The Debate to Come over Wall Street, Autos, and Everything Else: Cyclical or Structural?

First prediction for 2009: A widening gap between the public’s view of the bailouts of Wall Street and Detroit, and the views of the direct beneficiaries. The public believes the bailouts will permanently change these industries, but industry insiders don’t really want to change.

Exhibit one is Goldman Sach’s CEO Lloyd Blankfein, who says the firm’s business strategy doesn’t need to change.

What? Goldman got $10 billion of taxpayer money precisely because it and other big banks were so over-leveraged they threatened the whole financial system. I can understand why Blankfein doesn’t want to change. He took home $54 million last year. (He has foregone a bonus this year and is taking home a piddling $600,000.) But the public expects real reform for its $10 billion at Goldman and tens of billions more in other major banks.

Blankfein isn’t alone. I’ve heard the same thing from CEOs and directors all over the Street. They see the problem as cyclical, not structural. “The economy stinks,” they tell me, “but it’ll turn around in 18 months, and then we’re back to the same business.”

Or take the Big Three. They’ve agreed to become far more fuel efficient, as a condition for their bailout. But they promised this before — during the oil crisis of the 1970s, when Congress threatened higher fuel-economy standards. But after the crisis passed, they never delivered. Why? Because their biggest profits were in gas guzzlers that consumers wanted to buy as soon as the first oil crisis was over.

Will history repeat itself? Now that gas prices are half what they were six months ago, consumers who can afford it are suddenly less interested in fuel efficiency. They’re buying fewer hybrids and showing renewed interest in SUVs. So why should we think Detroit will revolutionize itself?

I’m not so cynical as to accuse anyone of bad faith. It’s just that both Wall Street and Detroit earned big bucks from their old strategies, before the bottom fell out of the economy. So it’s natural they’d view the bailouts as ways to hold on until the economy rebounds. And it’s clear they see their problem as cyclical, not structural.

Right now, Wall Street and Detroit are willing to say whatever they need to say to keep the taxpayer money coming. But when the economy begins turning up, my betting is that their Washington lobbyists will push back hard against any major restructurings the government wants to impose on them. New regulations of Wall Street will be watered down and circumvented; new requirements on the Big Three for green technologies will be resisted.

Yet the bailouts have been sold to the public as means toward fundamental change in finance and autos. If the bailouts are to do what they’re supposed to – stop Wall Street from wild risk-taking with piles of borrowed money, and push the auto industry into making fundamentally new products that conserve energy — Washington will not only have to set strict standards now and in the months ahead when the bailout money flows, but also hang tough when the economy begins to revive.

The emerging debate over Wall Street’s and the Big Three’s ongoing obligations to reform themselves is but one part of a much larger national debate we’ll be entering upon in 2009 and beyond — whether the economic crisis we’re experiencing is basically cyclical (in which case, nothing really needs to change over the long term, after the economy gets back on track) or structural (in which case, many aspects of our economy and society will needs to change permanently).


Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

3 Responses to "The Debate to Come over Wall Street, Autos, and Everything Else: Cyclical or Structural?"

  1. Guest   December 27, 2008 at 12:18 pm

    I agree with this analysis. The bailout is a take-the-money-and-run scenario. In two years, people will forget what it was all about except they still will not have recovered their losses in house, 401K investments. However, the very large, well-heeled will continue to do very well. I think the timing will align perfectly with the 2010 elections and legislators will “sell” themselves to get campaign funding.

  2. Connski   December 27, 2008 at 1:31 pm

    Over the past eighteen months my readings of Paul Krugman in the New York Times and of Nouriel Roubini and other writers at the RGE Monitor have alerted me to the sea change brewing in the US and global economy. Both sources reported repeatedly on the dangers of a credit crisis stemming in part from the US housing oversupply. Of course that kind of news concerned me as an architect. Indeed my profession has been in the teeth of the financing gale: the AIA archtects’ billing index, an advance indicator of construction activity, has plunged over the past year. Early this year I had the feeling, from research (not analysis for which I have neither the time nor the tools), that the economy’s structural problems would obviate a return to the status quo ante for investments. At times, when expressing my concern to investment professionals, what I’ve believed is my realism has been reflected back as pessimism. Now, with fallen investment houses, scandal and the impending bankruptcy/federal rescue of GM, I feel my realism has been real. A well known investment advisor confirms as follows.Below is a quote from Pimco’s latest newsletter:My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5,000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well. One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks, but that’s a story for another Investment Outlook.William H. GrossManaging DirectorNow it seems to me that structural problems; overleveraging and vague valuation of derivatives caused both the bubble and its attendant business failures. The bank bailouts have neither stemmed the fall in housing prices nor recapitalized the banks enough to stimulate lending. What then, will boost the economy to the status quo ante, where the Fed can dampen a “normal” business cycle with monetary policy?

  3. Guest   December 27, 2008 at 5:58 pm

    Great comment by Reich. Agree with Connski too. The first thing to do is reject the second $350B of TARP. The first half was not used as promised (even if it’s somehow legally within bounds) so faith is broken: reject the rest, then move on.Instead of TARP funds for GMAC, a special bill can be passed. We should support the auto industry, while requiring deep changes. (By the way, I don’t support “green” restrictions on them unless Toyota, Honda etc. have the same or stronger restrictions.)We know these banks will cheat like hell. They have abused trust and the open checkbook stops here. Let them fall.