Home >> United States & Canada >> Economics & Trade

     Email   Print 

On banks, Obama talks tough, does little

Prof. Peter Morici - 1/27/2010

Goldman Sachs, JPMorgan Chase and other big Wall Street banks are awarding multimillion-dollar bonuses to the same financiers who pushed the nation to the brink of financial ruin. President Barack Obama voices outrage, but he fails to take the actions available to him to stem the abuse.

Wall Street has kept its mischief legal by salting the pockets of politicians running for Congress and the White House and by making certain that key policymakers at the Treasury Department and the Federal Reserve are faithful Goldman Sachs alumni.

Those bonuses were made possible by billions in taxpayer-financed TARP funds and nearly $2 trillion in loans from the Federal Reserve and through the Federal Deposit Insurance Corp. Those funds helped Wall Street financial institutions, deemed too big to fail, survive their own misdeeds. Bankers used this cash -- much of it obtained at near-zero interest rates -- not to make loans for homes and businesses but to trade derivatives, currency futures and other exotic contracts.

The fallout is a drastic drop in the interest paid by banks for private capital. Retirees suddenly found CDs that once paid 4 percent or 5 percent interest now pay 2 percent or 1 percent. Essentially, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke are taxing grandma to subsidize Goldman Sachs and finance huge paydays for bankers who hatched the greatest financial calamity in 80 years.

Meanwhile, Goldman, JPMorgan and others continue to pay cartel salaries to everyone from top executives to the mailroom clerk. It is not surprising that their CEOs, who get the biggest paydays, claim huge bonuses are essential for rewarding talent. When my students grade themselves, they reach self-serving conclusions too.

Sadly, Obama, Geithner and Bernanke could halt this madness, but they don't. These banks serve as primary dealers in U.S. Treasury securities -- a very profitable business -- and depend on Federal Reserve lines of credit to sustain business. Status as primary securities dealers and access to Fed financing could, and should, be withdrawn from banks that refuse to establish sane compensation practices going forward.

Wall Street has contributed mightily to the campaigns of Senate and House committee members who make the rules and to Obama's election campaign. Goldman Sachs and others paid Obama's senior economic adviser, Lawrence Summers, millions in speaking and consulting fees the year after he resigned as president of Harvard University and before he joined the Obama administration.

Americans should expect better, but they won't get it as long as Barack Obama has the audacity to hope voters will look the other way.