Ugh

If you've been reading me long, you'll know how I feel about the big banks, and you'll also know that I think the banks have been the recipient of many more government-sponsored bailouts than we could possibly imagine--TARP was just the tip of the iceberg.

Bloomberg (and, more hilariously, Jon Stewart) broke the news of one of these backdoor bailouts last week, in the form of trillions of dollars in secret loans from the Fed, many of which were then lent back to the Federal government for a profit (borrowing from the Fed, lending to the government, and taking a profit on the difference--uh yeah, that's a bailout).

But I've always been more interested in the non-financial type of bailouts--namely, the crimes that banks are allowed to perpetrate without facing anything more than a fine when the crimes are discovered. That they can internalize these fines as a cost of business only ensures that for banks, crime does indeed pay. For evidence of this dynamic, look no further than this New York Times infographic (brought to my attention by Barry Ritholtz), detailing the so-called "Wall Street Recidivists".

You'll notice that my favorite company Bank of America shows up on there multiple times, as does Merrill Lynch, which is now wholly owned by BofA. I'm absolutely shocked.

It's clear that this world needs more Eric Schneidermans and Jed Rakoffs, and fewer bankster criminals. The prevailing attitude in Washington seems to be that if we prosecute the banks fully, it will "upset the markets", or that the banks will scale back lending and devastate the economy. That line of reasoning is insulting to our intelligence. If we allow different people to have different treatment under the law, the whole nation suffers immensely. Equality under the law is the only thing keeping our democracy (and, frankly, our economy) intact. It must be preserved at all costs.

The banks have been lying, cheating, and stealing for over a decade, and it's about damn time we put a stop to it. Fines aren't enough--they're just a thinly veiled bailout. We need handcuffs and bank closures, and if the markets suffer in the time being, so be it. Anyone actually feel like stepping up and doing it?

[NY Times]
(h/t Barry Ritholtz)

A new twist on creative destruction

I've written about creative destruction here plenty of times before, usually in the realm of consumer products (Blockbuster, Sony Walkman, the music industry, Borders, Harry & David). Today, I've got a different twist on the matter, one that's oddly reminiscent of this post of mine from last year on the increasing urbanization of America.

In that post, I wondered whether we as a society were prepared to let our cities fail ("We must be willing to let dying businesses fail (hello, Blockbuster and the Walkman), and so too must we let dying cities fail."). Today, I wonder whether a city must occasionally die, so that it can be reborn.

Recent census figures show that Detroit’s overall population shrank by 25 percent in the last 10 years. But another figure tells a different and more intriguing story: During the same time period, downtown Detroit experienced a 59 percent increase in the number of college-educated residents under the age of 35, nearly 30 percent more than two-thirds of the nation’s 51 largest cities.

These days the word “movement” is often heard to describe the influx of socially aware hipsters and artists now roaming the streets of Detroit. Not unlike Berlin, which was revitalized in the 1990s by young artists migrating there for the cheap studio space, Detroit may have this new generation of what city leaders are calling “creatives” to thank if it comes through its transition from a one-industry.

With these new residents have come the trappings of a thriving youth culture: trendy bars and restaurants that have brought pedestrians back to once-empty streets. Places like the Grand Trunk pub, Raw Cafe, Le Petit Zinc and Avalon Bakery mingle with shops with names like City Bird, Sole Sisters and the Bureau of Urban Living.

Those familiar with past neighborhoods-of-the-moment recognize the mood. “It feels like TriBeCa back in the early days, before double strollers, sidewalk cafes and Whole Foods,” said Amy Moore, 50, a film producer working on three Detroit projects. “There is a buzz here that is real, and the kids drip with talent and commitment, and aren’t spoiled.”

Veeeeery interesting. Could it be that for Detroit to survive, the answer lies not in saving the Big Three auto manufacturers who have been at the city's economic core for decades, but in fact in letting them die, so that a new industry, a new employment base, a new culture can thrive?

Much of the discussion surrounding the auto bailout concerned "saving" Detroit, a pursuit that realistically failed, anyway. With or without the auto bailout, it was clear that Detroit's multi-decade reliance on one major industry was becoming untenable. Now, with plummeting real estate prices making the city an intriguing choice for young professionals, the crash of the Big Three might be exactly what Detroit needs to get back on its feet.

Ironic, no? Of course, that then begs the question... why did we bother saving GM and Chrysler in the first place?

[New York Times]

Too much good stuff

You all know by now how much I hate the concept of a link dump, but every once in a while I must admit it's a useful tool. With the couple of days off that I had to take last week, there's a ton of stuff that I would have posted about that fell through the cracks. Since I'll never really catch up if I don't write about this stuff now, it's time for another pseudo-link dump.

As with the last time I did this, I'll post the links to the relevant articles, give a quick blurb with my thoughts on the link (or links), and you can choose whether or not you're interested enough to read the whole piece. I enjoyed all of them thoroughly.

It's harder to get a job at Walmart than it is to be admitted to an Ivy League school
Jerry Shenk; American Thinker

Jerry Shenk notes that while acceptance rates are extremely low at Ivy League schools--6.9% at Harvard, 8.2% at Princeton, 11.5% at Dartmouth--these rates are nothing compared to hiring rates at many midwestern Walmarts. One Cleveland-area store reported a hiring rate of only 5% (6,000 applicants for only 300 jobs), whereas the sheer number of applications was staggering at a pair of Chicago-area stores--15,000 and 20,000 total applications, for reportedly similar numbers of jobs to the Cleveland store.

Shenk notes that 2% fewer college graduates received jobs in 2010 than 2009, which no doubt means that the Class of 2011 will be fighting with a few long-term unemployed graduates when they leave their campuses after graduation this month. That's not good for them, and it's certainly not good for our nation's colleges (Ivy League schools included). Who would bother going through the arduous application process, spending four years at college, and taking on over $100,000 in debt if there's no jobs available on the back end? Why not just throw your hat in the ring at the local Walmart and get a head start on the game?

The People vs. Goldman Sachs
Matt Taibbi; Rolling Stone
Goldman Viewed Unfavorably by 54% as Poll Shows No Damage
Christine Harper; Bloomberg
As Wall Street Firms Grow, Their Reputations are Dying
Steven M. Davidoff; New York Times

These stories are all closely related, and frankly they deserve their own post (especially the Taibbi piece, but that's true about almost every Taibbi piece). But I could honestly write for days about this issue, and I've been consistently too lazy or too busy to give this one the time it deserves. So rather than let it go entirely unaddressed, I'll address it here. Ultimately, the point is that there is an extreme divergence at present between the profitability of the banks (particularly Goldman Sachs) and their general reputation. Almost everyone hates the banks, but they just keep on printing money.

Several reasons are given for this divergence, especially in Davidoff's NY Times article. But I think the explanations all basically miss the point. The point is, this is what happens in bailed-out industries. Companies who don't need to worry about failing also don't really need to worry about customer service. What's happened with airlines in the last 20+ years is now happening with banks. With unconditional federal support, there is no longer any incentive to do things properly or in a way that keeps your customers happy. That's why we all hate airlines, and it's why we're all beginning to hate banks, and it won't change until our federal government decides that it's going to stop bailing out failed companies and failed industries.

As for Goldman, they'll just keep on stealing until somebody decides that they've stolen too much. I'm not holding my breath.

Library of Congress Revives Thousands of Vintage Recordings
Caroline Cooper; WQXR.org

The National Jukebox, a project launched last week by the Library of Congress, has compiled more than 10,000 rare and previously unavailable recordings of music, speeches, and comedy acts (all of it recorded between 1901 and 1925) into a free streaming database. Also known as: Ken Burns' wet dream.

I think it's a pretty cool use of the internet (along the lines of yesterday's super-nerdy interactive solar system post). Some of the stuff is actually really fun to mess around with, even if there is enough old-timey ragtime music on there to make me feel like I'm walking around inside an early Mickey Mouse cartoon. Good work, Library of Congress.

Opinion: The Auto Industry Bailout - Still Debated But Worth Every Penny
David Kiley; AOL Autos
GM's Profits are Still a Huge Net Loss For Taxpayers
Megan McArdle; The Atlantic

Another pair of related articles, this time with drastically opposing viewpoints. From my discussion above about Goldman, you already know where I come down on bailouts of all kinds, but that's hardly the point.

The point here is that the true costs and true benefits of any of these bailouts will only be known with the benefit of several decades of hindsight. Any attempt to write a post-mortem on these bailouts now is early at best, ignorant at worst. Note that the financial crisis of 2007-2008 had many of its roots in the fiscal and monetary response to 9/11, but we only fully appreciated those links nearly a decade later (and some of us still don't fully appreciate that dynamic). Therefore, to pretend that we can properly assess the long-term impacts of our bailout strategies at this point is foolhardy.

Of course, my greatest criticisms of the bailouts is that they sacrifice the long-term at the benefit of short-term stability, so maybe I'm just letting my own viewpoints here bias my reading of the articles in question. But I really do believe that we will only fully appreciate the impacts of these bailouts long after any of us has stopped thinking about them. That's what scares me.

Behind the scenes of the auto industry bailout

In a fascinating piece for The New Yorker, Malcolm Gladwell takes a look back at the ins and outs of the auto industry bailout, nearly two years after the fact. While the Wall Street bailouts have garnered many more of the headlines and a disproportionate amount of public scorn (largely because banks and bankers are easy targets), the auto bailouts were also extraordinarily large, and arguably more complex.

Gladwell's piece is interesting on a few fronts, but his insight into the nuts and bolts of how these bailouts got done is simultaneously intriguing and unsettling. No one man should hold as much power as these men wielded, at any point in time--a sentiment that our Constitution would echo. Gladwell writes,

“Team Auto,” as [Steven] Rattner refers to the group that he assembled to help supervise the bailout, consisted of about a dozen people, some in their twenties and early thirties. They started work in March of 2009. One of the first major issues was whether to save Chrysler. To settle the question, Rattner tells us, Team Auto gathered in the office of Larry Summers, the President’s chief economic adviser. 

The case against Chrysler was that most of the jobs lost by letting the company fail would eventually be offset by gains made by Ford and General Motors, as those companies picked up Chrysler’s old customers. Letting Chrysler fail would make Ford and G.M. stronger. But did the team really want several hundred thousand jobs to disappear—even if the losses were short-term—in the middle of a severe recession? 

Chrysler’s failure would also mean that Michigan’s unemployment-insurance fund, for starters, would need to be bailed out. One of Rattner’s team members made a counter-argument: “Given the uncertainty in our economy, it was better to invest $6 billion for a meaningful chance that Chrysler would survive than to invest several billion dollars in its funeral.” Summers put the matter to a vote. The tally was 4-3 in favor of letting Chrysler die. When the vote came to Rattner, he said that it should live. Summers agreed. Chrysler lived.

It's downright scary to appreciate how close a company was to dying, and how fickle the reasoning was behind its rescue. This is far too much power for a small panel of people to have, especially this type of panel. Keep in mind, the people on "Team Auto" were not elected, nor were they subject to any sort of Congressional approval process. And yet they were charged with the task of making massive decisions on how to deploy taxpayer resources, with the implicit understanding that any recommendation they made would be rubber-stamped by the Obama Administration. That's troubling. It amounts to a Constitutional end-around, and regardless of your feelings about the bailout, the underlying decision-making process was flawed.

To be fair, I've largely been an opponent of bailouts of all types, and that of the auto industry in particular. While I appreciate that the frictional costs of a large company going through bankruptcy can be extremely painful, and that the costs can be highly localized (as in Detroit), I think that the precedent that a bailout sets is extremely dangerous and leads to moral hazard, which can breed even more painful (if somewhat more spread and less obvious) consequences in the long run.

Gladwell's piece is both fascinating and frightening, as we realize just how much power we have entrusted to people we know nothing about (including, in many cases, their names). For an administration that preaches transparency and accountability, this seems not to jive. To have laymen making major decisions regarding the deployment of tax dollars is at best perverse, at worst non-Constitutional and illegal. Kudos to Gladwell for passing along this story.


[The New Yorker]