U.S. Bankruptcy Court Judge Walter Shapero (left), namesake of the symposium presented by the Bankruptcy Committee of the Federal Bar Association, met with special guest speaker Peter S. Gooon recently at the The Westin Southfield. Goodman is the national economic writer for The New York Times and author of “Past Due: The End of Easy Money and the Renewal of the American Economy.”
By John Minnis
Legal News
If anyone knows better than bankruptcy judges and attorneys the devastating impact the 2008 financial collapse has had on ordinary working families it is Peter S. Goodman, national economic writer for The New York Times and author of “Past Due: The End of Easy Money and the Renewal of the American Economy.”
It was fitting, then, that Goodman was the special guest speaker at the 2010 Walter Shapero Symposium, presented by the Bankruptcy Committee of the Federal Bar Association, Eastern District of Michigan Chapter, on May 12 at the The Westin Southfield.
In introducing the speaker, committee co-chair Leslie K. Berg said Goodman’s book tells the story of the 2008 financial crisis in “jargon-free prose.”
“I don’t know how many of you here have had a chance to read this book,” she said, “but it is phenomenal.”
She was joined at the event by fellow Bankruptcy Committee co-chairs Michael C. Hammer and David A. Lerner.
Goodman, whose coverage of the origins of the financial crisis of 2008 was part of the Times’ award-winning series “The Reckoning,” described how economists were in denial that a recession was even happening.
He said the current debate over regulatory reform lacks the urgency it deserves.
“This view that the crisis is behind us is not only wrong,” he said, “it is dangerously wrong.”
Goodman said now is the time for a critical economic policy review.
“If we don’t get it right,” he said, “we’re likely to relive it.”
He said the economists’ rationale is “we all lived beyond our means, but now we’re not. It sounds therapeutic. This comeuppance narrative is inadequate.”
The Times writer pointed out that over the past two decades real wages went down and easy money filled the gap.
Now faced with bad credit, formerly hard-working people, like “Dorothy” in his book, cannot get a job because they fail the credit check increasingly used by employers.
“She succeeded,” Goodman said of Dorothy story. “She sent her daughters to school. Dorothy didn’t pay all her bills. She paid them strategically, making sure the utilities and rent were paid.”
One day she was stopped for having an expired registration sticker, a $10 item. She couldn’t get to work and lost her job and her home. Within a few months, she was in a homeless shelter, hair unwashed, and despairing she would never get a job again. When she was finally offered a job, she failed the credit check.
“She clearly made mistakes,” Goodman said. “She would be the first to tell you that. But how did we end up living in a country with so many Dorothys, spending more than we earn, heading for disaster?”
As America headed into the “longest, deepest recession since the Great Depression, one half of the country was in a situation where one bad event was a calamity.”
By 2008 real wages had not grown in 10 years. “For a decade,” Goodman said, “the economy virtually stood still.”
After the technology bubble burst, “we constructed this fantasy that housing prices can’t go down.”
Wall Street then invented the “securitizing of housing,” Goodman said. “The two bubbles, technology and housing, made us think working and saving were for saps. Houses were used as ATMs. This warped our thinking.”
Dorothy, like countless Americans, felt the money would always be there.
“The comeuppance narrative not only masks reality,” Goodman said, “it also masks how Wall Street perverted our cultural norms. Lenders kept flooding consumers with more ways to get deeper in debt.”
The dominant view, he said, is that Wall Street over-leveraged and took risks, but the market took care of it, that there isn’t a need for more regulation because the market is self-correcting.
“The Obama administration is now talking that way,” Goodman said.
He cited an analogy once given by Larry Summers, the president's top economic adviser. Summers compared the 2008 financial meltdown to a plane crash.
Afterward, we investigate, find out what went wrong and fix it.
The problem with Summers’ analogy, Goodman said, is no one benefits from a plane crash. Pilots do not engage in risky flying, only to crash the plan and escape in golden parachutes.
“But in our financial plane crash,” he said, “the pilots (Wall Street) were paid obscene wages to fly unsafely” — and they were the only ones with parachutes.
Goodman does not believe there was a sinister conspiracy among bankers and investors, but rather the incentives were in place to encourage risky behavior.
“Some think today that this was just an anomaly,” he said. “(But) unless we do something, it will happen again. The intoxication is too great.”
Now, after we have suffered, Goodman said, we are being told to be more innovative and don’t regulate as that will stifle the economy.
“The next time someone says innovate,” he warned, “grab your wallet.”
If Americans learn anything from the financial crisis, Goodman said, it should be credit default swaps.
“If we don’t regulate these things,” he said, “everything else we do is worthless.”
He said credit default swaps are a form of insurance but they weren’t called insurance, because then certain regulations would come into plan and reserves would have to be maintained and less money could be spent.
“AIG and others felt they were making money from nothing,” Goodman said, “that housing prices would never fall.”
He compared credit default swaps to avoiding buying expensive fire insurance by paying your neighbor a pittance to save your house with a garden hose.
Eventually, all homeowners would do the same, and the government would save money by eliminating the fire department.
“The risk of fire was ‘innovated’ away,” Goodman said. “Everyone had more money to spend, and your neighbor sold his garden hose to China. They dismantled the fire department, and Wall Street built a bonfire.”
Credit default swaps, or derivatives, grew from $1.6 trillion in 2002 to $46.7 trillion in 2006 to nearly $600 trillion today, 10 times the world’s total economic output.
The renewal of the American economy must include a return to “meat and potato” economic policies, Goodman said, “basically policies that create jobs with new products and services — not financial hocus-pocus.”
To do so, the Times man favors increased investment in institutional research, alternative energy and the life sciences (biotech).
That being said, he does not believe “a central planner can determine or control ‘the next best thing.’”
“We’ve been chastened by this crisis, no doubt,” Goodman said. “Our beliefs have been challenged, that if you get up every morning and go to work that everything will be OK. We need to get our incentives straight, regulate the market and return to the age-old values before our economy can return.”
He had some positive news:
“The economy is growing again,” he said; “however, it may not feel that way in Detroit. There is some growth going on. Academic economists believe the recession is over.”
The Walter Shapero Symposium is named in honor of the long-time bankruptcy judge who at the age of 79 still practices full-time for the court.
In fact, he was just recalled to serve another year.
“When the Walter Shapero Symposium was formed years ago, it seemed right to name a symposium after him,” said Chief Judge Phillip J. Shefferly. “It serves not just as a meeting, but as a chance for the bankruptcy bar of Michigan to get together.”
Shapero has served as a bankruptcy judge since 1980.
“If ever the taxpayers got their full money’s worth, it is with Judge Shapero,” Shefferly said.
He noted that Shapero’s wife, Kathleen Straus, had something in common with U.S. Supreme Court nominee Elena Kagan: They both graduated from Hunter College High School in New York City.
“Many of you know my wife,” Shapero said. “Many of you may have voted for her.” Straus is serving her fifth term as president of the State Board of Education.
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