Rolling Stone Article -- Must Read, Must Rebut

I think this Rolling Stone piece by Matt Taibbi is a must read. It is annoyingly profane, but also lucid.

However, I do have some criticisms I wanted to share:
1) Hating the bankers doesn't recapitalize the banks and get credit flowing again. Without a decent banking sector, the rest of the economy will suffer a far worse recession than we are already having. So what's the alternative? There are no good alternatives. The bankers know this, and are using that reality to position themselves to profit from this. Taibbi is outraged by that positioning but doesn't explain what could have been done instead. (My view: it would have required the President calling out the bankers in public, taking the risk that they would choose country over personal gain. If they pulled the plug, however...)

2) There is no analysis of what would have happened had any more of the very largest financial institutions been allowed to fail like Lehman Brothers had (which was bad enough). I agree with Taibbi that their size is a problem -- that nationalizing the banks in order to split them into smaller, more financially stable entities is a better policy than the current plan -- but he doesn't address systemic risk in a way that suggests analytical objectivity.

3) I don't believe that President Obama, for example, is part of an elitist in-crowd helping to game the system. There is a conspiratorial edge to this piece that makes it more exciting, but also giving the "fatcats" more credit than they probably deserve. Outrageous bonuses and compensation aside*, the government overpaying for now-toxic assets to quietly recapitalize the banks is probably in our enlightened self-interest.

4) Seeing the Federal Reserve's true balance sheet would be most interesting, but it is not in our national security interest. Too many international investors hold dollar denominated assets and of course they would like to better analyze the risk of a US dollar devaluation that would clearly happen if the Fed couldn't borrow more dollars to cover losses and instead had to "print" new dollars. However, a panicky reaction to a worse-than-expected balance sheet could cause a crash when people holding dollar denominated assets rush to sell them, causing the price to fall, causing more people to sell them simply because they didn't want to risk holding assets in a declining market.

*Extremely high compensation IMO is a major part of the problem. The people making the risky choices did not face much in the way of personal risk when their personal wealth was in the 7 or 8 or even 9 figure range. More behavioral economics: people will treat the risk of losing $5 million differently depending on whether they have 5, 10, or $50 million to start with. Each bank had a good reason to pay their talent very well, because otherwise another bank would out-bid them for the talent. But the collective situation was that everyone had convinced themselves that they had to pay large bonuses or lose even more than that in potential profit, and so lost touch with the risk v. reward calculations for individuals compared to their firms compared to the entire system. Individuals had low risk and high returns and their choices added up to high risks to the institutions and the entire system. Had those risks paid off, everyone would win. But they didn't, and now the whole world is paying for their greed.