Recently, the Obama administration has changed its tune and decided to limit executive pay for the Wall Street firms and banks that have taken TARP money.  Although many of the banks have already paid back most of the tax payer bailout money, the sheer amount of money they are planning to hand out this year is considered a gross injustice by most observers.  For instance, Goldman Sachs has set aside over $20 billion dollars in bonus money.  Morgan Stanley handed out $5 billion last quarter.  Apparently, Mr. Obama initially tried to play it soft with Wall Street.  However, since they refuse to do the right thing, everybody is demanding action.

The Wall Street culture is not only built on greed, but it is also built on not having any skin in the game.  In essence, they took enormous risks with money that was not theirs.  After they caused the financial meltdown in 2008 and took enormous sums of taxpayer money, the banks had an opportunity to do right by the American taxpayer.  Instead, they chose to hand out more bonuses than in the years before the current recession.

President Obama claims that he has had enough.  Between the Federal Reserve, Congress, and administration officials, Wall Street is feeling the pressure.  Given an opportunity to clean up their own mess, Wall Street chose to thumb their noses at the American people.  Now they will be dragged into reform kicking and screaming.

The Wall Street culture will not change overnight.  More than likely, they will never change.  No matter how much regulation we impose or how much we beg and plead, Wall Street will continue with business as usual until we make them comply.  It seems like the Obama administration is finally growing a spine.  In terms of real value, stopping Wall Street from handing out bonuses does nothing.  However, it sends out a significant message that the American people are not going to take it anymore.

The crisis that almost brought about the fall of civilization as we know was started by unscrupulous Wall Street bankers and brokers who knew that any risk they incurred would be passed on to somebody else.  After the federal government stepped in and prevented a financial catastrophe, many observers believed that a new, sobered Wall Street would emerge.  They were wrong.  The financial sector is averse to changing their risky, yet profitable, behavior.

Only a few months removed from the abyss, Wall Street has returned to business as usual.  Congress passed weak regulations and banks made nominal changes.  Yet, pay scales have almost returned to 2008 levels on the heels of substantial stock market gains.  As the money again flows into coffers bolstered by billions of taxpayer dollars, it becomes ever harder to institute substantive changes.  Regulating executive pay, the derivatives markets, and forcing banks to carry more leverage are still no-starters in Congress.  Many economists believe that a larger crisis looms on the horizon because bankers are playing recklessly; only this time they are gambling with billions of taxpayer dollars.

Even bankers are surprised at the lack of oversight from the federal government.  Many believed that not only punitive regulations, in the form of executive salary caps, would be issued, but they also insist that without adequate regulations there will be no incentive for Wall Street to change.  Because Wall Street thrives off aggression and competition, just because the climate changes does not mean that the culture has changed.  Arguably, it has become worse.

An even more virulent form of arrogance has crept into the banking sector.  After the government bailed out the bankers, many of them no longer believe that the government will let their institutions fail.  It is the equivalent of going to a casino and having someone with unlimited funds back you.  By the way, this backer doesn’t collect whether you win or lose.  With such lucrative financial gains at stake, and a pool of money to finance risky endeavors, why would anyone be concerned about anything other than their own bottom line?  This problem is much more serious than punishing some bankers for their colossal mismanagement of the economy.  Without government intervention and regulation, we will be digging ourselves out of a depression soon rather than later.

Americans have really been hurt by the recession.  Many people have watched their debt skyrocket as their mortgages rose, 401ks dwindled, and savings evaporated.  After an age of plenty, many families have come to realize that responsible financial planning is the only way to avoid being caught in the dregs of another recession.  Unfortunately, it is much harder to get into debt than it is to pull yourself out of it.  For people looking to get a handle on their credit debt and make it manageable, there are credit counseling services that are willing to assist you in that process.

Consolidation involves taking all of your debt and combining it into one smaller payment that will be disbursed to all of your creditors.  These smaller payments not only help many families climb out of debt, but they also help these same families save extra money each month.  If you are behind on your mortgage payments, swamped by credit card bills, or are just having trouble making ends meet, it is well worth your time to seek out qualified debt counseling.

As many of us know, credit card debt can have an extremely detrimental effect on your ability to obtain financing.  A low credit rating is like an albatross.  You are unable to get loans or more credit until you have your debt under control and your credit score is raised.  With piling debt, family money management is often impossible, and many families stay mired in debt indefinitely.  The counselors at Consolidated Credit Counseling Services offer homeowner counseling, debt management counseling, and personal finance consultations, in addition to credit counseling.  Specializing in helping families, especially military families, they even offer free debt consultation.  In these difficult times, you it is worth your time and money to seek out solid debt counseling in order to ensure that you have the means to move forward from a financially stable position.

Boo hoo!  AIG paid their top executives $160 million of our hard earned tax dollars and we are supposed to be up in arms about it.  Maybe you are genuinely pissed about this issue; and maybe it’s a way to rile up the Joes to get a free drink at the local pub.  Either way, I am quite bored by the grandstanding from politicians and average Joes alike.  Of course the executives took their bonuses and yes, they should keep them.  When these individuals created the financial instruments that led to our doom, politicians and regulators were asleep at the wheel and “hard-working” tax payers were flush with credit and spending themselves into debt.  Now, when the toothpaste is out of the tube, everybody wants to catch feelings.

Besides some trite sense of justice, and satisfying a uniquely American sense of vengeance, what will making these executives forgo their bonuses accomplish?  The bonuses amount to less than 1% of the total bailout money we have already given to AIG.  Wanting to punish these executives is the equivalent of wanting to kill the Frankenstein monster when Dr. Frankenstein is the one who got us into this mess with his unholy experiments.  Who are the Dr. Frankensteins of this crisis?  I am glad you asked.

Besides Tim Geithner, who I have discussed before, Obama’s other top economic adviser is Lawrence Summers.  Larry Summers was the genius that pushed for deregulation of the credit derivatives markets, which is the underlying cause behind our economic collapse in general and the need to bailout AIG in particular.  This excellent article in The Nation details the economic devastation Summers has left in his wake.  Besides Geithner and Summers, Mr. Obama’s economic team is full of Wall Street and banking insiders and lobbyists.

Many people turned to Mr. Obama because they believed that he was genuine about fixing what is wrong with America.  In my private conversations, I have always asserted that he was more of a consensus builder than a revolutionary.  He is the embodiment of the Blackberry model of new American business.  He hired old hands to run the economy and threw in some tech savvy window dressing.  So, be mad at the AIG executives, and Wall Street analysts, and all the other financiers that have been gaming the system.  But mostly, be mad at yourself.  In our desperation to get out of the desert, instead of electing Moses, we elected the guy that created the golden calf.  Hey, at least it was a helluva party…

The government has sunk (understatement alert) a lot of money thus far trying to move the country out of this recession.  As of this writing, their attempts have proven futile.  “Why”, you may wonder, “have we spent all of this money and it has not helped?”  Comparing our economy to a human body accurately illustrates the problem.  Right now, our economy’s arteries are severely blocked.  The government keeps giving us blood transfusions, but this does nothing to eliminate the blockage.  The blood is diverted to cells and organs thirsting for blood, but this only staves off the inevitable.  In essence, this describes the credit crunch.

A credit crunch is a decrease in the availability of loans, credit, and the tightening of conditions needed to obtain a loan from a lending institution.  When the housing bubble finally burst, the largest investment banks, insurance companies, and savings and loans, were left with billions of dollars in toxic debt.  The effect on global financial markets was so severe that credit flow ceased.  In in order to slow the precipitous drop in stock prices, Henry Paulson proposed the TARP (Troubled Assets Relief Program) on September 18, 2008.

Unfortunately, this bill was defeated and the stock market plummeted.  Congress was forced to amend many parts of the original proposal in order to insure passage on October 3rd.  Although the TARP money was supposed to stimulate the economy by providing capital so that banks could begin lending again, it was unsuccessful.  Instead, banks diverted the money and used it to prop up their bottom lines.

The credit crunch affected a broad swath of the economy, including the retail, manufacturing, automotive, and real estate industries.  Since consumers and businesses could not borrow money, consumer spending dried up, which in turn led to a sharp decline in business profits.  Thus, businesses cut jobs, which led to increased unemployment and further decreases in consumer confidence and spending.  If the banks had lent the money when they were supposed to, it is a very real possibility that the recession would not be this deep.

Now, the Obama administration and economists are debating the best way to inject the large amount of capital needed to end the credit crunch.  Geithner wants to inject capital into the markets by encouraging private buyers to purchase the bad bank assets.  In addition, Geithner is also seeking to enact measures that would encourage consumer and small business lending.  Unfortunately, no one knows if even these measures will ease the credit crunch.  However, something has gotta give, because the consequences of a stifled credit flow could be fatal for our economy.

Now that a weak, and underfunded stimulus plan has been voted on by the Senate and is on its way to conference, let us turn our attention to something a bit more important: the looming collapse of our financial sector.  In the midst of the political squabbling over the stimulus plan, we missed the fact that the $750 billion bank bailout passed under the Bush administration, also known as TARP, has failed to shore up our financial markets.  Mr. Obama’s Treasury Secretary, Tim Geithner, unveiled his $2.5 trillion dollar plan to buy up toxic assets from failing banks.  Unfortunately, Wall Street was underwhelmed by Mr. Geithner’s proposal and stocks fell by 5% yesterday.  In addition to rapid deflation, these toxic assets are the most significant threat to the very foundation of our economy.  Mr. Geithner wants taxpayers to spend trillions of dollars on essentially worthless bank assets.

What are the alternatives?  If the government does nothing, and allows large banks such as Citigroup to fail, the consequences for our economy could be catastrophic.  The other alternative would essentially nationalize the banking system and place the government into an unprecedented administrative role.  Unfortunately, Mr. Obama and Mr. Geithner have not been forthcoming with the details of this plan.  For instance, there is as of yet no agreed upon price for the worthless assets.

Normally, I eschew doom and gloom scenarios.  Unregulated emotions plus hyperbole clouds the decision-making process.  However, I believe that Mr. Obama’s administration has greatly underplayed the threat to financial markets.  Coupled with a failure of will on the stimulus plan, what is his prescription for solving this monumental crisis? Couching his language in equivocations does a disservice to the American public.  No one is expecting a magic bullet solution.  Yet, most Americans will weather hard times if they can see some light at the end of the tunnel.  It is time for Mr. Obama to truly level with the American people.  There is no end in sight.