May 21, 2012

Sage Comments from a Liberal Pundit and a Republican Senator

At the time of the Watergate scandal, The Washington Post -- led by the legendary Ben Bradlee -- was poised to challenge The New York Times as America's best newspaper. No more. Today, every section of the Post is embarrassingly second-rate compared to the Times. There's one exception: the Post's Business section often outshines the Times in analytical reporting.

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
My favorite columnist these days is Steven Pearlstein, the Post's business columnist. In yesterday's column, he again got to the heart of the matter... this time analyzing the JPMorgan Chase multi-billion dollar loss.

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."
Our society's problem is not that "banks have become too big to manage or even too big to hedge," Pearlstein concludes. "It is that banking and finance have become too detached from the real economy they were meant to manage."

That hits the nail on the head.

Senator Coburn on Washington
I found equally interesting Ezra Klein's interview with Sen. Tom Coburn (R-Okla) in the Post. Coburn served on the Simpson-Bowles commission and is a member of the "Gang of Six" -- both bipartisan groups of legislators who, unlike their colleagues, have been willing to make compromises to address out debt crisis. Last month, with co-author John Hart, Coburn published The Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America.

Much of the interview focused on Coburn's views on the prospects for the warring sides in Congress to reach a deal on our long-term fiscal issues before the end of the year. If it doesn't, what's been called the "Taxmegeddon" will be triggered by the existing legislation that calls for doing away with the Bush tax cuts and slashing defense and domestic funding.

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..

1 comment:

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