if they could have used the stress test numbers back then, along with their own models, they could have engineered their losses under $2.5bn. I hope if one of those three banks above needs to go back to the government we let them fail – else it is going to be a leverage war to see who can get to $125bn the quickest (it may already be).
The Economist disagrees with the tone on the Goldman articles, quoting Krugman’s latest in the first sentence:
[Krugman says] What [Goldman] does is bad for America. Not “some of what it does is bad for America”. Not “the legal, profit-seeking behaviour of large investment banks may have some negative externalities that should be addressed by government regulators, in the following ways”.
This is no way to have a policy discussion.
Is there room for outrage? I always find this frustrating in economic technocratic talk, where outrage/disgust/shaming is dampened by having to focus in terms of “bad incentives.” There’s a schizophrenia in the way we talk about this, that capitalism on one hand is a benevolent invisible hand guiding us all together, and also amoral tiger who of course was going to rip your throat out if you don’t lock its cage properly.
Getting a little hyperbolic, it’s like someone has broken into our house and is looting everything in sight. How do we “set up his incentives” so that he leaves without the treasury in tow? Setting up the terms for discourse in economic rationality speak is only going to allow us to answer the question of “why didn’t we lock the door?” Good question, of course. But we have problems right now that rightfully deserve shock and anger. Couching it in terms of setting up good economic rules implies that government officials are like a Walrasian auctioneer, and we just have to get him to use the right rules – I think a genuine worry is that the auctioneer has been captured; not necessarily with bribery and conspiracies, but in that he (or his habitus) confuses the tiger for the benevolent hand.