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The near credit-freeze that came to a head in September of 2008 meant that even in the ensuing recovery, managers at American companies would be hesitant to spend their companies’ cash reserves. $838 billion for S & P’s 500 Index in March, 2010, was up 26% from March, 2009. Accordingly, managers have been hesitant to hire. From late 2007 to late 2009, payroll employment dropped by nearly 8.4 million by July, 2010; only 11% of the lost jobs were regained. Robert Gordon, an economist at Northwestern University, points to the shift in executive compensation more in the direction of stock options. This arrangement gives managers more incentive to cut costs more in recessions and hold off in hiring in recoveries so that profits might surge first. However, one could point to the mandatory delay stipulated in some executive’s options to buy stock as giving them an incentive to look to the longer term.  Lynn Reaser, another economist, points to the lack of available external credit even more than a year after the financial crisis of 2008. She argues that managers conserved cash because they couldn’t rely on outside financing. However, firms like Apple, Yahoo, and Google are debtless and doing very well, so I would question the premise that outside credit is something to be desired.  Managers betting on leverage typically allow their irrational exuberance to distort their debt-to-assets and debt-to-profit benchmarks. If managers have become more averse to debt, maintaining higher cash reserves is not a bad thing, even when little interest is made on the cash. Once the new level is achieved, then only replenishments would be needed, so the diminishment of a firm’s investing in equipment or new hires would be temporary—to build the reserves and then to keep them stocked.  Drawing on their firm’s cash reserves rather than asking a bank for a loan or selling bonds proffers more freedom and self-reliance—qualities that are valuable even though they are difficult to quantify.  So we might view the recovery from the financial crisis of 2008 as a systemic correction in which managers were weened off their reliance (i.e., addition) on debt. Of course, the key lies in holding to the correction rather than falling off the wagon. Perhaps there should be an AA for debt-ridden businesses.

Source: Robert J. Samuelson, “The Big Hiring-Freeze,” Newsweek (August 2, 2010), p. 26.

He who has the gold makes the rules.  I suspect this is the operating mantra at Goldman Sachs even after the bank’s near-death experience (when Solomon Bros stock was taking a hit, Blankfein knew his bank could be next).  As it turns out, the bank was involved in enabling Greece to stealthily spend beyond its means. According to The New York Times, in 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means. Additionally, in late November, 2009— three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting. The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

Lest it be forgotten, half of Goldman Sach’s 2009 revenues came from trades on its own books—even as the bank had become a bank holding company and thus supposedly more not less risk averse.  In general terms, my concern is that the bankers at Goldman might be overly in love with leverage and thus be blind to the risks.  Were this contagion limited to Goldman Sachs, it would be a question of whether the bank is too big to fail; that the bank has actively enabled one of the EU’s states to secretly take on more debt suggests that the systemic risk that is involved is political as well as economic.

According to The New York Times, “bankers enabled Greece and other governments to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.”  This is a condition that American and European citizens have allowed to happen; the market for sovereign debt (and the enabling banks) could be better regulated. Indeed, the government of Iceland floundered economically and politically due to its holdings in valueless subprime mortgage derivative securities; its perilous fiscal condition prompted it to apply to the EU to become a state. Enlargement itself was flagged in the EU as entailing risks for the union. So Wall Street banks whose managers believe in debt and minimizing or avoiding market regulation present the world with not just economic systemic risk, but added political risk as well. That is to say, Wall Street can reach across the Atlantic, with European governments hanging in the balance. To push for banking deregulation in the U.S. can entail political risks abroad. In other words, banking regulation can be viewed as a social responsibility and a matter of good foreign policy.

Even though they had contributed to political instability in Europe, Goldman Sachs managers received near record bonuses in 2010. The payouts were more than a sufficient incentive for the economic alcoholism to carry on in abject denial.  "We're not at fault! We're just market makers." The problem here is that the alcoholic has the gold, and thus can make (or at the very least dance around) the rules.  As Richard Durbin of the U.S. Senate said in 2010 after he tried to allow bankruptcy judges to be able to modify home mortgages, the banking lobby owns Congress. The amazing point here is: the lobby could still call the shots in Congress even in the wake of the industry's sordid role in the financial crisis of 2008. This ought to be a red flag for anyone who values the republic as a form of government in the U.S.

Ultimately, it is the American people who are to blame—that's right, you and me—because too many of us are sufficiently credulous to elect and re-elect representatives who cave in to the banking lobby’s pressure.  There are too many “professional” pols seeking to perpetuate themselves; there is hardly a citizen statesman left serving as a matter of duty rather than power and vocation.  We have stood by and let the banks too big to fail get even bigger (and thus more powerful over our governments). We have not put sufficient pressure on our representatives in Congress to remove the too big to fail problem.  It is all too easy to point our fingers at the managers of Goldman Sachs, especially on the bank’s role in the Greek debt problem, but it is ultimately ourselves who are responsible for enabling the elephant in our living room.  Now that that elephant is breaking furnature in other houses, perhaps we might find the time to get our own house in order.  As the Germans would say, alles ist nicht in Ordlung.  We continue to think and act otherwise. Crucially, this is to our own peril.  In other words, denial is not a viable survival mechanism, even if it is more comfortable.

Source: http://www.nytimes.com/2010/02/14/business/global/14debt.html?hp