Krugman: Goldman Sachs Becomes Poster Boy for Financial Reform

Neither predatory lending, nor the selling of mortgages on false pretenses, caused the financial crisis in 2008, but they surely made it worse, writes Nobel Prize-winning economist Paul Krugman.

Krugman reckons that by helping to inflate the housing bubble and by creating a pool of assets guaranteed to turn into toxic waste once the bubble burst, the investment bank contributed, massively, to the crisis.

“As for the alleged creation of investments designed to fail, these may have magnified losses at the banks that were on the losing side of these deals, deepening the banking crisis that turned the burst housing bubble into an economy-wide catastrophe,” he recently wrote in his column in The New York Times.

“The obvious question is 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. And the answer is 'yes.'”

According to Krugman, an independent consumer protection bureau, like the kind currently contemplated by some in Washington, could have helped limit predatory lending.

“Another provision in the proposed Senate bill, requiring that lenders retain 5 percent of the value of loans they make, would have limited the practice of making bad loans and quickly selling them off to unwary investors,” writes Krugman.

Tuesday, Goldman Sachs Chief Executive Lloyd Blankfein faced a blistering cross-examination from U.S. lawmakers about the company's ethics and behavior toward its clients.

Blankfein conceded in the final hours of a nearly 11-hour hearing that the criticism of his firm would lead to soul searching. He said "everything that's been the subject of criticism will be tightened up," an indication that the pressure on Wall Street may be starting to change behavior.

Blankfein, who was quoted late last year as saying he was "doing God's work," was asked time and time again whether it was morally correct for the bank to sell clients securities while at the same time the firm was betting against them, the Associated Press reported.

"You shouldn't be selling junk. You shouldn't be selling crap. You shouldn't be betting against your own customer at the same time you're selling to them," said Senator Carl Levin.

"You're going short against the very security (you're selling) ... many of which are described as crap by your own sales force internally," said Levin, chairman of the Senate Permanent Subcommittee on Investigations.