Forget the brouhaha the media have blown up around the head of "car czar" Steven Rattner. It doesn't bother me and shouldn't bother you.  He happens to be one of those people it's too easy to dislike on principle: (a) because he's so obviously on the make it makes one's teeth hurt, and (b) he seems to have delivered performance sufficient to substantiate his flagrant ambition. The latter will be much more irritating to many people than the former (a good portrait of Rattner, especially his rivalry at Lazard with Felix Rohatyn—they were sort of  the Nadal and Federer, respectively, of the firm—can be found in William Cohan's The Last Tycoons). But he won't be the difference, any more than the U.A.W. will.

A couple of weeks ago, The Washington Post carried a story, based on information fed to the paper by government insiders, that the reconstituted GM is expected to be so successful that the government will recoup its $50 billion investment, along with uncountable dividends, in five years. Perhaps. But has it occurred to no one that this is exactly the thinking, precisely the same investment rationale,  that underpinned Cerberus's disastrous buyout of Chrysler? It would be interesting to compare Uncle Sam's plan for GM with Cerberus's plan for Chrysler, which postulated an identical return to profitability. Can alchemical schemes to remake two large automobile companies really vary that much? Aren't the problems the same company-to-company? And are there really any steps that can be taken virtually overnight that can reverse 20 years of engineering, manufacturing and marketing stupidity?

Sure, GM will have certain advantages that are outright discriminatory (take this, June 4, from The Wall Street Journal: "On Wednesday, GM got even more help. GMAC, which funds dealers and car buyers, began issuing $3.5 billion in three-year debt backed by the federal government. This should cost GMAC about 2.2% annually. Ford Motor Credit just priced a five-year bond. It's paying 8%." Perhaps if GM could revert to its last business model, which was essentially to manufacture loans with cars inside them, the future would brighten, but I don't think that's going to happen. There keeps lighting up in my mind this extraordinary statistic: At the height of credit bubble, 20 percent of new automobiles purchased in California and Florida were financed with home equity loans. If the latter no longer exist, can the former?

As far as I'm concerned, it's time to put aside the pipe dreams and "Hamilton Project"–style blah blah blah and concentrate on the kind of economy we can have—and then to work back from there to see how that scheme of things might be attained. Let's start with where I think any reasonable person will come out as regards the dominant chords in our economy.

Our wage and cost-of-living levels will continue to make this a consumption-based economy. Nothing wrong with that, provided we consume within our means at every meaningful level of the political economy. And I define "within our means" to include a realistic likelihood of discharging our debts, public and private, individual and institutional.

We simply cannot make stuff itself in a free global economy at prices competitive with China or Brazil or Costa Rica. The U.S."goods" economy must inevitably consist in the main of the assembly, delivery, retailing and financing of stuff mainly made overseas and sold here, including complex commercial and military systems and equipment fashioned from componentry and technology developed both here and overseas, and it will function alongside a much larger economy consisting of agriculture, and personal and institutional services ranging from TV repair to health care to transportation.

O.K. That's the hand it looks like we've been dealt. What's the smartest way to play it? Isn't it basically a matter of working back from the likelihood to the fact? From there to here? A consumption-based economy requires a vigorous base of consumers. The base is a shambles today; it needs to be rebuilt psychologically and fiscally. And how is that to be done? Well, perhaps for openers, it would be nice to see public and private wholesalers-retailers of consumer-homeowner credit—the creditor class—treating ordinary people—the debtor class—with something approaching the same respect and generosity with which our government has treated them.

I accept that it's become a given that if there's any free money to be handed out by Uncle Sam, Goldman Sachs has a kind of droit de cochon that entitles it to automatic first dibs, but maybe we can find a way to squeeze a bit for the rest of us at a rate that doesn't make Dante's flame-stricken usurers grow icy with envy.

Here's one suggestion. Most average debtors' problems have to do with fixed monthly payments that comprise an interest and a principal component. Why not defer 50 percent to 75 percent of the interest component of those payments? Let the credit-card issuers and auto-loan mulchers run the deferred interest through their profit statements onto their balance sheets; we're well into the age of federally sanctioned phony accounting in which capital is what someone says it is, so that can't be a big deal. This deferral can then be amortized over time. A long time. Since monthly payments would now go mainly against principal, consumer debt levels should come down steadily, preferably accompanied by a simultaneous, judicious lowering of individual credit limits—and a million wolves will retreat over time from a million doors.

I don't think any of this can happen until we starting taking people who've met a payroll—and by that I mean a real, honest, business payroll—into government. Those are the sort of men incoming administrations used to seek out.

And here's the sort of people to whom we shouldn't entrust a scintilla of our destiny. In the current New Republic , there's a passel of blather under the byline Amitai Etzioni (a name achingly familiar to all connoisseurs of crypto-academic bien-pensant bullbleep) that sets forth a plan by which America will transform itself into a nation of savers. At the heart of this plan will be a series of "megalogues" by which we will talk our problems out of existence.

In laying out the process, the author puts forth what is perhaps the single most witless and stupid proposition I can recall. "Public intellectuals, pundits, and politicians," he writes, "are those best-positioned to focus a megalogue on this subject and, above all, to set the proper scope for the discussion."

Ah yes: turn our future over to a chatterati of public intellectuals who are self-serving nostrum peddlers, of pundits who are usually wrong, and of politicians who are corrupt.

As Ronald Reagan liked to say: "Where did we find such men?'

Every day now, as this sorry story plays out, I find myself wondering whether Obama isn’t a bigger Wall Street con than Madoff. If so, I admit I was fooled. I suppose I should have paid closer attention to the extraordinary fact that the Street was pouring tens of millions into a campaign that on the face of it was likely to be antithetical to the interests of hedge funds, private equity and banks too stupid to survive. I suppose I was somewhat blinded by the conviction that the other candidate was, like death, the unacceptable alternative, but that’s no excuse.

Six months ago, the banks needed TARP to survive. Now, claiming that the program was forced on them, a number of them wish to pay it back in order to get out from under restrictions that they claim are onerous. I can’t argue that the proposed caps on compensation make sense because they don’t. In that area, it’s up to stockholders to protect themselves. But they will also argue that the equity stakes, represented by stock purchase warrants that were packaged into the infusions of fresh capital that TARP and other programs supplied, are an unfair and untoward exaction on a bunch of grand fellows who have suffered enough for a night on the town. That’s a load of crap. There should have been a one-size-fits-all formula: 1 percent of pro forma equity for every $1 billion of TARP, etc.

The people charged with upholding the taxpayers’ side of these bargains with the devil have let us down terribly—so terribly that a rational observer can only conclude that this was the intent from the outset. As I wrote years ago in an unpublished piece for The Times, “On Wall Street, there are no hearts of gold: only calves.”

ANYWAY, here we are now, with our great, silver-tongued president, the guy with the cute family and the fearsome articulateness, clearly having fronted for powers that from the outset conspired to sell the average taxpayer, the average employee, the average credit-card holder, right down the Potomac. The word “jobs” seemed to have disappeared from central political discourse. Why? I would think that an administration that really gives a merry screw about the general state of the nation might have something to say about employment. Why is no one upfront demanding serious study of such questions as, how are we going to put people back to work? How are we going to put our college graduates to work? Can we find work for them? If so, of what kind? We are continually told that the mark of a great nation is an educated workforce, that the key to our collective future will be massive investment in education, and yet here are 2.2 million members of the class of ’09 fanning out across the landscape looking for work and not finding it. What are the baby boomers going to live on when they retire, if they retire, now that their retirement mites have been decimated? And if they don’t, are we going to see the same “choke effect” in jobs that we were told affected the credit markets?

Does no one capable of effective protest have a shred of insight into the financial prestidigitation that is the Great Geithner Giveaway? Has no one grasped the shift in Fed-Treasury thinking that the best way to rebuild banks’ balance sheets isn’t by injecting capital, or dealing with toxic assets (which seem, as I wrote recently in this space, no longer to be a problem, to judge from the media’s silence on the matter), but by putting in place a “carry trade” (borrow from Uncle Sam at less then 1 percent, lend that money back to Uncle Sam at 3 percent, pocket the difference: adds up nicely when a trillion dollars is involved) that the Street, in its wildest fantasies of free money, could never have contemplated.

Now the Street must be thinking, and—take it from me—they are, “If I can get away with this, what can’t I get away with?” Let us hope this thinking is delusional, but if it should prove not so, that proof will be in a pudding baked by the Obama administration.

IN A WAY, I’m not surprised. You can’t say I didn’t warn you in one respect. From what I read, it appears that the administration is getting loads of useful advice from “the Hamilton Project.” These are people who see life in macro and conceptual terms. They have nothing useful to say or offer with respect to the situation of someone losing his house or her job. Nothing. Why should they? Life, as generally understood in these circles, barely grazes the hors d’oeuvre tray.

I know these people. The curse and blessing of my life was to grow up in circumstances where anyone who might be useful to my younger ambitions or gratification was seldom further than two phone calls away. Life was all about being “inside,” a truth whose hard lesson has been ground into me evermore as, thanks to this column and other follies, I have taken myself “outside.” In Washington today, no one seems to be looking out for the “outside” interests.

Anyway, as I was saying, look where we are now. It appears that a perfect storm of folly in finance has mutated into a perfect storm of fatuity in governance. It has always seemed to me a truth self-evident that you get the government you are willing to pay for. We pay our senators and congresspeople, stewards of a multitrillion-dollar budget, roughly 60 percent of the magic $250,000 that all hands agree is the threshold income level for economic respectability. What we pay a senator would be sniffed at by a third-line bond trader, one of those prognathous steakhouse types who makes millions by following a computer’s instructions. No wonder our elected representatives’ hands are out when K Street comes calling. No wonder we get the mediocrities, crooks and fools we have.

In the U.K., in a scandal that has gotten surprisingly little traction in this country, MPs have been caught fiddling their reimbursable expenses as a way of topping up inadequate incomes. Even the British right-wing press admits that MPs are underpaid compared to other professions. Wall Street argues that ample—we in the street might say “bloated”—compensation packages are essential to getting and keeping the best talent. Why can’t the same argument be made on behalf of Congress? Or is the money better under the table? I fear to ask.

editorial@observer.com

First, the background. Between 2003 and 2007, the largest firms in global finance engaged in a protracted display of recklessness and irresponsibility, of morally hazardous behavior, not seen since the South Sea Bubble and the heyday of John Law, and probably never by institutions with such standing, dignity and presumptive responsibility—and systemic centrality.

Inevitably, when collapse and reversion came, We the Taxpayers were called upon—via our elective and appointed fiscal and monetary authorities—to fix a catastrophe that we had little or no part in causing. And what form has this “fix” taken? Upward of $2 trillion of bailout and stimulus that the Treasury as had to borrow to inject into the banking system and the general economy.

Now we get to the fun part. (I’m italicizing to emphasize the main point.)

It has consisted of the guardians—mainly the Federal Reserve and the Treasury—of the Public Capital—namely, the Full Faith and Credit of the U.S. Taxpayer—lavishing on Wall Street, the villain in the piece, not punishment, not penalty, but a bonanza on a scale probably never seen since the first coinage was struck millennia ago in ancient Phoenicia. In terms of the public interest being fairly served, it is as great a financial scandal as there ever was! And done by the very people we elect and appoint to watch out for us!

Now, let’s turn to the relevant scripture. First, a couple of snippets from The New York Times.

Here’s Edmund L. Andrews reporting on the “stress tests” (May 7): “… regulators gave the banks a break by letting them bolster their capital with unusually strong first-quarter profits …”

Actually, “letting” isn’t really the right word. It implies an option where there is none. Profits are profits and, to the extent not paid out as dividends, increase equity capital, period. Indeed, adding these profits to equity may be about the only honest accounting we’ve seen from the banks recently. And “unusually strong” is the understatement of 10 lifetimes, as we shall see, because it is how and why those “unusually” strong banking profits came to be that is the crux of the scandal.

Next, let’s go to a second Times text, this from my friend Gretchen Morgenson last Saturday, May 9: “Cheap money from government programs translates to delightfully low expenses and the potential for profits where there might otherwise be only losses.”

Gretchen is over the plate in her analysis (with a nice whiff of snark in “delightfully), but it’s a softball she’s serving up when a beanball would be more like it—if the general reader is to be made to grasp how really dreadful, how mind-bendingly inequitable, the Great Geithner Giveaway is. K Street must be wetting its collective bloomers.

For clarity, let’s look to a pair of items from Bloomberg.com. I’ve italicized the especially important points.

First, from Caroline Baum (May 5):

“Dealers can buy, say, a 10-year Treasury note yielding more than 3 percent and finance it (borrow against the securities) [at the Fed] at the overnight repo rate of 0.2 percent.

“No wonder some broker-dealers are applying to the New York Fed to become a primary dealer. At least one dropout is looking for readmission.

“Not only is it a good time to be a primary dealer, it’s a great time to be a bank—assuming you aren’t one already. The Fed is practically giving money away to almost anyone that asks.

“Even if private credit demand is sluggish—it always is in recession—Uncle Sam has a huge appetite. Banks can borrow from the Fed at 0 percent to 25 basis points, turn around and “lend” to Uncle Sam, with the difference going to the bottom line.”

Just in case you don’t grasp the significance of that, let me rephrase: Uncle Sam is handing out virtually free money—via the Fed and the F.D.I.C. guarantee pool—to Goldman Sachs, etc., which those firms are then lending back to Uncle Sam—via Treasury securities issued to finance the bailout, etc.—and pocketing the spread, hence “unusually strong first-quarter profits!”

Private firms borrowing from the Fed/F.D.I.C. to re-lend to the Treasury at a markup? Is that the way the system’s supposed to work? I don’t think so.

But for the facts in the case, let’s turn to Bloomberg.com’s Christine Harper and her May 6 dissection of Goldman Sachs’ footings:

“Trading and principal investments accounted for 61 percent of the bank’s revenue in the first quarter of 2009, up from 59 percent in the first quarter of 2008. Net interest income, the difference between the interest the firm pays and what it charges, doubled from the first quarter of 2008 as the company’s interest expense dropped 76 percent, the filing showed.

“Banks such as Goldman Sachs are benefiting from lower borrowing costs after the Federal Deposit Insurance Corp. in October started guaranteeing bank debt issues that mature within three years. Goldman Sachs has issued about $22 billion of debt that’s guaranteed by the FDIC, according to data compiled by Bloomberg.

“Today’s filing showed the weighted average interest rate paid by Goldman Sachs on its unsecured short-term borrowings dropped to 2.14 percent in March from 3.37 percent in November.”

Nice work if you can get it, and Goldman Sachs apparently can.

Then we need to stir into the pot the fact that the competitive pressures that would normally work to lower the Treasury’s (that is, We the Taxpayers’) borrowing costs have been significantly reduced by the disappearance and decimation of Bear Stearns, Merrill Lynch and Lehman Brothers, and the virtual incapacitation of Citigroup. Finally, the circumstantial evidence is mighty powerful that the Goldmans, etc., are using these “free money” profits to repay the TARP loans they scrambled to take down last fall, and thereby disengage themselves from any meaningful federal oversight.

The questions raised are obvious:

Why doesn’t the Fed lend directly to the Treasury, and save We the Taxpayers the spread cashed by Goldman et al.?

Why just hand the banks these profits without reserving a ratable claim on them—in the form of equity, an excess-profits tax, an interest premium—for We the Taxpayers? Are we not entitled to a piece of the action on terms as good as St. Buffett? It’s our money.

And, with apologies to Pete Seeger, where have all the toxic assets gone?

I hope by now you get my point. This stinks. Stinks!

The callow, squeaky-voiced, miserable sloganeers in charge of effectuating and explaining away this scandal, Messrs. Bernanke and Geithner, like to talk of “transparency.” But in the World According to Goldman Sachs, transparency is a relative term. The philosophy that governed the Clinton administration—namely that if everyone’s lying, no one is—seems merely to have been modified to suit the times. 

Which brings me to the final question.

Does the president understand any of this?

If Mr.Obama doesn’t, that’s bad. If he does, that’s worse.

editorial@observer.com

“Every report on Lehman that I have recently read is saying that the real toxicity on the Lehman balance sheet is in its commercial real estate holdings and investments. Of no other troubled firm does this seem to be true, only Lehman, which may also explain the Paulson team’s no-bailout call.

“So what led Fuld and his firm into this particular quagmire? I have a one word answer: infatuation. My guess is that Fuld became a fool for love. Not in the conventional sense, but in the way that older men in high places lose perspective when some brilliant boy—the name of Mark Walsh, the company’s former commercial real estate chief, is frequently mentioned—dazzles the emperor with magical, alchemical, odds-defying feats of illusion and financial prestidigitation and is given his head.

“It’s an old story, of which the moral is: Put not your trust in princes. Or Maguses. Good advice. Always.”

It’s nice to see a big newspaper get behind one’s idea. I have no way of knowing whether the Times writer ever read my article (acknowledging other journalists isn’t The Times’ style). Anyway, I have larger, sadder matters to ponder—twice over.

THE OLDEST AMONG my friends, Albert H. Gordon, died last Friday at the age of 107. He was easily one of the half-dozen most extraordinary, original people I have met in my life, one whose passing leaves a giant hole gaping in the lives of those who were close to him. As I write, I can look up to a bulletin board on which is a picture of himself that Al sent me, taken perhaps a dozen years ago on the tee at his beloved Fishers Island links, as always about to neither ask nor give any quarter from the golfing gods.

I first heard of Al as a verb, when one of my partners at Lehman Brothers sighed and announced that, with regard to a juicy piece of prospective business, he had been “Al Gordoned.” That is to say: outflanked, outrun and outbid by the man who of all those who competed against us more or less fairly—a category that excludes some of the greatest names of that bygone era—was consistently the toughest and most obdurate down the stretch. He was a rare mixture of flint and sunshine: nail-tough and yet a complete optimist about this country and its prospects, and an unmitigated reveler in the pleasures of investing.

The Times obituary omitted a bit about Al that I think he would have liked to have had noted. He was a world-class bibliophile whose uncommon generosity delivered the only surviving copy of John Eliot’s 1663 “Indian Bible” to his alma mater, Roxbury Latin School, and helped underwrite the acquisition of the manuscript of Trollope’s The Way We Live Now by the Morgan Library and Museum. Some said he was Harvard’s largest individual donor, and he was also a notable supporter of Winchester College in England, where he sent his sons to receive an education he no longer felt to be available in this country. Finally, it is fair to say that without Al’s patronage, encouragement and support, Heywood Hill, arguably the last century’s greatest bookshop, would not have prospered as long as it has.

It’s perhaps agreeably symmetrical that Al has quit a scene that pretty much resembles the one he was thrust into in 1930, when his friends in the Webster family summoned him to help salvage Kidder Peabody, in which they had a large imperiled investment. Then, as now, men of probity and intelligence found themselves picking their way among the ruins, and picking up the pieces, of a financial system wrecked by a Wall Street on which, as Al notably told me in 1987, for a piece I was writing for The Nation, “young men thought they could do anything.”

AL GORDON got better than a century on the ground. Richard Hambro was granted a mere 62 years when he left us on April 25, not enough by half, but the gap his departure leaves in the lives of his friends is no less empty, no less bleak.

I hadn’t seen Ric for some time. Friendships—especially those with an ocean in the middle—are like continental plates, borne apart as time goes on by age, illness, stasis and all the other forces for separation that soul and flesh are heir to. But there was a time …

When I think of Ric Hambro, I think of London in the late ’60s, and languid June lunches with pretty girls at the Mirabelle, with the roof rolled back, flowers everywhere, cigars and a brandy, and a kind of overall elegance that I hear has been all but ruined by Russians with money, whose devastation of the more civilizing aspects of Western life must cause the Great Khan to spin enviously in his grave. I see Annabel’s as it then was, a place like none other on earth, and I recall sharing a good laugh with Ric as the City banker I brought there one evening knocked back the crucial extra whisky that inspires a chap to cut in on J. Paul Getty. And I see Ric at Wilton’s, the Jermyn Street restaurant he and his family owned, with a menu card whose prices cause even dukes to go pale, enjoying himself to the fullest without the slightest hint of proprietary arrogance. I can hear that laugh and see that smile, and that sly twinkle.

That was the amazing thing about Ric Hambro. He was blessed with charm, looks, athleticism and pedigree to a degree that might be thought unfair. He was elegant to the bone, with a wry good humor. These are qualities, an embarras de richesse, if you will, that have spoiled many a man, that have produced many a clubland shit. But if I had a fiver for every time I heard someone—heard myself—say “Ric Hambro is the nicest man I have ever known,” I would not be searching for tonight’s main course in the dumpster out back. He laughed, and we all laughed with him.

Like many people my age, I got drunk on A. E. Housman’s poetry while still a boy, and that intoxication has stayed with me even into the sere, the yellow leaf. Musing now on the passing of these two friends, with whom I associate a kind of life that seems far, far better than the one we live now, these verses return:

That is the land of lost content,

I see it shining plain;

The happy highways where I went;

And cannot come again.

It doesn’t take much imagination to visualize that ribbon of road, perhaps paved with yellow brick, winding away into the future until it crests just below the setting sun and then slips down and away into the twilit distance. It’s not hard for the mind’s eye to conjure up two doughty figures perched on that last hilltop, looking back perhaps to wave, and then turning away and disappearing. 

I don’t know if Ric Hambro and Al Gordon ever met. Probably not. Perhaps, though, they’ll get to spend some time in each other’s company in the afterlife. That would be nice. These two great guys deserve each other. I like to think that we deserved them, too. Barely.

editorial@observer.com

I brooded on this a good part of the day. The Times piece reported that average (not median, average) pay at Goldman Sachs shaped up at $569,220. Since the political and economic discourse of recent months has fixated on $250,000 as the line of demarcation between well-off and not, I couldn’t help wondering what halving the Goldman average might extrapolate to in terms of people kept on rather than laid off, and other questions of that sort. What might we be talking about? A couple of thousand extra pairs of hands spending money in this city’s economy and elsewhere? Five thousand? You can see how, by Sunday night, I’d managed to get myself pretty worked up.

On Monday morning, my mood wasn’t helped by a squib on Bloomberg.com: “Goldman Sachs Boosts Risk-Taking at Fastest Pace On Wall Street.” Your TARP dollars and mine at work, I reflected. But, of course, Goldman plans to pay back its TARP money, which raises the question: Was TARP (and correlatives) supposed to be a crucial economic initiative, or merely the Wall Street equivalent of a flag of convenience?

I WASN’T THE ONLY ONE  bothered by what was reported in Sunday’s Times. Paul Krugman had quite a bit to say in his Monday column. Among other things, he reiterated something that we whose public capital is being shamefully, greedily exploited need to repeat to our mirror a dozen times a day: “I’m not just talking about the $600 billion or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of AIG contracts; the vast expansion of F.D.I.C guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.”

In other words, imagine a publicly owned casino whose management has worked it out that every player except the house, every grifter, sharpie, shark imaginable, gets to play with the house’s—that is, the stockholders’, which is to say, our—money.

This stinks. Stinks to high heaven. Stinks all the way from Wall Street to K Street, whence you can be sure significant funds have been routed to Congress to purchase the Capitol Hill equivalent of an S.E.C. “no action” letter. No Action, which begins with “N,” which sort of rhymes with “M”—as in Madoff.

What went down at Madoff Investment Securities is zilch compared to the moral dubiousness of the Great Geithner Giveaway, which is shaping up to be the biggest mulcting of an innocent polity in recorded history. As one keen-penciled observer, Satyajit Das, notes on his blog, TARP, etc., have enabled financial double-dipping of a rapacious effrontery that would have made Jim Fisk redden with envy: “The issuance of government guaranteed bank debt provided underwriters with a ‘double subsidy’—the government guaranteed the debt but then allowed the banks to earn generous fees from underwriting government guaranteed debt.”

Here’s how Bloomberg.com explains the financial “progress” that enables Goldman Sachs to trade on the economic and investment discomfort of millions at a level that permits a pay average of $569,220. I emphasize “trade” because that’s the only game on the Street right now—that and bankruptcy advice. Mergers are very few and very far between, underwritings likewise, and private equity is off in a corner figuring out how to minimize its write-offs. Anyway, here’s Bloomberg.com on Monday: “Wall Street made money in the first quarter from traditionally unprofitable corporate loans and trades for their customers, as the gap between what banks pay to buy fixed-income securities and what they sell them for, the so-called bid-ask spread, almost doubled.”

But that’s really not quite the way it works. “Buy cheap, sell dear” isn’t quite the same as “Borrow cheap, lend dear.” The difference may be subtle, but not when it comes to totting up the zeros on the bottom line. It’s all about allocation and location of risk, about whose ox will get gored. The Bloomberg account speaks of “… traditionally unprofitable corporate loans and trades for their customers …”—and that may once have been the case, but not when Uncle Sam is handing out free money to finance your trading book and allowing you to keep liquidity tight enough to permit a mark-up that a Bensonhurst loan shark would blench at. At that point, the Bloomberg report should speak of “… traditionally profitable loans and trades for its own account.”

I DON’T KNOW  what we can do about this. The fix is in. Geithner is the Street’s poodle, that’s clear enough. He can’t really be blamed: It’s all he knows.

I know a bit about that world, too. I worked on and around the Street for a quarter-century. I know what the work used to be about, what it’s about now, what kind of qualities it takes to be successful. Back when I was co-running corporate finance at Lehman, in the early 1970s, I shared in the hiring of some young men who have gone on to eminence and wealth. I made partner at the age of 30, but I can’t say I was a success, because I had no taste for the intellectual and moral coarseness of Wall Street, and if you have no respect for the work you’re doing, sooner or later you won’t be very good at it. That was my story.

At least, back then, more times than not, we thought we were helping the country to move forward by arranging finance for ventures and infrastructure and business combinations. Not that we didn’t chase our share of fool’s gold and follow the dictates of expediency (conglomerates come to mind), but we prospered only as our clients did. Our business was about our clients; if trading for our own account added up to 10 percent of our action, that was high.

But it changed. We started dealing commercial paper in 1966 or thereabouts, purely as a client service. If the paper reposed on our balance sheet more than a matter of hours, that was cause for alarm. But within five years, we discovered we could use our low-rate bank lines to position our clients’ paper and pocket the spread between what we were paying and what we were charging. We had become a bank without a license or a charter. Trouble followed.

As I say, I don’t know what we can do. What Goldman is up to is disgusting. That’s the way it usually has been, and it’s interesting that Morgan Stanley, a firm with a different ethical DNA, trails badly in the league tables. I think what we’re seeing are the consequences of living in a society that has essentially eliminated stigma and disgrace as shaping forces when it comes to institutional and personal behavior—almost wholly with respect to institutional and corporate conduct, and significantly in our private lives. I’d say turn back the clock, but when I look at the long arcs of American history, I’m not sure exactly where I’d turn it back to. Like the poor, the money-changers we have always with us.

editorial@observer.com

But of all those who unfairly suffered, one group especially plucks my heartstrings and causes my soul to weep. This sad lot, women and children mainly, I’m certain, not only may have been exposed to financial shrapnel, but—even worse—have had fiercely stripped from them one of the few sustaining illusions of innocence, indeed of Western culture.

I refer to the members of the Goldman Sachs family, who presumably learned late last year that “no, Virginia, there is no Santa Claus!”

What other conclusion can one draw? After all, I think we’ll all agree that in order to have Santa Claus, you have to have Christmas, and to have Christmas, you have to have December—but at Goldman Sachs, apparently, there is no such thing as December. Hence no Christmas, hence no Santa. And hence, apparently, no problemo.

Last week, when Goldman reported its sparkling first quarter, the world learned that on midnight of Nov. 30, 2008, Goldman and all who sail in that mighty vessel bedded down for the night, and when they awoke the next morning, it was Jan. 1, 2009: a bright new dawn, if ever there was one. December had simply vanished. In Greenwich and East Hampton, children’s eyes may have brimmed at the realization that Christmas had passed them by, and trophy wives may have inquired after the expected Yule bauble, but what are a child’s tears or a trophy wife’s shrieks compared to an additional bottom-line zero?

By a single stroke of Goldman’s accountants, Mickey Mouse & Co., an entire month was gone, and with it a whole lot—billions, one can only assume—of inconvenient bad-balance-sheet stuff. And made to disappear along with this financial offal would have been Santa Claus, Christmas, sugarplum fairies and the like, the stuff that dreams are made of.

Eliminating December, I need hardly add, also eliminates discomfiting episodes like Christmas Eve visits from spirits sent to point out the misery one’s avarice and rapacity have cost the world, spirits who, I dare say, had scheduled a 2008 visit to Goldman CEO Lloyd Blankfein to interrogate him about his firm’s business model, which is based on the entirely logical proposition that the surest path to profit is to be on every side of every deal or trade or political backslap or ethical situation. This model was set in motion by Gus Levy, Goldman’s managing partner back when I was on the Street, who seldom hesitated to use his influence as chairman of the New York Stock Exchange to prejudicially advance Goldman’s interest. To Gus, corners were for cutting.

WHAT AN INCREDIBLE arrogation of power it is to simply eliminate December! If Goldman can do this, what cannot Goldman do! In all the millennia since men started scratching crude records of the movements of the sun and phases of the moon on rocks and mammoth tusks, no one has ever simply done away with a whole month! Weekends have been lost, to be sure, and in their Revolution, the French changed the months’ names, but forever and ever, until Goldman came along, every year has consisted of 12 months. Well, no longer—and the weird part is, it seems to have been federally sanctioned.

Take this business of TARP repayment. Goldman wants to repay its TARP funding, so as to eliminate ceilings on compensation, etc., but I don’t see Mr. Blankfein offering to repay the billions in F.D.I.C.-guaranteed “Free Money” with which Washington has fattened his firm’s calf. Why aren’t Geithner, Bernanke and Bair insisting that every dollar of TARP repayment be matched by a dollar of “Free Money” repayment? Would Goldman then be so eager to reduce its TARP footings? I rather doubt it. But let’s see if Goldman gets away with it. I know which way I’m betting.

Like Lola, whatever Wall Street wants, Wall Street seems to get. It wasn’t always this way. I was there in 1969 when after years of excess the Fed appeared on our collective doorstep and laid down the law: No more buyout loans, cut the crap, make sure your capital is adequate and your records accurate and current. Violators will be shut down. And some, including Lehman, were—until they got themselves straightened out.

The procedure today is for the regulators to turn themselves inside-out to make nice and unthreatening, to be solicitous of the delicate feelings and purses of people who, in a justly ordered world, deserve to be strung up from every lamppost for what they have done to the rest of us. People who still bank (sic!) on the financial naïveté of We the Taxpayers.

What’s with this deference to Wall Street? Who’s making the running inside the administration? Summers, whose intellectual arrogance apparently passeth all understanding? I have known such men: one thing to which they tend to be utterly blind is the possibility of a conflict of interest. The Goldman alumni club: Geithner and others? How can the fix still be in? Anyone concerned with these issues needs to read MIT economist Simon Johnson’s “The Quiet Coup” in the new Atlantic (in print or online), which is an entirely convincing account of how Wall Street and its consorts in piggery have sliced and diced this country financially, morally and politically.

We now find ourselves nine months into a curative process that was supposed to unblock the credit arteries. And, indeed, banks are reporting record earnings (mainly, I suspect, by trading TARP funds for their own account)—but at retail, interest rates have moved from the merely punitive to the homicidal, credit remains hard to come by. For all I can tell, the toxicity indices of the too-big-to-fail set are about where they were last fall. How can a political economy with the slightest claim to moral and fiscal legitimacy permit taxpayer investment on this scale to have yielded so little in the way of public benefit?

Forget Santa Claus: What I’m starting to want to know is, is there really a Barack Obama? Sunday’s Times to the contrary, the talk is going one way, the facts another. Listen to what I’m saying and pay no mind to what they’re doing—that seems to be the rhetoric.

What we’re hearing from Washington and the Fed reminds me of a singular piece of wisdom uttered years ago by my late, great stepmother. After hearing my father describe a deal, she looked him skeptically and observed, “Well, that’s Wall Street for you. All good news and no money!” I wish she’d lived to see this performance.

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Now, suddenly, banks are talking about robust and satisfactory first-quarter profits (largely, I suspect, by shoving the bad stuff below the line, as we bankers say) and complaining that the premium Uncle Sam requested for the use of his stakeholders’ money—mainly warrants to buy varying percentages of afflicted banks’ equity—was extortionate. Some want the feds just to tear up the warrants—presumably to make confetti to shower over the heads of the bankers who have so miraculously turned things around and deserve a parade up Broadway.

Here, for instance, from last week’s New York Times: 

“Douglas Leech, the founder and chief executive of Centra Bank, a small West Virginia bank that participated in the capital assistance program but returned the money after the government imposed new conditions, said he complained strongly about the Treasury Department’s decision to demand repayment of the warrants. That effectively raised the interest rate he paid on a $15 million loan to an annual rate of about 60 percent, he said.

“‘What they did is wrong and fundamentally un-American,’ he said. ‘Even though the government told us to take this money to increase our lending, the extra charge meant we had less money to lend. It was the equivalent of a penalty for early withdrawal.’”

There are two aspects here that merit scrutiny. Anyone over the age of 60 should be familiar with the argument that now that the damage is undone, at least in theory, the warrants should be canceled. It happened with Chrysler back around 1979. The government bailed out the automaker, and—just as any private-sector financier would have done—took back a stake in the form of warrants. When Chrysler recovered—at a time when Cerberus was but the merest mote in Mammon’s eye—down to Washington went Iacocca and his colleagues to argue that these warrants should be eliminated. Uncle Sam and his advisers—principally, as I recall, Jim Wolfensohn—stood firm and the warrants were cashed, earning a nice but hardly exorbitant return for the taxpayer. We should do no less today.

As for the “un-American” effective interest rate, I think Mr. Leech is mistaken on two counts. If gouging is “un-American,” then I expect that the patriotism of most credit-card-holding Americans is being sorely tried. Actually, sharp-dealing and welshing on contracts are entirely in the American vein, as is beating up on the little guy. The first definitive history of the American currency and banking system was written (in 1833) by a chap named Gouge, which I have always thought was Providence’s way of telling us something about ourselves.

As for Mr. Leech’s argument about the high effective interest rate that results from the inclusion of warrants in first-round TARP financing, let me quote, in its entirety, an email from a friend who—take it from me—knows his way around high finance up close and personal:

“In case you are wondering about the ‘exciting’ profits of Wells Fargo and some other banking institutions? It goes like this:

“The Federal Reserve Bank supplies almost all new monies to the banks as loans at a rate of 0.25% per annum. That is to say, separate from TARP, taxpayers are lending to banks an undisclosed but extraordinary amount of money at 0.25%.

“The banks then turn around and lend that money out to the taxpayers at an approximate average of 6.0%, a profit of 5.75% or, in other terms, a mark-up of 24 times cost. As the average equity capital requirement is approximately 10% (5% in the case of mortgages) the banks are able to earn at least 57.5% per annum on equity. At the same time the equity of the banks is augmented by taxpayers, courtesy of TARP and 9 trillion other dollars of guarantees grants, investments, etc., guided by our economic team in Washington.

“When will there be some real relief for the middle and poorer classes which will actually help to reverse the downward spiral in the economy rather than the continued subsidies to incompetence?”

My correspondent’s last point ties neatly to an assertion made in a recent Wall Street Journal piece, “From Bubble to Depression?” by Steven Gjerstad and Vernon L. Smith: “Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we’re witnessing the second great consumer debt crash, the end of a massive consumption binge.”

I can only say that this makes perfect sense to me. And it suggests that, when it comes to securing a cheery economic future for ourselves and our posterity, top-down solutions, at least as they are going right now, are only going to drive the real problem child—the overstretched, overcharged, over-indebted, insecurity-stricken consumer—deeper and deeper into the hole his friendly neighborhood “all-American” financiers have been only too pleased to help him dig for himself.

I think we have entered a very tricky period here, one of great confusion about what it all means, about right and wrong, about distinguishing cabbages from kings. The high-finance blogosphere is sizzling with the statistically replete argument at the blog Zero Hedge (http://zerohedge.blogspot.com/2009/04/incredibly-shrinking-market-liquidity.html) that there is “… a high likelihood of substantial market dislocations” resulting from big liquidity shifts, and that the little guy, the marginal plain-vanilla investor, is likely to be the one left holding the empty popcorn bag.

In this scenario, the Lohengrin riding the black swan is none other than our old friend Goldman Sachs. Indeed, with all due respect to GS CEO Lloyd Blankfein’s nostra culpa the other day, it is Goldman that is the paradigm-setting paragon of our era, with its eminently sensible rationale that the best path to total success and riches is to be on every side of every deal, which includes being closest—in approved Iago style—to the ear of a bewhiskered old boy in a star-spangled topper whenever he takes a seat at the table and stumps up a trillion-dollar buy-in.

I don’t like to see this. Not now. At a time when we are beset with so many questions that yield contradictory and confusing answers, with so many mixed signals, the last thing we needed stirred into this witches’ brew is moral and ethical ambiguity.

Which brings me to the matter of Larry Summers. But I guess I’ll have to save that for next week.

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“Most halfway educated people know about idiots savants, people who are dyslexic, autistic or otherwise gravely impaired by ‘normal’ cognitive and psychological metrics, but who can reel off complex algorithms and theorems or intuit great scientific truths. I submit that there is a corollary genus, the savant idiot: festooned with credentials, diplomas, laurels and prizes professional and academic, who pontificates and expounds impressive-sounding ‘truths’ and explanations—what a friend of mine used to call ‘chinstrokers’—that in the fullness of time and markets prove to be utter b-lls---t. The idiot savant produces substance out of apparent ignorance; the savant idiot produces ignorance from apparent substance.”

When I wrote that, I had in mind, as I do in most instances of punditical spleen, Alan Greenspan. Later, however, there also popped up in recollection the stupidest thing I ever heard emerge from the lips of a certified genius. It was uttered over dinner some 20 years ago in a swank Manhattan restaurant by a famed econometrician, the Nobel-winning co-author of a valuation algorithm that is basic to the mathematics—the deeply flawed, it turns out, mathematics—of modern high finance.

“This morning,” he said to me (I’m reconstructing these remarks from memory, so the wording may be off, but I have the sense right), “I had to really give my kid a blast. He wants to major in history. What a waste of time!” And (he did not have to add): tuition.

As it turns out, the exotic arithmetic that underpinned the alphabet soup of modern derivatives and structured investments seems, like the great man quoted above, to have been inadequately informed by the one element of history that towers above all others: that it is made by human beings. By people who, as they struggle along the road to dusty death, persist in making the same mistakes over and over again, mistakes that flow from something innate in mankind’s DNA, mistakes better elucidated by poets and writers than the devisers of algorithms.

Here’s what I mean. I’ve recently been rereading, for what must be the fourth time, Anthony Powell’s A Dance to the Music of Time, the novel in 12 volumes that to my way of thinking stands fully up to Proust and Balzac (although, being in French, the latter have much greater cachet with Anglophone readers). In the third installment, The Acceptance World, mainly set in the early 1930s, Kenneth Widmerpool, Powell’s great monster, rises uninvited to speak at an Eton old boys’ dinner. It is an uncomfortable, unnerving moment, made no less so for the 21st-century reader by Widmerpool’s assertion: “… I put it to you that certain persons, who should perhaps have known better, have been responsible for unhappy, indeed catastrophic capital movements through a reckless and inadmissible lending policy.” 

The Acceptance World was published in 1955; the dinner addressed by Widmerpool is assumed by Powellians of standing to have taken place in 1933—which is, as it happens, a date of some significance in financial circles today, since that was the last year the stock market sustained a monthlong upward move equivalent to what we have seen in the past 30-odd days.

To many, the recent rally is a deeply moving validation of what history may well come to call “the Great Geithner Giveaway”: the program for cleaning up “toxic assets” that to my eyes represents the ultimate in socializing risk and privatizing profit, since the latter will be maximized by six-to-one leverage underwritten by the taxpayer. Already the Internet is chockablock with ways to “game” the Geithner plan, all based on taxpayer exposure to nothing approaching a fair or reasonable ratio of risk to reward.

Validation or not, this is a rally that your humble correspondent missed. The market is reflecting the belief of investors of every size (apparently, a lot of small money has shared in this historic upsurge) that the worst is over for the forces that presumably drive equities, notwithstanding that General Motors is still on the verge, Chrysler’s probably toast and the fundamental question remains lit up like neon: What kind of work, what kinds of job-creation programs, incentives or market developments, will reverse a rising unemployment rate (8.52 percent, according to Uncle Sam)? How are we going to evacuate the average American consumer from the credit equivalent of Dunkirk?

What no one understands is that none of this matters to the people who make the call and their masters who dwell at the intersection of K Street and Wall Street. As is usual in this country, the fix is once again in (The Washington Post’s coverage of the bailout, available online, has been memorable) and the usurers rule.

To have missed out on the biggest sustained uptick in 70 years is discouraging, although I take some small comfort in my consort’s response to my despair: “A fat lot of good it did in 1933, I might point out.” She has a point. Somehow I doubt that the profits from this rally are going to find their way to Wal-Mart or the housing market. This worm is likely to turn, and when it does, it will assume the dimensions and rapacity of a python. But that’s a tale for another day.

So what is one left with? More gloomy fantasies of retribution à la worm into python. Much as I’d like to see someone march into Moody’s and Standard & Poor’s and make a citizen’s arrest for Enterprise Corruption, that’s not going to happen. Much as I’d like to see distributions to corporate executives tied to distributions to corporate stockholders (the best argument going for making dividends tax-deductible at the point of origin, and fully taxable at the point of receipt), that’s not going to happen. Much as I’d like to see the sellers and buyers of “naked” credit protection and other securities left to fight it out among themselves, that’s not going to happen. Much as I’d like to see the banks forced to disgorge their toxic assets 100 percent by category (all CDOs, all SIVs, all CDSs) in exchange for Federal Reserve Notes that count as statutory capital but are repaid out of realizations over time, that’s not going to happen. And the M.B.A. degree isn’t going to require course credits in “Finance in Fiction,” because who needs truth when you’ve got algorithms?

To put it simply, the recent stock market rally, as I see it, is more a validation of a point of view than of economic fundamentals. A point of view that grasps the truth that Wall Street stands in relationship to “Main Street” like the opposed lanes of an expressway: They share a landscape, but run in opposite directions, toward different destinations. As they used to say during my time on the Street, happiness can’t buy money. And so it goes.

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Obesity occurs in financial institutions—look at Citigroup—as much as in teenagers, brought on by junk finance rather than junk food; there’s as much water-bloat on our balance sheets as in our waistlines. The artery-clogging qualities of junk finance can be as threatening to our overall health as a nation as those of junk food. Mayor Bloomberg should have required the securities firms he has courted so assiduously with stay-in-Manhattan subsidies to post trans-fat warnings on their deal documents.

Whether we’re speaking of Wall Street or Main Street, fast food is rapidly prepared and even more rapidly consumed. Gobble gobble, slurp, slurp—the way teenagers blow through Value Meals, but then, Wall Street has always displayed a penchant for adolescent behavior. For confirmation, you need only have visited any of Manhattan’s reigning steakhouses during the pre-bust boom; no place on earth is as vile at the height of a traders’ bull market than one of those places that dishes up 20-ounce porterhouses slathered in Black-Scholes testosterone, where the behavior of the crowd at the bar, the louts with street voices, big cigars and bumpers of $50 per glass Barolo, perfectly fits what John Dos Passos wrote about Veblen: “… the last grabbing urges of the profit system taking on, as he put it, the systematized delusions of dementia praecox.” (The Big Money, 1936)

Next: stupidity. Here we need only look at the uproar over the AIG bonuses. To be sure, this is an issue that’s a specific proxy for a widespread, generalized, confused anger, but in a situation like this, more than mere catharsis is called for. Emotional distractedness never solved anything. What you end up with is this idiotic movement toward one-size-fits-all compensation controls in a situation that calls for careful case-by-case analysis.

This is a situation that involves two enablers and one enablee:  the press and the Congress being the parties of the first part, and the public/electorate the party of the second. Anyone who has ever observed the average citizen at a fast-food counter, a supermarket checkout point or boarding an airliner knows that, as a people, we don’t have an instinctive or intuitive grasp of process. We need instruction and protection: The former is the job of the press, the latter of the Congress. Both have failed miserably. The media suddenly rediscovered the bonus “scandal”—which was known about last fall, as Michael Kinsley has pointed out—and whipped up a froth that has drowned out the real horror show: the AIG “pass-through,” whereby billions of bailout money has ended up in the hands of Goldman, Sachs, foreign banks and assorted other derivatives counterparties. As for the Congress … well, five minutes of TV exposure to Nancy Pelosi tells all that need be said. 

Of course, solutions confected under intense, emotional PSI seldom work, which brings me to “nudity,” as in “naked,” as in naked derivatives and naked short sales. Start with the latter. In the good old days, if you didn’t like a stock and wished to short it, you had to fulfill two requirements: Your short sale had to be made on an “uptick,” at a price higher than the last previous recorded sale, and you had to deliver the shares sold short, which could be borrowed for a small fee.

That ceased to be the case quite a while back. The “uptick” rule was revoked. The requirement to deliver just seems to have vanished. What this leads to, as a Bloomberg report puts it, are “… unlimited sell orders, overwhelming buyers and driving down prices.” There seems to be clear evidence, in the form of unsettled short sales where the seller failed to deliver the stock, that this is what happened to Bear Stearns and Lehman Brothers, even as those firms writhed in their death agonies, and it’s probably what herded Merrill Lynch into the embrace of Bank of America. What this also accentuates is the folly of the various Paulson working groups in trying to devise crisis solutions under the gun of a market in which they must have known this was taking place. 

The way I work out the nudity in the derivatives market is this: The amount of debt notionally covered by credit default swaps (CDS) comes to three to four times the amount of debt actually ever issued. How can this be? Simple. The global CDS book breaks down into two categories: insurance, and bets.

Insurance is easy. I own $1 million of X’s debt. I want to sleep easy, so—for a modest monthly premium—AIG sells me insurance, promising to pay off any shortfall if X can’t come up with principal and interest when due. There’s the easy part. But then the ironclad precept that Wall Street steers by kicked in: As more people try to get in on the game, the game itself degenerates, the players start to reach. In this case, the players started to buy protection on debt they didn’t own; basically, all they were doing was betting that Bear or Lehman or whoever would fail, would default or be downgraded, whatever. AIG was happy to book these bets, so enticing was the vigorish. The result? A naked global CDS book that probably runs to $30 trillion.

Normally, when a bookie loses big, he skips town. He doesn’t go to City Hall pleading that the Steelers didn’t cover and he’s tap city and the municipal coffers need to be hit up to make him whole. Yet that’s what happened at AIG. And, by gum, City Hall seems ready to pay.

I don’t think that should happen. I think naked transactions—short or CDS—should be left out of any bailout. Legitimate bets, such as Buffett’s been making on future levels of stock prices and indices, can be left on the books. But for the most part, I don’t think We the Taxpayers should be obligated to strip down to cover someone else’s nudity. We’re up to our hocks in naked emperors as it is.

A trillion for TARP, a trillion for TALF.

Throw in what’s in the “stimulus” package and you’re probably at close to $3 trillion.

So why not simply distribute $25,000, tax free, to every U.S. taxpayer? There are 100 million of us, in round figures, so we’re talking about $2.5 trillion, give or take.

This is what two friends and I asked each other over lunch at Three Guys last week. After we got through the usual preliminaries, such as where can one buy hemlock these days, given that our actuarial match-up (two of us are over 70) with our resources leaves us as upside-down as the most strapped Corona del Mar mortgage victim, we started talking about the economy and how to rescue it.

Clearly, these institutional rescue plans are going nowhere. The pricing dichotomy—Uncle Sam either pays too little or too much—seems intractable and the recipients are surely undeserving. Even though there have been two big distress sales of toxic assets—by Merrill Lynch last fall and Legg Mason last week—at around 20 cents on the dollar, which might represent a pricing benchmark, I just don’t think the taxpayer should be put in the business of writing a “make whole” for either pigs or vultures, who in many cases may now be one and the same. That is capitalism’s tragic paradox, unseen by Adam Smith, probably understood by Marx: The people who cause crashes frequently profit from them.

The problem is, everyone’s hanging around looking for a deal from the government that’ll yield a deal that’s better than fair to everyone except the taxpayer, and Geithner and his small and doughty band know it. (The Treasury increasingly reminds me of Fort Zinderneuf in Beau Geste, with dead bodies propped up in the gun ports and Gary Cooper scuttling from post to post, firing at a superior force of Bedouins.) And the “infrastructure” solution, as I see it, is simply open-ended flapdoodle capable of inciting limitless political foolishness and private-sector thievery. Let’s not import Iraq back home.

Institutionally, what should be done immediately is to separate the good assets from the dubious. In the case of the “banks,” hive off depositary operations and wealth management from trading and arbitrage. At AIG, put a fence around the real insurance operations and let the credit default swap commitments go. Wipe out derivatives contracts that had no real third-party assets at risk (possibly as much as $30 trillion of “naked” puts), that were nothing more or less than bets against the solvency and credit rating of insurers like AIG and Lehman, and let the rest negotiate settlements as best they can.  All the crap can go into what I heard one English financial analyst on WNYC call “a giant international cesspit,” and let the scavengers fight over it like rats in a garbage dump. Isn’t this the kind of market solution propounded by (speaking of rats) the likes of Larry Kudlow?

The more I see what’s going on now, the better I think I grasp what really happened in the Depression. Why, by late 1940, there was so little trading and deal volume on Wall Street that people like my father, a 34-year-old partner at Lehman Brothers, enlisted in the U.S. Navy, figuring that F.D.R. was going to get us into a war with Hitler and he might as well have a commission.

History proved Joe Thomas right in his assessment of his president’s intentions. By then, F.D.R. probably understood that there was only one solution to the nation’s precarious economic condition: jobs, jobs, jobs. And that nothing would provide jobs—in the military, on the home front—more efficaciously than a war. And so it proved. Moreover, when the war was won, Washington grasped that millions of dis-employed  service people and defense workers might represent a brand new social and economic crisis and came up with the G.I. Bill. As opposed to the U.K., which sent its newly de-mobbed Tommies back down the pits and got a Labour government for its pains. I know of no more powerful example of the difference between the way a capitalist democracy is supposed to work and the way it isn’t. I should add my opinion that Ms. Pelosi (surely there can never have been a worse speaker!) and other Capitol Hill idiots would never have devised a G.I. Bill, not in a millennium!

So let’s go back to the “Three Guys” scheme, as history will doubtless christen it. At $2.5 trillion, the money’s about the same as Washington plans to spend. Any way you cut it, relief is going to be funded in the people’s money, so why not let the people decide how to spend it? To some taxpayers, $25,000 will be a lot of money and will be spent on life’s necessities or to ease household financial crises: to pay off debts, to pay tuition, to catch up on mortgages. Others may use a sum like this as a down payment on a house. Businesses can be launched on $25,000. To some, $25,000 won’t be that big a deal, so they’ll invest it or put it into a bank. Along the way, as it passes from hand to hand, as one person’s expenditure becomes another’s revenue and profit, it will become taxable, and Uncle will start to recapture his investment.

It really doesn’t matter how and where it gets spent and saved, because never forget, children, that every dollar spent is somewhere saved. The key is to keep that money hopping. To keep breaking it up into pieces, and moving those pieces along. If it coagulates in financial companies anxious to build up capital to support their collateralized debt obligations/credit default swap garbage, the main if not the entire purpose of the exercise is defeated. And this is exactly what is happening now.

It has got to stop. Parents of my generation were raised to understand that children are not to be rewarded for bad behaviors. Sadly, that view has faded. It’s time to turn back the clock and give the money to the 99,000,000 of us that had nothing to do with this mess!

editorial@observer.com