Wednesday, July 15, 2009

We're in the Money!

Goldman Sachs reported record profits for the quarter, and for some strange reason, a lot of people seem to be grumpy about that. Some on the right are annoyed that the government bailout appears to be working. Some on the left are annoyed that Wall Street fat cats are getting rich again, instead of being punished. (I'm referring in particular to a piece by Arianna Huffington in which she talks about her partners in misery at this news, namely the Wall Street Journal editorial page.)

I think we should all be dancing in the streets and patting ourselves on the back, that capitalism has once again been saved by timely government intervention. What was the alternative? Would it have been better if Goldman Sachs and other banks were losing money? Would we really rather go back to the situation we were in at the end of last year when credit markets were frozen, and we thought all of our financial institutions might go down the tubes? Isn't it a good thing that the Dow is headed up instead of down, and our retirement accounts are starting to replenish their losses? Shouldn't we be relieved that taxpayers are being repaid with interest for our investment?

It seems that people of all ideological predelictions are so preoccupied with wanting to punish the wrongdoers, or prove their political points, that they almost would have preferred failure to success. I thought the whole point of the actions of the Fed and the Treasury and the Congress since last September, was to avert a financial meltdown. When your ship is sinking, you first have to bail it out, get it sailing again, and then worry about repairs to prevent a similar accident in the future. In other words, we had to save Wall Street before we can reform it. We should be very pleased with our success so far.

(illustration of the Monopoly man from Hasbro Inc.)


  1. In our numerous interactions, you have yet to address the suspciion that these are phantom profits, generated by poor risk taking that has yet to be uncovered in the short-term and is really just setting us up for another insurance claim to the public coffer once the investments go bad.

  2. I don't think the maff is in as to whether the government money helped or hurt.

  3. Given the experience we have all been through, of seeing so much apparent wealth disappear, it is probably natural to be suspicious of any claim of profits. But let's be clear what we are talking about. These are not phantom profits in the sense of phony money. The treasury is going to be paid back, with dividends, in real money. And these are not phantom profits in the sense that Bernie Madoff was making phantom profits. That kind of Ponzi scheme we would find out about eventually. No, these could only be phantom profits in the sense that investments that are generating profits today might turn sour tomorrow and generate losses that could outweigh those profits. Of course, Goldman Sachs would have no reason to want that to happen, but it is always a possibility. And of course that is what happened last year. I don't assume that is going to happen unless we are starting to enter another speculative bubble like we already experienced with stocks and real estate. But where is the bubble this time? I'm not seeing it yet.

    And Harrison, as far as whether government intervention helped or hurt, we will probably argue about the for the next hundred years. Historians and economists are still arguing about which New Deal policies helped and which ones hurt, and whether we would have come out of the Great Depression faster or slower without this or that policy. That's the fun of being an historian or an economist I guess. My point is that we had a lot of smart people doing the best they could to get us out of the mess, and I would include Secretary Paulson, Chairman Bernanke, Congressman Frank, Senator Dodd, Secretary Geithner, Larry Summers, and a few others. I'm sure they all made some mistakes, but we seem to have avoided the total financial meltdown that everybody was worried about last fall, and we should be happy about that.

  4. I would love to be around to argue with you about this in 100 years. My understanding was that much of the government money was used to buy smaller, weaker banks which allowed some of the big guys to come roaring back. My limited understanding of this was that it was the intention for this to happen although many Democrats got angry at it.

    Maybe I am being silly in thinking that sticking taxpayer money into the economy like this is a bad idea because it doesn't teach anybody a lesson but I do understand the reasons for it. Would the world have ended if we just let the market sort it out? "Too big to fail" is the keyword but to me it seems to be "too big to be allowed to reap the consequences of your actions."

    I am probably not qualified to have an opinion on this, just my gut feeling.