In Wake of SEC Charges Against Goldman, Paul Krugman Calls for "Lowering the Boom" on Wall Street's "Racket"

In discussing the SEC suit against Goldman Sachs issued on Friday, New York Times columnist and Nobel Prize-winning economist Paul Krugman renews his call for passage of financial reform, and in the process calls Wall Street practices a "racket" in which "a handful of people are lavishly paid to mislead and exploit consumers and investors."

He asks the question, "whether financial reform of the kind now being contemplated would have prevented some or all of the fraud that now seems to have flourished over the past decade." His answer is "yes."

"For one thing, an independent consumer protection bureau could have helped limit predatory lending. Another provision in the proposed Senate bill, requiring that lenders retain 5% of the value of loans they make, would have limited the practice of making bad loans and quickly selling them off to unwary investors."

However, he says, "it's less clear whether proposals for derivatives reform -- which mainly involve requiring that financial instruments like credit default swaps be traded openly and transparently, like ordinary stocks and bonds -- would have prevented the alleged abuses by Goldman (although they probably would have prevented the insurer A.I.G. from running wild and requiring a bailout). "

He concludes that "the main moral you should draw from the charges against Goldman...doesn't involve the fine print of reform; it involves the urgent need to change Wall Street...The fact is that much of the financial industry has become a racket...And if we don't lower the boom on these practices, the racket will just go on."

Amen to that, my friends.