“Bubblenomics” and The American Dream

The business of news-mongering just ain’t what it used to be. Walter Cronkite is dead and there‘s no one else believable. Two weeks ago, a Time Magazine poll revealed that Jon Stewart, with 44% of the vote, is the nation’s most trusted news personality. Brian Williams was a distant second with 29%, Charles Gibson was in there somewhere, and Katie Couric was an “also ran”, with a scant 7%.

The message is clear: the network anchors are reporting glossed-over and sanitized news, but few of us are buying it. In a world where someone like Sarah Palin can become famous uttering nothing but well-rehearsed sound bite platitudes, no two sentences having any direct correlation, one pauses to wonder, “where does America get its news?”

Into this vacuum of truth, morals and intellect walks Matt Taibi. Matt is a senior political correspondent for Rolling Stone who just wrote a very controversial article entitled “The Great American Bubble Machine – How Goldman Sachs Blew Up the Economy.” The subhead is: “From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again”

Matt is a very earnest fellow. In interviews and talk shows he comes off as very knowledgeable and literate in the ways of Wall Street. He is smart, glib, and believable. I heard him on NPR take apart veteran Wall Street icon Charlie Ellis like slicing chicken. I have no reason not to believe him, because everything he says rings true compared with everything else we already know, and all the so-called experts lack any credibility whatsoever.

So this is the gist of it: Goldman Sachs has so many alums in positions to control the levers of power, they can and do manipulate world markets at their will. Matt calls it “pump and dump.” I call it “bubblenomics.” The scheme is the same. Run up the market by encouraging investors to jump in on the hot new thing. Get out ahead of time if you can, and even if you don’t, you’ve already made a killing. It worked on internet companies that had no earnings or even a saleable product or service. It worked on selling unsuspecting investors like pension funds, mortgage securities based on thin air. Matt even has credible evidence that Goldman Sachs had a lot to do with driving up the price of gas last year.

This is the new Wall Street. It’s not about building long-term wealth that creates jobs and commerce. It’s gimmick-driven wealth that does nothing for the overall economy. It’s not even capitalism. Capitalism is when people create value that someone else buys, and the ancillary benefits spin off through the system. I have no problem with people getting rich off that system; that’s the stuff of the American dream. These guys are hollowing out the economy by sucking the money straight out of the system. That some of their fabulous wealth eventually trickles down does not make for a robust recovery. It’s robbery! Some guys in three-piece suits cleaned out my 401K (twice in 10 years!), now those same guys are paying themselves billions in bonuses from bailout money that comes from MY taxes. Every time a bubble is inflated and busts, more wealth is stripped out of the working class and goes straight to the top. My friend, that’s no longer the American dream, that’s the stuff of Third World nightmares.

It all started when the giant investment banks went public. Before that there was a sense of guardianship among traders. Now it’s a “bonus culture” feeding frenzy, and the only sense is to jerk whatever chain you can to spill the money pot. With no one in control and no standards, greed has worked its magic throughout the system.

The list of Goldman Sachs alums is impressive: Robert Rubin (former GS CEO), Clinton’s treasury secretary, was the Godfather of deregulation. That sleight-of-hand was carried on by Rubin protégé Larry Summers, Clinton’s next Treasury Secretary and now Obama’s Chief Economic Advisor. Then there was Henry Paulson, Bush’s Treasury Secretary (former GS CEO). Hank strong-armed weak regulators (like SEC Head William Donaldson, former GS Head), and was instrumental in the gutting of rules governing leverage and the limits of risk. Together, they created an economy that was on a suicide mission.

The ultimate power-play was when Paulson allowed Lehman Brothers, Goldman Sachs’ chief competitor in many areas, to die, while they threw liferings to all the other drowning Wall Street souls.

Next Paulson bailed out AIG, (the day after he allowed Lehman to go down). That was because AIG was Goldman Sachs’ number one creditor. Of the original $80 billion AIG bailout, $13 billion went straight to Goldman Sachs, a bankruptcy payment of 100 cents on the dollar. (Unheard of in any insolvency situation, just ask General Motors creditors, who got pennies on the dollar, if anything at all; or GM stockholders, whose stock is worthless in the new re-organized GM.) Without this payout, Goldman Sachs would arguably not have survived.

Matt’s article was made all the more timely when Goldman Sachs, shortly after paying back bailout funds, went on to post the largest quarterly profit in its 180-year history. Of course the bailout money, which GS made a big deal about not needing, is just the tip of the iceberg. More important is the money coming out of the back door of the Fed, an amount that can never be known because of the shroud of secrecy under which the Fed operates. This cheap money means that GS and the other of the Government’s “chosen” banks have access to guaranteed profits, courtesy of the taxpayer. They used the bailout to fill their coffers and pay themselves record bonuses, an average of $700,000 for each employee.

The Goldman Sachs list goes on: Recently-departed New York Fed Chairman (Former GS CEO) Steven Friedman steered bailout dollars to GS while letting other banks twist in the wind. Present New York Fed Chairman is William Dudley (Former GS Chief Economist). Keep in mind that the NY Fed is the most powerful branch of the Fed and directly responsible for policing Wall St. Conveniently, when Goldman Sachs switched from an investment bank to a bank holding company in order to receive the cheap Government money, they would now be regulated by all their old buddies who now ran the Fed!

Garry Gensler, Rubin’s top aide in the deregulation years, is now the head of the Commodity Futures Trading Commission, the outfit that would be in charge of regulating derivatives — that is if there was any regulation, which there isn’t. The NY Insurance Department, which would regulate Credit Default Swaps (if there was any regulation), headed by, you guessed it, former GS Vice Pres.

That list only scratches the surface. Turn over any rock in any Government body that controls the economy; there you will find Goldman Sachs. President Obama vowed on the campaign trail that his White House would never employ a registered lobbyist. Regrettably, he has GS loyalists throughout the power structures.

After almost a year, nothing has changed. Instead of using that massive public subsidy to kick-start the economy, they are keeping the money and turning it into bonuses and yachts. Instead of adopting prudent business models, they are still engaging in extraordinarily risky behavior because they have a guaranteed stream of cheap money from the Government.

So, what’s the next bubble? Don’t be surprised; it’s already started: The cap and trade program in carbon emissions! This is a highly complex commodities market that, under the recently passed Energy Bill, is mandated by government but administered and controlled by Wall Street. Even Al Gore is in on the fun, having formed a cap and trade company with some former Goldman Sachs big wigs.

Goldman Sachs spent 3.5 million lobbying for the bill’s passage and they got exactly what they paid for, a new bubble to inflate. After all, Goldman Sachs was Obama’s second largest campaign contributor. Thought that Wall Street was a Republican sport? The street has, for the last several years, contributed to the Dems 3:1. As Nobel economist Paul Krugman says of Goldman Sachs “They are very good at what they do. It’s just that what they do isn’t very good for America.”

In response to Matt’s article, Goldman Sachs sent one of their “flacks” to respond. The rebuttal is laughable in its sanctimony. “We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance of being a force for good.” “We could hardly be described as having been a major player in the mortgage market, unlike so many of our current and former competitors.”

Ahem: In 2006 alone, Goldman Sachs sold $77 billion in mortgage securities, a third of which went bad. Sure, some sold more, but where I come from, $77B is real money.

In light of all the GS henchmen who marched the economy over a cliff and are now picking the pockets of the fallen, here’s the best one: “…in the wake of the events of the past year or two, Goldman’s partners have pretty much lost their appetite for going into public service.” Thank God. I doubt the public would survive any more of Goldman Sachs’ “largesse.”

Doug Friesen
Aug 10, 2009