State of Shock
People on Wall Street are in a state of shock today. It shows in the stock market, which is down 5 percent in three days.
(The last time we went down that fast, the market was hitting bottom in March. But this feels very different from that.)
Until now, it has appeared that the big banks, having been rescued, could go on more or less as always. The argument that it would cause too much damage to the economy to really hurt the banks had been persuasive at the top levels of the Obama administration. And Congress — especially freshman Democrats who crave campaign contributions in Republican-leaning districts — seemed willing to back the banks on the kinds of details of regulatory reform that few will understand. The administration’s plan — by no means hostile to the banks but including some real changes — was being quietly amended to take out a lot of the teeth. Paul Volcker, who wanted to scale back bank trading activities, was the odd man out among Obama’s advisers.
Then came Massachusetts.
First it was the president’s sudden conversion to Volckerism. But the shock of that seemed to be spent by this morning.
Then came reports that Ben Bernanke’s renomination might be in trouble. That is something that nobody on Wall Street had thought was in any doubt, and stocks fell again.
Whom would we get if he dropped out? Who would be confirmed by the Senate? Nobody knows.
This is going to be a very interesting weekend. Back in 1987, a stock market shock on Friday turned into a crash on Monday in part because the Sunday morning talk shows heard an administration official picking fights with Europe. For whoever goes on the shows this weekend, it will be difficult to sound the right notes to pacify the public anger without totally scaring investors, both here and overseas.
Until now, the consensus conventional wisdom went something like this: The banks deserve worse than they are getting, but the rest of us would suffer too much if they got it. So we bailed them out, and did not force bank shareholders to lose everything, or bank creditors to take large losses.
That wisdom may still be correct. But it may also not matter. If people are angry enough, they may want to damage the bankers and then figure out what to do to get over the problems that causes.
Could this have been avoided? Yes it could. If.
* If the Fed had shown a lot more contrition for its errors of monetary policy and regulation.
* If the banks had shown similar contrition, and accepted the idea that people who — as a group — almost sank the financial system did not deserve to return quickly to mega-bonuses.
* If Goldman Sachs, in particular, did not insist that it never needed a bailout and was never in danger of collapse.
* If the Obama administration had chosen to include only people with no ties to the past errors.
One comparison that seems apt is to baseball. Many people are jealous of Alex Rodriguez, the Yankee third baseman. But they know he plays baseball better than almost anyone else. It may or may not be just that baseball players should earn so much, but at least he does the job very well.
Imagine if he had hit .200 last season, struck out in every post-season plate appearance, and committed errors that cost the Yankees every game of the World Series. How would fans react if A-Rod demanded a big raise, or even insisted that his new contract should be equal to his old one?
That pretty much describes how 2007 and 2008 went for a lot of Wall Street heavy hitters. We learned they did their jobs very badly. Somehow the idea that they deserve raises this year does not seem right. Why, it seems fair to ask, did they even keep their jobs?