Why Goldman’s Greg Smith’s Critique Is Way Too Narrow

goldman sachs muppetsIf You Took the Greed Out of Wall Street, All You’d Have Left Is Pavement: Why Greg Smith’s Critique Is Way Too Narrow

Greg Smith, a Goldman Sachs vice president, resigned his post Wednesday with a stinging public rebuke of the firm on the oped page of the New York Times — accusing it of no longer putting its clients before its own pecuniary goals.

But if Mr. Smith believes his experience at Goldman is something new, he doesn’t know history. In 1928, Goldman Sachs and Company created the Goldman Sachs Trading Corporation, which promptly went on a speculative binge, luring innocent investors along the way. In the Great Crash of 1929, Goldman’s investors lost their shirts but Goldman kept its hefty fees.

If Mr. Smith believes such disregard of investors is unique to Goldman, he doesn’t know the rest of Wall Street. In the late 1920s, National City Bank, which eventually would become Citigroup, repackaged bad Latin American debt as new securities which it then sold to investors no less gullible than Goldman Sachs’s. After the Great Crash of 1929, National City’s top executives helped themselves to the bank’s remaining assets as interest-free loans while their investors and depositors were left with pieces of paper worth a tiny fraction of what they paid for them.

The problem isn’t excessive greed. If you took the greed out of Wall Street all you’d have left is pavement. The problem is endemic abuse of power and trust. When bubbles are forming, all but the most sophisticated investors can be easily duped into thinking they’ll get rich by putting their money into the hands of brand-named investment bankers.

Moreover, finance has become so complex that investors don’t even know when they’re being taken for a ride, and so can’t possibly hold a brand-name bank responsible for their losses – or for gains that are a fraction of what they might otherwise have been.

robert reichThat’s why we have regulations. After millions of investors lost everything in 1929, the federal government stepped into the breach with the Securities Acts of 1933 and 1934 and the Banking Act of 1933, sponsored by Senator Carter Glass and Congressman Henry Steagall.

But starting in the 1970s and 1980s, Wall Street made sure these and the regulations issued under them were steadily watered down – which contributed to the junk-bond and insider trading scandals of the 1980s, the dot-com scams of the late 1990s and early 2000s, the Wall-Street enablers of Enron and other corporate looters, and the wild excesses that led to the crash of 2008.

Wall Street’s shenanigans have convinced a large portion of America that the economic game is rigged. Yet capitalism depends on trust. Without trust, people avoid even sensible economic risks. And when they think the game is rigged, they’re easy prey for political demagogues with fast tongues and dumb ideas.

Robert ReichThe Street has only itself to blame. It should have welcomed new financial regulation as a means of restoring public trust. Instead, it lobbied intensely against the new Dodd-Frank Act and refused to resurrect Glass-Steagall.

The cost of such cynicism has leached deep into America, finding expression in Tea Partiers and Occupiers and millions of others who think the Street has sold us out.

Robert Reich
Robert Reich’s Blog 

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Comments

  1. JoeWeinstein says

    Capitalism is indeed based on trust – trust in the honesty and competence of others.  Therefore, quietly, many ordinary people de facto invest what they can in enterprises and instruments which seem more trustworthy (or anyhow involve trusting fewer unknown people and institutions), if less newsworthy, than those favored by Wall Street.  That’s why real estate – and various local small businesses - are only down, not out.    

  2. go99ers says

    Well-said, JackRabbit.
    I
    agree with Robert Reich that Wall Street has abused its power and our
    trust.  But I also think they have been
    excessively greedy. The Securities Acts of 1933 and 1934 and the Banking Act of
    1933, now known to us as the Glass-Steagall act were attempts to regulate Wall
    Street, but given enough time, and people’s short memory, we forgot the lessons
    of history, and Wall Street was at it again in the 1970s and 1980s, trying to loot
    and plunder as much as they could get their hands on, finally causing the 2008
    crash.

    They
    will continue to do this unless we keep a watchful eye on them and curb their
    omnivorous appetites. By now, people know enough about Wall Street, and of
    course we don’t trust them.  They must be
    held accountable, and that greedy part of the 1% must be regulated.  If they have all the money they need to lobby
    against attempts at regulation, how can we, the people, do what the government
    won’t do?  By continuing to keep them in
    the public eye, and by voting in new people who are not bought by lobbyists,
    and getting those new people (before they too might be bought) to pass or
    restore Wall Street regulations so that they don’t tank the entire economy
    again. 

    And
    of course, get money out of politics with an amendment repealing Citizens
    United, without which money will continue to buy all branches of government

  3. jackrabbit says

    While these comments are necessary, accurate, and to the point other things need to be said.  Capitalism is a dynamic system of capital accumulation that makes a small minority very wealthy at the cost of impoverishment for the many.  At different times the system has allowed for liberal aspects in order to ameliorate attacks from the dispossessed until the adversaries could be destroyed or weakened into submission.  Now, there is no threat on a world basis so the capitalist system is seeking to devour every piece of profit on earth and accumulate it to the few.  Our system is destroying itself and will take us down with it if we, the 999%, don’t displace this system with a new system of economics that puts the human race ahead of the profits of the few and takes away their power to abuse and destroy the planet through the production of commodities that are imbecile in nature: two or three generations of i-pads and the like in a year, cars that have built in obsolescence, houses that begin to fall apart as soon as they are inhabited, a financial system that takes prisoner its customers and threatens to destroy them if they default, and so on.  Our new system will have to be some form of socialism and the institutions of capitalism, the social and political superstructure will have to be abandoned and new structures substituted that are horizontal in nature and give broad democratic power to the peoples of the world.  Hopefully such a change in the reality of the world can be accomplished non-violently if the powers that be give up their outdated capitalist system and allow the new world to develop.  If not, then the change will have to come anyway and Wall Street will be brought down by the contradictory needs of the mass of humanity to survive.

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