This Is What You Get When You Mess With U.S.

Matt Welch | September 18, 2008

This bit of Harold Meyerson grave-dancing on Wall Street, published in today's Washington Post, is one of those boomkarkable, people-really-did-think-that-back-then kind of columns:

At the risk of speaking ill of the dead, what good was Lehman Brothers, anyway? And if Merrill Lynch was so bullish on America, why is it that, despite the torrent of foreign investment that flowed in to Lehman, Merrill and their Wall Street peers over the past half-decade, so few jobs were created in America during that period of "recovery"? [...]

Airports, bridges and roads are decaying. Rural wind-power facilities cannot light cities because our electrical grid has not been expanded. [...]

Someone needs to invest in the United States of America. For the past decade and, in a broader sense, for the entire duration of the Reagan era, both government and Wall Street have opted not to.

At the risk of taking Harold Meyerson even half seriously, this particular financial crisis he finds so cheery is based in significant part on financial institutions of all sorts getting involved with the sale of mortgages to U.S. residents who, it turned out, could not afford them. In other words, banks and other mortgage lenders–including those with explicit mandates from the government to expand the pool of home-ownership to lower-income Americans–went belly-up partly because they invested in America.

As for airports, bridges, roads, and the electricity grid, one reason private capital doesn't invest much in preventing their decay, is that the authorities that oversee them generally aren't private. Blaming investment banks for the crapitude of, say, LAX is like blaming the L.A. Unified School District for the share-price plummet of Washington Mutual: It does not make sense.

A final note. There probably wasn't a country in the world that didn't, at some point in the 1990s, attempt to create its own replica of the Silicon Valley. How does Meyerson suppose this America-led technology boom, which knowledge workers like him especially benefit from to this day, got its financing? Or is it just that the only kind of investment in America that qualifies as Investment in America must involve unionized jobs at the kind of factories Meyerson himself would never work for?

Comments

|9.18.08 @ 10:34AM|#

I don't understand how these banks are losing so much value. Even if their entire portfolio consisted of sub-prime loans, and they don't, those securities haven't dropped enough to wipe out all of the reserves they're supposed to be holding. Government is lurking like vultures over these banks, and instead of telling people to calm down, Paulson seems to be rubbing his hands together in glee. Maybe he thinks if government controls all of the banks it will be easier to squeeze funds out for his conservation agenda, like he did at Goldman Sachs.

NotThatDavid|9.18.08 @ 10:35AM|#

"Dumb" is far too kind a word.

The Extispicator|9.18.08 @ 10:37AM|#

At the risk of taking Harold Meyerson even half seriously

You should have listened to that little voice in your head and stopped there. Addressing the idiot only encourages the idiot.

Regular Here|9.18.08 @ 10:45AM|#

Mr. Meyerson,

The reason that the trains, canals, steel etc. were built back in the late 19th and earliest 20th centuries was because they were private enterprises and investors in them were seeking profit. You cannot expect private enterprise to build bridges and roads today when they are in public hands and built at a loss.

I would add that banks and bankers do provide money for those endeavors every time they buy the government's debt or pay the government taxes. That the government decides that overseas adventures and spending on the war machine (and providing prescription drug benefits, etc etc) are more important than repairing the nation's infrastructure is not the fault of the financial industry.

That financial flows seek higher returns by investing in China and India is no surprise and provides a benefit on a global scale. That you expect banks to invest in non-competitive firms here in the US is ridiculous. They did pour billions into housing and that was a mistake. But it was not seen as a mistake at the height of the bubble except by a few of us. I doubt your columns predicted calamity at the time.

As it is, the firms made poor decisions, did chase short term gain, ignored obvious risks, in many cases cheated and skirted the law, and should fail. The government should get out of the way and allow a repricing of risks and the market. In fact, were it not for Fannie Mae and Freddie Mac and the pooling of mortgages into securities, and had the banks had to hold onto mortgages rather than sell them off, none of this would have happened, as there would never have been a property bubble.

jtuf|9.18.08 @ 10:47AM|#

I expect the current stock dip to reverse itself in a few months. The stock price declines are just too sudden and too large to reflect anything but an emotional cascade. It's not as if there are suddenly fewer roads, factories, skilled employees, and other essentials economic inputs today compared to two weeks ago.

A five year trend is more difficult to predict, but I'll take a shot at it. More and more young Americans are becoming freelancers and small business owners, because they saw their parents getting downsized in the 1980's. This shifts economic growth from Wall Street to Main Street. My guess is that stocks will grow much more slowly over the next five year compared to the historical average and that small businesses will grow more quickly than normal.

|9.18.08 @ 10:54AM|#

Rep. Barney Frank is considering a resolution officially calling Sept. 15 'Free Market Day', because Lehman went Bankrupt on that day, and it was the beginning and the end of the Republicans' committment to the free market and capitalism.

|9.18.08 @ 10:55AM|#

James Ard - It's mostly a panic driven "bank run" by large investors. They are responding to the share price of the brokerages themselves falling, which was a reaction to how much bad debt these guys have exposed themselves to. I'm betting two of the big 5 survive in some fashion - Goldman and Morgan. Goldman has the best technical trading software in the world - you might be able to scoop some up on the cheap pretty soon and make off like a bandit in a few years. Now's the time to make some money, provided you aren't stuck in one of those terrible ARMs they were handing out.

|9.18.08 @ 11:09AM|#

Gaaaaaaaah!!! You bastard, Welch; reading that crap has totally wrecked my morning.

elevating shareholder value over the interests of other corporate stakeholders

I wonder what this blathering imbecile would say if someone told him he (the owner) should consult with the gardener and the pool boy (the "stakeholders") prior to making any decisions regarding upkeep, maintenance, or other significant changes to his home. Perhaps he should be compelled to seek approval from his maid prior to buying a new car.

|9.18.08 @ 11:16AM|#

Or is it just that the only kind of investment in America that qualifies as Investment in America must involve unionized jobs at the kind of factories Meyerson himself would never work for?

Leftist nostalgia for industrial age worker's battles is so strong, Matt, that to bring many of them into the modern era would require a brain transplant. Which, in Meyerson's case, might be a good thing for everyone.

|9.18.08 @ 11:21AM|#

Don:

I'm not sure if you've read the papers this morning, but it doesn't look like Morgan will survive. They're shopping themselves to Citi and Wachovia and there's a leaked quote from the CEO of MS saying that if they don't find a partner to merge with, they're toast.

And then there was one...

armcharipunter|9.18.08 @ 11:37AM|#

Oh no? If all the investment banks go under, who's going to handle my IPO? Oh, you mean to tell me than more and more of them are done in London, Dubai, Singapore, etc., etc. now? How exactly did all those high-paying jobs get shipped "offshore", Messrs Sarbanes and Oxley?

|9.18.08 @ 12:03PM|#

The basic problem isn't really that a higher than expected percentage of mortgages is going bad. The basic problem is that the financial institutions that hold the mortgages are leveraged like crazy.

If they had 50% reserves, and 5% of their assets went bad, it would be a pain for shareholders and a few bad years, but not an existential threat. When they have 3% reserves, and 5% of their assets go bad, it's game over, man.

highnumber|9.18.08 @ 12:44PM|#

"boomkarkable" is my new favorite word.

|9.18.08 @ 12:46PM|#

In other words, banks and other mortgage lenders-including those with explicit mandates from the government to expand the pool of home-ownership to lower-income Americans-went belly-up partly because they invested in America.

If Matt Welch is talking about the Community Reinvestment Act (which has been around since around '77) this isn't true and he should know better.

The CRA doesn't mandate making loans to anyone -- it merely forbids redlining poorer neighborhoods.

Amakudari|9.18.08 @ 12:48PM|#

I'm betting two of the big 5 survive in some fashion - Goldman and Morgan.

Uh, why? MS is down 60% over the last five days and looking to merge. Goldman would benefit from a stable deposit base, too. The market is not funding these guys, no matter how "smart" they are.

duster|9.18.08 @ 12:57PM|#

Don't mess with the Chewbacca defense, Weigel.

Tym|9.18.08 @ 1:00PM|#

Oh no? If all the investment banks go under, who's going to handle my IPO?

Some of the smaller firms are still somewhat healthy, Jeffries is one I know of.

|9.18.08 @ 1:37PM|#

The CRA doesn't mandate making loans to anyone -- it merely forbids redlining poorer neighborhoods.

A distinction without a difference. The bank is effectively required to make loans in those poorer neighborhoods.

|9.18.08 @ 2:08PM|#

props for the "radiohead" referance

|9.18.08 @ 2:11PM|#

R C Dean:

A distinction without a difference. The bank is effectively required to make loans in those poorer neighborhoods to people who can't even make their cell phone payments on time.

Fixed

|9.18.08 @ 2:37PM|#

"LAX is like blaming the L.A. Unified School District for the share-price plummet of Washington Mutual: It does not make sense."

Actually, it can make some sense. Washington Mutual makes home loans, LA is the biggest market. People don't want to live in LA and thus avoid it and move out when the have children, thus making it more difficult for Washington mutual to make a profit.
So bad schools cause the LA unfied school district can have a small but real negative impact on Washington mutual's share price.

Dello|9.18.08 @ 2:50PM|#

jtuf,
"This shifts economic growth from Wall Street to Main Street."

Agreed. And about time.