UPDATED: Remember the Titans (of Industry are Not Friends of Yours)

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Allow me, if you will, to paint a layman's picture of the economic crisis and unbridled greed through the use of some headlines that have caught my eye in the last few days.

Headline 1: With Wall Street Shorting the Dollar, It is Time for Congress to Pursue Fundamental Change by David Paul, President of the Fiscal Strategies Group. This article provides some insight into how it is that Wall Street is managing to have one of its best years ever, despite the fact that the rest of the economy is in the grip of a major recession brought on largely by Wall Street's criminally risky behavior. Outrageously, after having been bailed out by US taxpayers, the banks are making their billions right now by shorting the US dollar and thereby effectively weakening the US' international position further than it would be otherwise. I won't excerpt from this article, as the entire piece is well worth a read, and has sadly been overlooked by the continuing popular outrage against the billion-dollar bonuses the banks intend to pay out this month, but suffice it to say that the banks are committing financial treason, if not outright treason, in pursuit of their profits at all costs.

UPDATE: Turns out that the Federal Reserve will allow the bet-against-the-dollar party to continue through the rest of the year by keeping the interest rate between 0% and 0.25%.  Sounds swell.

Headline 2: Obama Blasts Banks for Opposing Financial Reform: Here Obama comes out with some populist lines trying to get ahead of public sentiment against the excesses of the banks, and those banks ignore him, since he officially has no leverage over the banks' practices now that virtually all of them have paid back their TARP funds to the government. The banks are now free to continue to reduce business lending and to actively oppose any sort of reform that puts a damper on their radical activities. The lack of lending is slowing the economic recovery as businesses aren't able to hire workers as easily, and the banks know that they have the power to hamper any sort of recovery through cutting down on lending, effectively vetoing the President's initiatives from the private sector.

Headline 3: Bailout Banks Keep Tax Breaks As They Repay Loans: Yes, Citigroup and others are going to cash in on massive tax breaks, even as they repay the TARP funds that put caps on compensation practices early, to better engage in the type of compensation practices that preceded the economic collapse. The IRS appears, for all intents and purposes, to be in collusion with the banks on first glance, however by allowing for these tax breaks, the Treasury Department is actually increasing the value of the banks' shares, so that taxpayers get a better return on their TARP investments. Still, it's just an extremely sketchy way of going about increasing a company's worth, when the underlying fundamentals are still so weak. It is never a good thing for a company to rely on tax breaks to increase its value, rather than on sound business practices (say I who support tax breaks alternative-energy companies...)

All that being said, there appears to be hope on the horizon in terms of financial reform. Yes, the House passed a reform bill last week, but that effort was weakened by bank-friendly Democrats, and as noted in the above link, the Senate will now be the main battleground over financial reform going forward, with bank lobbyists gearing up for a major fight. But the Senators may have some tricks up their sleeves, and a voice from the past may play a larger role in the reform movement still to come.

Hopeful Headline 1: McCain and Cantwell Want a New Glass-Steagall Law by Michael Hirsh for Newsweek. Glass-Steagall is a post-Depression-era law that worked to separate the investment arms of banks from the commercial lending sides (what we know as the regular bank you set up checking and savings accounts with, and that provide loans for cars to homes). The idea behind Glass-Steagall is that the investment sides of banks can take the risks, but the lending sides should be more well-regulated, and they will be provided for by the newly-created Federal Deposit Insurance Corporation (FDIC) with the government as "lender of last resort" should a bank fail. With the 1999 repeal of Glass-Steagall, the banks were allowed to merge their lending and investment arms, and some, such as Sens. McCain and Cantwell, believe that the risky bets the banks took with depositors' money, such as derivatives, laid the groundwork for the mess we're in today. While I'm no economist (I've only taken one micro class thus far) and I'm certainly not a financial market expert, it would appear to me that if the banks could get back to their core business of banking that would be a welcome return for many. Which leads me to my next point...

Hopeful Headline 2: Paul Volcker: Think More Boldly and interview with the Wall Street Journal's Alan Murray. Paul Volcker, former Federal Reserve Chairman under Presidents Carter and Reagan, argues that the "financial innovations" Wall Street has foisted upon the world in the wake of Glass-Steagall's repeal add nothing in the way of actual productivity or economic growth in the economy as a whole. The titans of Wall Street created fake profits, and the financial innovations of credit-default swaps and collateralized debt obligations simply "move around the rents in the financial system" meaning the complex transactions that played out between banks and insurers (such as AIG) to spread the debts out amongst many different players. Volcker goes on:

How do I respond to a congressman who asks if the financial sector in the United States is so important that it generates 40% of all the profits in the country, 40%, after all of the bonuses and pay? Is it really a true reflection of the financial sector that it rose from 2½% of value added according to GNP numbers to 6½% in the last decade all of a sudden? Is that a reflection of all your financial innovation, or is it just a reflection of how much you pay? What about the effect of incentives on all our best young talent, particularly of a numerical kind, in the United States?

In Britain, I was just talking to a high-tech company about the immense attraction to go into finance when both Britain and the United States are suffering from a basic inability to produce things competitively, to keep up with the new economy. Is this a result of financial innovation that we should be really worried about?

These thoughts intrigued me; how much have the outsize profits to be had in finance over the last decade shaped the job market in the US? How many of our "best and brightest" have gone on to huge-paying Wall Street jobs that would have otherwise gone into less, ahem, financially-motivated work? Look at these graphs of US job growth over the past decade; what does it say about our country when the investment sector grows from 2.5% of GDP to 6.5% over 10 years, but job growth drops to near-zero percent over that same period of time? Is there a link, a correlation, a causation? My limited economic knowledge at this point in my education leads me to admit that I cannot find an explanation for those two inverse movements of financial-sector activities and job growth, but I would be greatly interested if someone could explain them to me.

Let me take a moment to plug a wonderful website I've just recently come across, The Baseline Scenario, which, I must acknowledge, led me to the Volcker interview in the first place.  Some very esteemed financial market watchers and economists evaluate the current economic situation and provide some solutions, in very detailed form. I'll do some more investigating into the jobs/financial sector expansion connection and report back when I can. The main idea I've come away with is that the American people are being misled and misrepresented by our public officials and big businesspeople all at the same time, on many levels. It pains me that Obama has not been more of a force for true reform, especially when the plundering of our nation's economy and public coffers has been so widespread and rampant by the titans of industry. There's still time yet to make some fundamental changes, and Volcker seems quite confident that his views will prevail, so let's hope the situation changes soon.