Two cheers for Goldman Sachs
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.