A couple points for thought:
1) Is the bank crisis mostly imaginary, due to people's hysteria and exploiting panic?
The comments below are from a CNBC banking analyst, made before the good news about Wells Fargo and Goldman Sachs came out.
http://seekerblog.com/archives/20090325/richard-bove-hysteria-about-banks-financial-condition/
In the last 3 months of 2008 depositors put $100 billion per month into new bank deposits - deposits which cost the banks half the interest rate of a year ago. 98% of loans are paying interest and principle. 97% of loans are also current. Home equity loans - most people think they are awful, no longer supported by real estate equity, etc. But the facts are that only 1.6% of home equity loans are non-performing. Almost all of the banks have positive cash flow - how can they go out of business given the cash flow. Exceptions are Citigroup and In Q1 - 2009 banks are going to show an operating profit. Loan losses are going to go up in credit cards and commercial real estate. But so far the loan losses are not enough to make the banks unprofitable. But note that in Q4 only .25% of CRE loans were in default (per the FDIC). That default rate is increasing.
The Financial Times and other economists don't seem to like the Obama-Geithner toxic asset plan either:
http://www.ft.com/cms/s/0/b3e99880-1991-11de-9d34-0000779fd2ac.html?nclick_check=1
http://www.nydailynews.com/opinions/2009/03/25/2009-03-25_the_new_geithner_plan_is_a_flop.html
2) Equal justice for all?
http://www.tcpjusticedenied.org/
A legal group recently conducted a very extensive analysis of indigent defense (court-appointed public defense for people who cannot afford any better) in all 50 states, in order to evaluate whether the Sixth Amendment ("In all criminal prosecutions, the accused shall have the assistance of counsel for his defense") is being carried out. Counsels do get assigned, but if they are unable to provide adequate defense (due to excessive workload, poor skills/resources, and other disadvantages vs. prosecutors), then what is the point? The actual report is attached.
"You should not have a better shot at justice, a better opportunity for an adequate defense, depending upon who arrests you in this country or where you were when you were arrested or what court system a defendant winds up in," [co-author] Tim Lewis said. "This is a basic constitutional right." [...] The report goes into detail about the wide range of ways public defender systems fail poor defendants. Sometimes people don't get lawyers at all. Other times they get a lawyer who is so overworked and underpaid that there's no way the accused can get a real defense. -NPR
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On the Geithner plan, yeah, it looks like a massive wealth transfer from my tax-paying pocket to a bunch of assholes in the finance industry. Steiglitz wrote a NYT editorial attacking it as ersatz capitalism a couple weeks ago: http://www.greenchange.org/article.php?id=4209
Krugman had a fairly interesting editorial last week as well about making banking boring: http://www.nytimes.com/2009/04/10/opinion/10krugman.html The essential argument is that too many smart people are spending too much time pushing money around, rather than actually going out and building something. There's been a huge amount of backlash from the hardcore finance propellerheads arguing Krugman's data, and I honestly don't know enough about it to evaluate the strength of his empirical claims. But I remember being at Stanford and seeing a depressingly large number of really smart people going off to push money around on the plate in finance, rather than going into an industry where they could actually build something useful (and let's not even get started on the consultants).
There's this guy who went back through historical records looking at the percentage of Harvard's graduating class of MBAs each year and correlating that number with the stock market. Essentially what he discovered is that the percentage is negatively correlated with the long-term performance of the US equity market. That is, when ~10% of HBS grads are going into finance, the stock market goes up. When ~30-40% of HBS grads are going into finance, the market's headed for a big correction. It was in the high 30's for each of 2006 and 2007, as the market headed towards the crash. Here's the historical reports: http://www.soiferconsulting.com/soifer_consulting_articles.htm And here's a somewhat tongue-in-cheek reporting about it: http://www.slate.com/id/2109982/ It makes an interesting argument for regulating finance to be a lot less interesting, forcing those big brains can go do something more useful.
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On the equal justice thing ...
First off, clearly the way indigent defense is handled in this country is shameful, and should be fixed. That said ..
I read over their recommendations for state and federal governments, and they all essentially seem to come down to "put more money into public defense." I think that's probably a reasonable thing to suggest, given the problems. But looking at their reporters and committee, the vast majority of whom seem to be deep in the legal profession, I can't help but wonder if this is really the most efficient way to solve this.
I'm not a lawyer, nor do I play one on tv, so I'm mostly full of it here. But it seems like some part of the reason that rich people get a better defense than poor people is because of the unbelievable complexity of the law. The advantage the rich have is not that they can actually bribe the court into a better settlement (I mean, ignoring the corruption cases, which are admittedly embarrassing but I think relatively unrepresentative of the overall problem). It's that they can hire a huge team of people to go through and look for loopholes: lawyers to look for weird holes in the law, investigators to look for weird holes in the evidentiary process (I heard that phrase on tv once!), etc.
Seems like the most efficient solution is to simplify the law. If these processes were easier to work through, without so many crazy holes and trapdoors and so forth, it might make it a lot easier to provide even representation to everyone. Some of that complexity is useful, but we need to start acknowledging as a nation that the complexity also has a huge adverse effect on our ability to build fairness. Admittedly, though, it would force a lot of lawyers to go find something useful to do with their big brains, so it seems unlikely we'll be seeing that recommendation from any lawyerly review panels.
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Thanks for the comments and I agree. Yes it would be good to kind of de-incentivize interest in the financial sector and creative investing. I mean, we'll always need fund managers, brokers, and such, but maybe in a more reasonable scale. What can we do though - salary limits? I think 900 people at Goldman Sachs had over $1M compensation last year. They are famous for high pay, so obviously debt-ridden Ivy League MBAers would want to go there (also it's the best place to try to take over the world). It would be better if we could attract more talent towards more tangible innovative pursuits, maybe even education. I guess it does take some creativity and intellect to play these futures markets and move debt around to make money. But yeah, it's clearly not real LABOR. I haven't had a chance to look at your links yet but the correlation is hilarious. Too bad we don't have enough data points to track how HBS US presidents affect the econ, but the first one doesn't look good.
Re: legal fairness - for some problems, throwing money at it can help a lot. Clearly we need to invest more in improving public defense. But if you're talking about re-writing the laws to make them less complex, it's a much bigger challenge than the tax code. Presidents have talked about de-mystifying the tax code for decades, but it's only gotten MORE complex. Heck the recent Obama stimulus bill created 300 changes to the tax code. So you are right that the privileged are better poised to exploit complexities and loopholes to their advantage, yet the long arm of the law comes down hard on lower-income recreational drug users or Earned Income Tax Credit abusers. But getting Congress to do anything large scale is obviously tough.
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Oh, so I guess in my excitement I missed explaining what I meant by limiting how interesting finance is and how many people get into it. I honestly don't believe that limiting pay really works ... it usually just forces people to get more creative about how they pay (like back when software firms didn't account for stock options as an expense, though clearly that was how they were paying their people). I think the fix is just more serious regulation of the finance industry: putting limits on how creative you can get with derivatives and related instruments, forcing these instruments to be standardized and over the counter, adding more restrictive capital requirements (and making the requirements counter-cyclical), forcing the markets to be more transparent, blah blah. Krugman's editorial is more detailed about it.
And yeah, I agree that you need more money in public defense. But when I see a report written by a bunch of lawyers which reaches the conclusion that the government should pay a lot more money to the legal profession, it sets off a big red siren in the back of my brain :)
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Yeah you're right about the compensation. Even with the "pay limits" imposed on bailed out bank execs, I am sure they are getting other forms of compensation. But just as people get creative about pay, they are doubly creative on derivatives and exotic investment schemes. It seems that the schemers are always one step (or many leaps) ahead of the regulators. But maybe after learning the lessons of this bubble, coupled with increased transparency & restrictions, it can only get better.
Sure lawyers griping about pay looks silly, but of course there is a wide range of pay in the legal profession. Public defenders right out of school get $45k, and 5 years exper. get $61k. Their associate DA opponents get at least $80k in most metro areas. A "general attorney" gets $99k on average in the private sector, and we know some can net much more. I suppose I should use the physician analogy - who would want to be a GP when a radiologist specialist can make 4X more money while maybe even less work? If we can't attract bright people to the dirtier, less glamorous jobs in law or medicine, then those areas will continue to underperform.
http://www.payscale.com/research/US/Job=Public_Defender/Salary
http://www.indeed.com/salary/Attorney.html
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