Robert Lenzner Critiques Larry Summers' new Social Compact between Wall Street and Main Street

Robert Lenzner at Forbes writes that Larry Summers "has a dream of a new social compact between Main Street and Wall Street - but no details." Summers, Lenzner notes, sounds serious:

In a sober warning, Summers noted that "roughly every three years for the last generation, a financial system that was intended to manage, distribute and control risk has, in fact, been the source of risk--with devastating consequences for workers, consumers and taxpayers."

Forbes describes Summers' social compact in a separate article. Lenzner continues:

So, what's Summers' prescription to deal with the crises to come? He is borrowing former Sen. Daniel Patrick Moynihan's solution for automobile safety proposed in the late 1950s when Moynihan was working for Averill Harriman in New York. The financial equivalent of "guardrails, shatterproof glass and speed limits," for Wall Street is Summers' clever model.

So where, Lenzner asks, are the details? There are none, he says. And in conclusion he offers this pessimistic and sweeping generalization about human nature:

Summers' idea to create a "social compact" between the financial community and the rest of the nation is pie in the sky. It has never existed and never will, I'd venture, because you can't regulate human nature.

Ugh - so is Wall Street exempt from the powerful government regulators of human nature in America that include schools, jails and police departments? Is Lenzner is granting exemption from regulation of human nature only in its intelligent free market aspect? Actually, I find myself thinking that Summers' idea of a social compact between Wall Street and Main Street may not be a idea. But if so, I suspect this social compact may be better realized voluntary communication between these two streets than government regulation of one of them.

In closing: today the New York Times editorializes on the much ballyhooed 90% pay cuts [and 50% compensation package cuts] to be imposed by pay czar Kenneth Feinberg on top executives at Citigroup, Bank of America and five other big banks that owe their survival to the U.S. taxpayer. Here's one observation:

If you read the fine print you will discover that these reductions apply only to the remaining two months of 2009.

Over and out.

Caution! This is not a civic media site . . .

Even though it tried to be one. But it didn't work out. Its few readers had few comments on the site's 39 posts going back to May of '08. So the site lacked the dynamic give-and-take energy that sustains a civic media. And recently, in calling for President Obama to replace Larry Summers, it took a partisan and personal turn that - oops - disqualifies it from civic media's non-partisan and solution-oriented character. (One solves a problem not by replacing an employee but by finding the right solution, right?)

So I'll not likely be adding more posts now that I'm working to create Chicago WRKS, Chicago's first-ever problem-solving media platform. But I'll leave this blog online because it gathers together a good number of finance writers and economists from whom I've learned a great deal. They are mostly leftists and listed in the left hand column. I would welcome (and in the future will happily respond to) ideas from the center and right. But if you want to know what's going on in the world, it helps to read folks like these. So for now, thanks for reading - and see you at Chicago WRKS or our other sites.

Krugman, Taibbi, Johnston and Morgan nail Goldman; Commmenter nails Summers

Paul Krugman may not yet be awake to civic media as the only democratic remedy for America's economic (and soon to be political) crisis, but in today's column he does pillory Goldman Sachs as the driver of the financial oligarchy that has usurped control of American government and its elite universities as well. Comment after comment on Krugman's column is sharp; enough so perhaps to put some pressure on President Obama to recast his economic bailout program and change its leadership. References by commenters to GS critics like Matt Taibi, David Cay Johnston (audio clip from CBC Canada) and Mike Morgan are must reading. Morgan himself writes that

Sadly, what people don’t realize . . . is this time Goldman Sachs and other Banksters have raided our future, as they have control over many of our pensions, endowments and other fiduciary assets. Over the next few years, as people start to realize their pensions are gone, that is when the masses may finally rise up and crush Goldman Sachs and other greedy bastards that have destroyed so much. Unfortunately, it will be too late.

At Harvard in the 1960's, my professors would have dismissed language like this as "generating more heat than light." What would their counterparts at Harvard say about it today?

One comment to the Krugman column, #5 from Ruskin of Buffalo, NY, was recommended by more readers than any other - about 500 so far. It calls on President Obama to replace Larry Summers:

There are clearly MANY people in the Obama administration who have had a hand in the extraordinary betrayal of ordinary Americans represented by the policies formulated by Treasury Secretary Geithner, but the one person I would beg the President to get rid of is the second-in-command, Lawrence Henry Summers, head of the National Economic Council. I can think of nothing the President could do that would more clearly signal to the American people that he understands how angry tens of millions of us are, over the policies which have lavishly rewarded the banks at the expense of the taxpayers, than terminating Larry Summers's tenure in the Obama White House.

Why single out Summers? Because he is so obviously the big enchilada in the economic team; because his insensitivity to common sense behavior for someone in his position led to his "earning" millions and millions of dollars by giving talks [my link] to bankers and consulting for other players in financial services; because he was singularly unsuccessful in the most important job he ever took on (the presidency of Harvard) where his tin ear and lack of empathy left him isolated and rejected by the central faculty of the university. For God's Sake, Mr President, this MAN HAS HAD HIS TURN in the corridors of power - replace him with someone who has a heart as well as a brain, someone who has not lived his whole life surrounded by moneyed people, someone who CARES about the "little people" of this country (to reference Leona Helmsley.)

As a Harvard Alum, I can say that Ruskin says what I've been thinking for months. Summers really should go, and Ruskin's case for the man's quick departure is just plain eloquent. And David Olive at the Toronto Star says it's time for Summers to go, with Laura Tyson a a competent and ready-made "plug and play" replacement.

Wake Up, Paul Krugman!

In "Boiling the Frog," New York Times Nobel prize winning economist Paul Krugman today compares America to the proverbial frog that lacks the ability to hop out of a slowly heating pot. So what's making life hot for the American frog? Krugman says it's government gridlock on two critical issues: inaction on a second stimulus plan to prevent potentially crippling unemployment and inaction on climate change. This gridlock scares Mr. Krugman, who concludes:

So if we can’t get action to head off disaster now, what would it take? I don’t know the answer. And that’s why I keep thinking about boiling frogs.

Of course, many Americans vehemently disagree with the liberal Mr. Krugman on these vexed issues. Yet the solution to polarized disagreement and government gridlock obvious: it's a national decision-making process on these issues, available to all Americans. Why are smart liberals like Mr. Krugman so blind to it? To open his eyes, I cranked out and submitted the following to the comments section of his column. (oddly, it never appeared).

Mr. Krugman, with all respect, the answer to your dilemma has been staring all Americans in the face for years: it has to do with the television and computer screens that mirror the nation to itself. The obvious solution to your problem - which is rooted in the nation's polarizing, ideologically divisive political media - is a non-partisan, issue centered, problem-solving CIVIC MEDIA whose ongoing interactive public forums give ALL Americans an informed voice in the government decisions that affect their lives. This media exists to make citizens and government responsive and accountable to each other in shaping the nation's future: solving its problems, resolving its conflicts and maximizing its opportunities. It creates political discourse at local state and national levels that bring out the best in us, not the worst.

For years all of the interactive communications technologies needed to create a true dialogic civic media have abundantly been in place in America. One format - the game show format of voter-driven reality TV - is particularly appealing in a civic media context. Why? Because its weekly votes mimic and, in their sequence, actually refine and articulate the great voter-driven game of democracy.

Just think of what a vital civic media, produced with integrity, could do for the nation. Imagine an ongoing three month contest of ideas starring 16 four-member teams of well-informed, telegenic ordinary Americans who have been charged to compete AND co-operate with each other in an intensive search, broadcast each Sunday night on network TV and 25/7 on the Internet, for the best solution to your problem of climate change. Imagine these 16 teams being able to interview anyone, anywhere with a view to creating "60 Minutes"-style segments that advance their findings on this issue. Now imagine millions of Americans linking up with these teams and then voting their preferences each week, as on American Idol. And finally, imagine the excitement and media buzz as millions of Americans, in schools, colleges, business, homes and government offices nationwide cast their votes for a single winning team.

Interactive public forums like this would at long last give America the democracy it needs in order to function in an age of information. The winning solutions of these forums would of course be advisory to government and not binding. Market (citizen) demand for interactive media experiences they provide is enormous. So what's keeping mainstream media like the New York Times and CBS TV from creating them? Do these managers and conduits of public opinion fear that ordinary Americans lack the interest, capacity or desire to participate in an intelligent decision making process? Are they afraid that American people, given all the information needed to make sensible decisions on the economic and environmental issues you speak of, will make stupid choices, or choices that do not serve the interests of the powers that be?

The implementation of a civic media is critical to America's future. At issue is the Jeffersonian principle of government "of, by, and for the people." Should you, your paper and your readers therefore not give it careful thought?

When it comes to frogs, I submit that the heat that's about to boil the American frog comes less from the economic and environmental dangers you speak of and more from the reluctance of the powers that be to give all Americans an informed voice in the decisions that effect their lives. The real danger, as you say, is the nation's inability to make decisions, and in our democracy, civic media is the appropriate response to this danger.

"10,000 Home Foreclosures Daily" prompt Saskia Sassen to call for a new economic model.

At this site, we've been mulling over the idea of economic models since last February and pondering the possibile need for a new one here in the USA. I just found what could be a seminal article on this topic, "Too big to save: the end of financial capitalism," by Saskia Sassen, a professor of sociology at Columbia University, New York, and at the London School of Economics. It appeared last April at Opendemocracy.com. It begins as follows:

The misnamed "Group of Twenty" (G20) meets in London on 2 April 2009 to discuss how to save the global financial system. It is too late. The evidence is in: we don't have the resources to save this system - even if we wanted to. It has become too big to save: the value of global financial assets is several times the size of global gross national product (GDP). The real challenge is not to save this system but to definancialise our economies, as a prelude to move beyond the current model of capitalism. Why should the value of financial assets stay at almost four times the overall GDP of the European Union, and even more of the United States. What do everyday citizens - or the planet - gain from such excess?

Sassen has a strong term to describe the predatory practices of the existing model of capitalism:

A defining feature of the period that begins in the 1980s is the use of extremely complex instruments to engage in new forms of primitive accumulation, with taxpayers' money the last frontier for extraction.

And here, says Sassen, is what primitive accumulation has been designed to do:

Finance has created some of the most complicated financial instruments in order to extract the meagre savings of modest households: by offering credit for goods they may not need and (even more seriously) promising the possibility of owning a house.

The outcomes of primitive accumulation, in Sassen's account, recall those of Aesop's story of the man who killed the goose that laid the golden eggs:

Thus in the United States - ground zero for these forms of primitive accumulation - an average of 10,000 homeowners have been losing their home to foreclosures every day. An estimated 10-to-12 million households in the US will not be able to pay their mortgages over the next four years; under current conditions they would lose their home. This is a brutal form of primitive accumulation: presented with the possibility (which is mostly a fantasy, a lie) of owning a house, many people of modest income will put whatever few savings or future earnings they have into a down-payment.

This, it would seem, is not how democracy should work. Let me interject a question. How would the Amerian people react today if President Obama were use language like this? Would citizens support him? Would he alienate the financial community and the U. S Chamber of Commerce? Getting back to Sassen, how true this observation of hers?

The difference of the current crisis [and prior ones] is precisely that financialised capitalism has reached the limits of its own logic. It has been extremely successful at extracting value from all economic sectors through their financialising. It has penetrated such a large part of each national economy (in the highly developed world especially) that the parts of the economy where it can go to extract non-financial capital for its own rescue have become too small to provide the amount of capital needed to rescue the financial system as a whole.

Score one scarcity, zero for abundance. But how does Sassen think this crisis can be solved?

The implication of the foregoing is that two major challenges need to be faced:

▪ the need to definancialise the major economies

▪ the need to move out of the current model of capitalism.

She calls for a transition, or bridge, to a new model:

If seen in this light, the financial "crisis" could serve as one of the bridges into a new type of social order. It could help all involved - citizens and activists, NGOs and researchers, local communities and networks, democratic governments - to refocus on the work that needs to be done to house all people, clean our water, green our buildings and cities, develop sustainable agriculture (including urban agriculture), and provide healthcare for all. This innovative order would employ all those interested in working. When all the work that needs to be done is listed, the notion of mass unemployment makes little sense.

This is not socialism. It's capitalism renewed and designed to meet the needs of all citizens, not just those dedicated to wealth generation.

Sassen was recently interviewed by Chuck Mertz on This Is Hell. Here's Chuck's hellish image. Don't be fooled. Despite the show's sometimes sophomoric format (e.g., a weekly hangover cure), this is the finest political talk show in America. Very left wing, but still by far the best: 30-minute interviews of splendid guests all the over the world for four hours every Saturday AM. Broadcast on WNUR, Northwestern University Radio, 89.3 on your radio dial and streaming live. Great program, great interview. And a great website with complete archives going back to 2001! Look for the Sassen interview in the Archives for July 4.

The Danger of Incentives for Bankers to Take Risks with Taxpayer Dollers: Martin Wolf Gets It, Larry Summers Doesn't.

Martin Wolf of the Financial Times said flat out yesterday that the inadequate reforms of the U. S. financial system coming from Summers & Co are certain to lead to a second financial crisis. His main concern? Incentives: the incentives that Summer & Co. have given America's "too-big-to-fail" bankers to take risks with taxpayer dollars. Links to three recent Martin Wolf columns are here, here and here. The first is the most outspoken and urgent. It opens with a warning.

With one bound the banks are free, or so it seems. Already, the panic of the autumn of 2008 is fading. The period within which lessons can be learnt and changes made is closing. Yet without radical changes, another crisis is certain. It may not even be that long delayed.

He goes on to say of the Summers reforms that

what has emerged after the crisis is . . . an even worse financial system than the one with which we began. The survivors are an oligopoly of “too-big-and-interconnected-to-fail” financial behemoths. They are the winners not because they are necessarily the best businesses, but because they are the best supported. It takes no imagination to realize what these institutions might now do, given the incentives for risk-taking.

Wolf has three remedies for this state of affairs: capitialization, liquidity and incentives. He deserves close attention. He is the most widely respected financial writer in the world. And it's amazing how no one of our side of the pond seems to be listening to him. One exception is finance blogger Yves Smith at Naked Capitalism who says that

Wolf understands the problem, but only alludes to the implications. It is now abundantly clear, to use that Richard Nixon turn of phrase, that the big banks not only have a license to steal, but the goverment now undermines its risks. That plus the failure to try to engineer controlled deleverging (high leverage is systemically destablizing) guarantees that if we do not sink into Japan-style maliase, we will have an even bigger crisis in pretty short order, five years at the very outside. The failure to implement real reforms will cost us dearly, and sooner than anyone wants to believe.

If you can stomach this, take a look at the latest column from Mike Whitney.

Gone Fishin'

I'm taking a break from this site for awhile. For just how long, I don't know. I've decided to put all my energies into creating a civic media platform tapping the "market of the whole" 9.5 million residents of the Chicago area, where I live.

Looking back on these posts, I've learned something useful about the economic crisis. I did so by making little jumps. I'd put up a post and then wait to see if stimulus (hah!) for the next post would pop up. It always did. Yet without feedback from readers, these posts came to reflect only my personal outlook, namely that the U.S. (and the world) was blowing its best chance to rebuild its economy on a firmer foundation than that of replacing one house of cards with another - a house of structured private debt with one of government debt. My first thoughts on what constitutes a firmer economic foundation are here.

The absence of feedback to my posts was a disappointment, but not too much of one given my rank amateur status and the abundance of expert and gifted finance writers online. I did, however, receive emails from people I respect in response to information I'd sent: Northern Trust economist Paul Kasriel, finance blogger Yves Smith, Carnegie Mellon economist Allen Meltzer and from Clive Crook and (my hero) John Authers of the Financial Times. Now for an old English major, that's good company!!

I'm grateful to these folks and to everyone listed on my Finance Links, to the left. Nouriel Roubini, you the man, and Meredith Whitney, you the woman. But thanks also to Lifters of the Veil like Charles R Morris (sadly overlooked, a brilliant explicator), Pulitzer Prize-winning tax expert David Cay Johnston (fearless in describing rottenness when he sees it), economist Simon Johnson of MIT (whose Baseline Scenario site is the place to be for finance crisis activists), and so many other others. The individual I most want to tip my hat to, however, is economist Mike Hudson of the University of St Louis at Missouri, whose New Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse struck me as overly radical two years but makes more sense to me as time goes by.

Chiao for now!

Mid-Course Correction

I haven't posted since May 15, when the Dow, at 8268, was 500 points lower than it is today. I've been busy talking about the future of journalism at Seeding Civic Media. Also began a diary about President Obama's $75 billion Making Home Affordable plan at Daily Kos. But there's another reason. This site, while fascinating to me, has not interested others. Something needs to change. It's mid-course correction time.

Posts, my buddy Arturo tells me, need to be shorter. Make one point at a time, let people respond. Makes sense. I'll also look into promoting the site.

Meanwhile, the Green Shoots are looking strong in the battle for the World Cup. To me, though, their recent strength is dubious. I can't help thinking that Summers and Co. are building a house of cards - a house of government debt - modeled on the house of leveraged debt from whose collapse the global economy is struggling to emerge. William Buiter of the Financial Times says it all in his June 12 piece, "The Fiscal Black Hole in the U.S."

So where does civic media fit into all this? At the risk of sounding like a scratchy record, let me repeat one simple axiom: neither the U.S. or the global economy will be on a sound footing until citiznes everywhere have a genuine voice in the economic decisions that affect their lives.