Yesterday's Sunday Post ran two excellent reports that describe what's gone wrong with our economy -- on Wall Street and in Washington.
Pearlstein on Wall Street
I'll admit I didn't fully understand Pearlstein's description of what went wrong with JPMorgan's speculation in credit derivatives. But that's OK since JPMorgan chief executive Jamie Diamond didn't understand what was going on either.
Midway through his column, however, Pearlstein got my full attention when he asked the key question -- What useful social or economic purpose does Wall Street's speculation in the credit derivative markets serve?
The financial service industry, Pearlstein says, argues that the reason we need trillions of dollars in credit default swaps is that they lower the cost of borrowing for corporations and households. By making it possible to hedge risks, the derivatives make investors more willing to buy bonds, and make banks more willing to buy and make loans. That process increases the supply and lowers the cost of borrowed money, the banks assert.. Pearlstein cites a study by two researchers at the Federal Reserve Bank of New York that shot down this theory. Again I didn't fully grasp the explanation.
But Pearlstein concluded his column with two points that are most significant for me:
- The credit default swap game-playing "ties up hundreds of billions of dollars of the world's capital -- capital that would otherwise be used to actually finance real businesses that could create wealth and jobs and new products and services."
- "It also represents a massive waste and misallocation of some of the world's brightest, most skilled workers who are lured in part by the outsize salaries and bonuses that the imperfectly-competetive financial markets now offer. Imagine how much more vibrant and innovative the economy might be if those Wall Street 'rocket scientists' were actually designing rockets and all those hedge fund traders were channeling their entrepreneurial risk-taking into starting new companies."
Virtually no one expects the present Congress -- which has been unable to agree on anything important -- to close ranks and agree on a major issue like this before the November election. So, Klein and Coburn talked mostly about what might happen after the election.
At the start of the interview, Coburn took the Republican Party line that the chances for an agreement would be much better if Romney were elected president. Throughout the interview, Coburn demonstrated that he was very well-informed on economic issues, and he was critical of both parties in Congress for their inability to get results.
I found two of his responses late in the interview particularly interesting. Asked to speculate on what would happen if Obama wins but the Republicans continue to hold the House and maybe even take the Senate, Coburn said:
If President Obama is president again, those problems are still there and we have to solve them. He knows that. We've had conversations where he's told me he'll go much further than anyone believes he'll go to solve the entitlement problem if he can get the compromise. And I believe him. I believe he would.Contrast that assessment with these remarks about a possible Romney win:
One of my biggest worries is what happens if Romney wins and Republicans control both chambers, do they have the courage to do what it takes to fix the country? It's kind of their last chance. If they're given the favor of control and they don't act on it, why should you ever trust them again? It'll be the death knell of the Republican Party. They controlled it all for four years under Bush and grew the government. They created a new entitlement with no revenue. Went against the tenets of what they said they believe.Hmmmm. As I reread those quotes,\ it sounds like Coburn trust Obama on this crucial issue more than he trusts his fellow Republicans..