The Financial Industry: Takes Too Much, Gives Too Little

The "Wall Street Bailout" is quickly reaching into the trillions of dollars, and many analysts are speculating as to the current running total of the outlays thus far, while other financial experts like John Bogle, the founder of the Vanguard Group, are questioning the legitimacy and impact of the costs to maintain this overly-complicated system even when economic conditions are good.

Henry Paulson yesterday presented his latest in a series of bewildering press conferences, each of which seems to be orchestrated to reveal - in only an incremental fashion - the true extent of the damage to our financial system.

Yesterday’s installment from Paulson in summary: Things are really bad, and they will get worse. Whatever we told you our plan to stop the markets from further hemorrhaging was last time, we have since changed our mind. We will let you know when we change our minds again.

In the meantime, the Dow dropped enough to more or less erase the gains realized in trading the last two weeks, posting the third worst point drop in history with the DOW closing down nearly 680 points.

So what are the mounting costs of the bailout to the public in total? Some estimates would have the bailout costs as high as $8.5 trillion dollars, while more conservative estimates are a mind-boggling $4.6 trillion dollars.

But these costs only represent the liquid assets the Federal Government has pumped into the system in the last few months through FDIC insurance payouts, FHA loan guarantees, Federal Reserve cash injections, the direct Treasury bailouts of public and private firms, and the equity stakes taken in others.

What about the non-bailout costs? What do we as consumers, as private companies, and as taxpayers actually pay on an annual basis to support this system? How much have businesses and consumers already given to the Financial Industry that now demands we put our grandchildren into debt to save their golden parachutes today?

John Bogle illustrated in his recent book Enough: True Measures of Money, Business and Life, the damage to, and dangers inherent in, today’s financial industry.

The financial sector itself has been building for many decades into the largest single element of the American economy. We have moved to a world where far too many of us seemingly no longer make anything; we’re merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune.

In the process, we have inevitably added even more costs by creating ever more complex financial derivatives, in which huge and unfathomable risks have been built into the financial system.

According to Bogle’s more-than-qualified assessment, the Financial Industry produces little overall value for the economy, while the value extracted is considerable - and this is assuming a reasonably good economy.

Given the already demonstrated incompetence of the overly compensated Financial Industry CEOs, their legions of sycophants, as well as the utter lack of oversight by the designated federal regulatory bodies, one has to wonder why none of the money from the troubled companies’ record profits and record-breaking executive compensation plans are on the table along with taxpayer monies in any discussion of a bailout.

The AP reported yesterday that there were clear warnings of the risks of this crisis back in 2006, while others have produced evidence that Federal regulators were well aware of the problems and risks as early as 2002, according to FDIC documents.

Bogle also tells it like it is in a recent interview on NPR’s Fresh Air (the money-shot is at 4:22):

I started to look at what was going on in our financial system, and to be honest, Allison, I got outraged. I did some research and found out the financial system costs six-hundred billion dollars a year.

That means, whatever the markets deliver, we investors get six-hundred billion dollars less because we pay it to this institution, or this series of institutions: mutual fund managers, hedge fund managers, stockbrokers, investment bankers, that we call, loosely, Wall Street.

And that means we lose to the market by, you know, over a half a trillion dollars, year after year after year. And investors have to know about that, because it speaks to a real flaw in our system, where the financial system is consuming an excessive share of the economy’s resources…it turns out the financial sector subtracts value from society.

This is not a message that the financial industry wants to hear, but when insiders with the repute of Bogle are banging this drum, it’s hard to shut the cacophony down. Maybe it’s time to examine more than just where the bailout dollars are going, more than who got us into this truly horrendous situation in the first place, and more than who we are trusting to get us out of it.

Maybe it is is time we step back and make a more holistic assessment of the costs and benefits of a financial system that demands the return of all the gains ever delivered now that times are bad, and also demands the lion’s share of the returns during the good times. Maybe we should be as outraged as John Bogle.

Maybe we should do this before they ask us for everything.

Disclosures: Author holds a long position in Citi (C)

Comments

[socrateazz]

I was quite surprised to see somebody besides myself saying what I have said for years. The financial systems extracts wealth from any society. I would add government to that statement. Only production adds wealth. If a good is not produced, that good does not add to wealth. Even producing something that is totally destroyed like a bomb has less negative impact than tying money up in nonproductive hands. Capitalism is right in many ways. Marxism does have one thing I agree with strongly:When wealth goes into the hands of a few the economy suffers greatly. China and India are producing wealth by producing goods. Their economy will continue to improve to the degree they produce and sell goods. Societies that are concidered mature are really societies that are extracting excess wealth. The piramid cultures of egypt would be an ovious example. Note: I believe what has happened recently has happened for centuries. Marxism probably existed in some form ten thousand years ago. and it continues to be thought of as an evolving new concept. Marriage is really illistrated in Marxist concepts. In the family some folk produce excess and others consume excess. A good family is Marxism illustrated

2008 Dec 03 06:46 AM

[Balderdash]

The financial industry has, and will continue to be, necessary to streamline the depolyment and distribution of capital. It just so happens that a bunch of crooks in Washington have created insentives that encourage wreckless and dangerous behavior from this system which will ruin us all, all the way back to the creation of the Fed in 1913, which is no different that a racketeering operation.

This 600B per year was the price to pay relative to the creation of business, weath, technology and production financed by careful capital allocation. Don't forget that. We just need a sound framework in which it can operate without some mob boss running the show.

2008 Dec 03 07:11 AM

[Anthony M. Freed]

"On Wednesday, December 3, 2008 The New York Federal Reserve website reported that they will begin to purchase Asset Backed Securities (ABS) from failed mortgage giants Fannie Mae and Freddie Mac, as well as the Federal Home Loan Banks.

They also hinted that they will stop there - everything seems to be on the table now, officially. Treasuries and stocks may see direct effects, with outcomes mixed. Initially, the program will concentrate on non-callable, fixed-rate senior benchmark securities such as Mortgage Backed Securities (MBS), but there are indications in the language used that the program may expand to include other ABS such as privately issued MBS (non-GSE), bonds, stocks and other equities.

With this much unprecedented Government intervention in the markets, I find it difficult to apply any models effectively in a predictive fashion. In the long run, I believe will be inflation and devaluation of the dollar - combined with the aftermath of record writedowns, mergers, buyouts, and outright failures that we will see in 2009 - that will be the legacy of these efforts."

yourmortgageoryourlife.../

2008 Dec 04 08:00 PM

[Vienna]

Yes indeed,

We in Europe that you always have called behind, slow, dumb and always threatend and pushed us to follow your principals, even if we where decisive against it.

The US was convinced that their system was the only true one, but now you (we new it) are starting to realize that you being robbed by your own people (people always get robbed by their own people and not some Chinese or terrorist).

I hope this will lead the US to more consensual and trustworthy way of business, just as we did it before the US came and told us how to behave.

A little into socialism, higher taxes, convert public interest back into state controlled NGO and a good trade off between capitalism and communism, maybe the truth lies in the trade off of the two systems.

2008 Dec 07 11:55 AM