James Pethokoukis

Politics and policy from inside Washington

Two cheers for Goldman Sachs

Jul 20, 2009 20:18 UTC

The PR folks working for Big Oil have to be breathing a sigh of relief these days. All the populist outrage that is usually spewed at the Exxons and Halliburtons of the world is being  redirected at Goldman Sachs — and its gleaming, glittering $2.7 billion second-quarter profit amid the wreckage of the American financial system.

The specific charge is that Goldman is supposedly making big profits via risky trading activities financed, in effect, by Uncle Sam.  Two pieces of evidence here: First, Goldman’s Value-at-Risk measure, a much-debated way of calculating daily losses, has  been steadily increasing.

Second, Goldman is benefiting from several government interventions and programs — such as the guarantee of its debt, an ability to tap the Fed’s discount window and its implicit too-big-to-fail status — that give it access to supercheap capital (thus the snarky nicknames “Government Sachs” and “Goldie Mac”).

To those who hate Goldman as a symbol for modern capitalism, that evidence is merely a current reaffirmation that the firm is a “great vampire squid wrapped around the face of humanity,” as a recent Rolling Stone article put it.

Rather than an example of succubus capitalism, a more reasoned and clear-headed analysis would see Goldman’s government-enabled success as a market distortion caused by an unprecedented government intervention into the private economy.

And to the extent that such fat profits would not exist without government and taxpayer backing, what should be government’s response to the distortion? New regulations to limit trading activities, perhaps, or a bailout tax paid by Goldman and other TBTF firms (We’re looking at you, JPMorgan.)

Then again, maybe what’s necessary is to remove the distortion. This is all so reminiscent of the constant worrying by good-government types about the influence of lobbyists and campaign cash on the political process. The usual suggested remedy is limits on political donations, whether in the form of cash or cash-in-kind such as independently produced political advertisements.

Of course, lobbying government is a rational response when government can tax, spend, regulate and subsidize this or that business activity to the tune of trillions of dollars every year. (Now there’s your vampire squid.)

So why not try an alternative response: Shrink government largess and power, thus reducing the need and incentive to influence it with campaign cash.

Goldman plays the lobbying game. During the 2008 campaign, the company (via its political action committee and employees) donated just under $1 million to the Obama campaign and just under a quarter of a million to the McCain campaign. And right now, it is unapologetically playing the bailout game, too.

It’s also worth keeping in mind that to some extent Team Obama wants banks to play the game, to take advantage of  government financing (as well as the Fed’s zero interest rate policy) to earn their way out of trouble and avoid nationalization or further direct federal financial aid needing congressional approval

Of course, if Goldman is out of the woods and acting more like a hedge fund than a bank, then perhaps it should be stripped of bank status and cut off from all government aid, as Charlie Gasparino of CNBC has suggested.

Yet even then, Goldman will still benefit from the implied TBTF guarantee. So one possible solution is to end that market distortion by preventing financial institutions from getting big enough to need rescue. Even better would be to end market expectations of government rescue, though that doesn’t seem likely under the current administration, which has embraced the TBTF policy by advocating the creation of a systemic risk regulator to monitor such firms.

Yet even then, Goldman, thanks to its huge role on Wall Street and Washington, is likely to be a popular target for populists across the political spectrum. What academic Bernard Lewis has said of the West also seems true of Goldman: “It is not possible to be rich, strong, and successful and be loved by those who are none of these things.”

Oh, and if Goldman is capable of generating bubbles, as the Rolling Stone article suggests, it might want to gin one up in oil and get people agitated about Big Oil again.


I would be interested in hearing the specifics of what exactly the government created market distortion Goldman is profiting from and why Goldman is unique in their ability to profit from it.

The case against Ben Bernanke

Jul 20, 2009 20:11 UTC

My pal John Tamny doesn’t think the Fed chairman deserves a second term for the following reasons

1) Bernanke is too much of a political operator.

2) Bernanke thinks too much economic growth causes inflation.

3) The dollar has collapsed vs. gold during Bernanke’s tenure.

4) Bernanke was a TARP enabler.

5) Zero percent interest rates are  a market of Fed failure.

Bottom line:

Here’s hoping the Obama administration ignores the establishment consensus, and realizes that the job of Fed chairman should be a prosaic, undesirable one, whereby the chairman is humble in his actions with an eye solely on issuance of a stable dollar.

Bernanke’s past and present lust for the job of Fed Chairman signals an expansive vision about what the position entails, and this means he’s unfit for the role, which should have greatly diminished prestige. Indeed, the fact that he covets the position so much tells us all we need to know about his love of status and rank. As Bagehot observed, “such men are dangerous.”


You’re smart. You should have a tv show!

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Applying the Summers-Google metric to healthcare reform

Jul 20, 2009 19:26 UTC

So does more public interest in healthcare reform help or hurt?


Where cap-and-trade and healthcare are heading …

Jul 20, 2009 17:49 UTC

While both healthcare and cap-and-trade look to be in various degrees of trouble, some savvy Capitol Hill watchers make this point to me: Democrats look at failure to do something about healthcare as an Extinction Level Event, with a failure on cap-and-trade also incredibly damaging, particularly with the Dem base.  House Speaker Nancy Pelosi told wavering Dems that a cap-and-trade failure was a dagger in the Obama presidency. She pushed them to the wall. Healthcare even more so.  Expect a full-court press in the Senate on both. At the same, either of those issues slipping into 2010 is fatal to their chances. The next five months may make or break the Obama presidency.


I hope they are both headed for the shredding machine where they deserve to be. Plus, I want the money back that’s been wasted on all of this unconstitutional hogwash!

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Why globalization is winning over militancy

Jul 20, 2009 14:58 UTC

This analysis by the great Thomas PM Barnett really places the recent troubles in Iran in a geopolitical context.  It also explains why Iraq is, in the end, a win for America and the West:

The collapse of legitimacy in Iran comes after a string of similar setbacks to the movement: Morocco 2007, Jordan 2007, Pakistan 2008, Indonesia this year, Kuwait this year, and then Lebanon. In each instance the more radical groups, which had done better previously or were perceived to be on an upswing, have suffered surprisingly bad outcomes–when votes were actually counted. Why the broad reversal? The brutality of the radicals. This is why I’ve always maintained that Iraq would have its desired effect either way: if we had succeeded from the start, the Big Bang could have been unstoppable (remember all the positive tumult back in 2005 across the region); but done badly, the outcome works just as well and in some ways better. Why? One, the U.S. military is forced to evolve as it should, making it far more ready for the tougher slog in Af-Pak (which, as I argue, is of far lesser strategic value–thus the need to have our ducks in a row thanks to the far more important battlefield called Iraq). But two, any temporary al Qaeda “victory” or “cause célèbre” just allows their brutality to emerge, and that works in our favor nicely. In the end, history will judge Bush-Cheney kindly on the choice to go in, even if the execution sucked.

How Goldman Sachs is hurting cap-and-trade

Jul 20, 2009 14:39 UTC

My sources have been unrelentingly negative about the chances of a cap-and-trade bill getting passed, but far less so about a renewable energy standard on electricity providers. So any suggestion to split the Waxman-Markey approach into separate cap-and-trade and RES bills, as  Sen. Byron Dorgan is doing,  is a big negative for capandtraders.  It’s also amazing to see how the current anti-Wall Street sentiment is hurting cap-and-trade because of the perceptions that financial firms will make a mint in the trading of emission permits. Here is a bit from a recent Dorgan op-ed piece:

For those who like the wild price swings in the oil futures market, the unseemly speculation in mortgage backed securities or the exotic and risky financial products such as credit default swaps that pushed our economy into the ditch, this cap and trade plan will be the answer to their prayers.

Just last year, speculators overwhelmed the oil futures market, and every day they were trading 20 to 25 times more oil than was being produced. That speculation drove the price of oil from $60 to $147 a barrel and gasoline to more than $4 a gallon.

Then the same speculators forced the price back down and made money in both directions. The American public paid the price for it.

And remember the financiers who wallpapered America with risky derivatives and credit default swaps that they traded in dark markets before the financial collapse last year? We shouldn’t need a second expensive lesson in how manipulation in financial markets can hurt our country.

Don’t’ get me wrong. I like free markets. But given recent history, I have little confidence that the large financial markets are free or fair enough to trust them with a new, large cap-and-trade carbon securities market.

Another free-market fix for healthcare

Jul 20, 2009 14:21 UTC

I can tell you the pro-Obamacare Washington wonks I chat with are pretty down right now about the chance of “real reform” getting passed. And as the costs and inadequacies of Obamacare become more apparent, I expect to here more ideas like this one by economic analyst Ed Yardeni:

I think that the problem isn’t that health care costs too much. Rather, we provide it too cheaply. Insurance companies should probably charge higher copayments. Medicare simply gives health care services away to senior citizens without any limits on how many times a patient can go to see a doctor or go to the hospital for the same ailment. Some older folks jump from one doctor to another to get multiple opinions. Perhaps keeping electronic records might help to limit the over usage (and abuse) of our health care system. However, the government shouldn’t have access to our medical records.

We should consider a more radical solution to the Medicare problem. Privatize it! I propose that senior citizens should also be required to have coverage under private plans with the federal government reimbursing them for their premium payments. To insure competition, let them rather than the government select their health care insurance providers. It would be up to individuals to choose the best plan for themselves. The government shouldn’t set the premium fees, but let the market do so. The onus of rationing health care services for the elderly and the rest of us should fall on the insurance companies, which is where it belongs. The government shouldn’t be in the business of monitoring, approving, and allocating the health care needs of Americans.


I respectfully disagree with Rich G. AT&T didn’t decide to break the company into smaller parts, it was broken up for being a monopoly. It is monopolies that destroy free markets. Monopoly capitalism is marked by booms and busts.

I also disagree that free markets don’t keep costs down. They will do that–if the market is truly free. Right now, the health “care” business (more accurately the “health denial industry”) is controlled by two major groups: a handful of insurance companies that make fortunes by denying healthcare, and the AMA, a union that effectually limits the number of physicians available in the market. With limits on where you can get insurance and who provides actual care, there is no free market at all.

But “economic analyst” (I have other descriptions for him) Ed Yardeni provides a total non-solution. Making health care MORE expensive as he proposes and limiting access to health care will result in higher costs (as people put off getting care and end up in far more costly emergency rooms), more illness, less work productivity due to chronic and acute illnesses not receiving treatment, and both more deaths and shorter life spans. One wonders just how much Mr. Yardeni is getting paid by the health denial industry.

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