Rahm's Doctrine And Breaking Up The Banks
According to David Leonhardt, writing in today's New York Times magazine,
TWO WEEKS AFTER THE ELECTION, Rahm Emanuel, Obama's chief of staff, appeared before an audience of business executives and laid out an idea that Lawrence H. Summers, Obama's top economic adviser, later described to me as Rahm's Doctrine. "You never want a serious crisis to go to waste," Emanuel said. "What I mean by that is that it's an opportunity to do things you could not do before." (Links in the quote are from the on-line original.)
Leonhardt explains how this Doctrine can be applied to issues ranging from health care costs to education, and some of this is already apparent in the fiscal stimulus details currently before Congress.
Can the same approach also guide actions regarding our deeply broken and broke financial system? There are three possible answers.
1. No. If you support this view, you presumably think (a) there are no powerful vested interests on Wall Street, (b) these vested interests are not a first order reason why we are in so much trouble, (c) these same interests are doing a good job leading us towards economic recovery. My guess is that this is currently the view of only a small minority; perhaps it is limited just to people who received large TARP-funded bonuses.
2. Yes in principle, but the situation is now so dire that we really don't have the opportunity. In this view, the Wall Street interests are a problem, but we need to get credit flowing again as fast as possible, and this requires being nice to banks and bankers. If you think that maintaining or increasing the amount of nominal credit in the economy is the number one issue (e.g., for February), then this view may have some validity. But if credit is falling in part because creditworthy people don't want to borrow as much as before and because desired savings are increasing almost everywhere in the world, then the case is weaker. Most likely, we have some time to sort out the banking system properly.
3. Yes, but how? Members of the incoming Administration have spent years thinking ahead about controlling health care costs and reforming education; no one really anticipated there would be an opportunity - let alone a potential need - to restructure the financial industry. Perhaps we should leave this to G20 reregulation, meshing with the Dodd-Frank legislative agenda at the national level? This might be part of the answer, but it doesn't seem to match other proactive uses of Rahm's Doctrine or the scale of the financial catastrophe.
Recent prominent actions on Wall Street - excessive risk taking, pervasive mismanagement, failure to take responsibility, mind-boggling bonus behavior - all point to a deeper underlying problem: no real owners. Large banks operate on the fundamental principle that it is all, "other people's money."
So it has been and so it is - except now it is very much taxpayer money, from the Treasury and from the Fed, that keeps large banks alive. In essence, the government is already the primary provider of capital to this part of the banking industry, i.e., we are in some fundamental sense already the owners, and if we provide more capital or insure/purchase more bad assets then we really own the store. (If anyone from a large bank would like to do without taxpayer support at this stage, please step forward.)
What should we do with our ownership rights? We will, no doubt, attempt to exercise greater control over executive compensation and bonuses - and the industry, no doubt, will evade the spirit of these controls quite effectively. We might impose some other symbolic restraints over corporate jets and the like, but none of this will be meaningful.
The only real way to apply Rahm's Doctrine is to break the overly powerful vested interests in this part of the economy, and that means to break up the banks. The government needs to sell its effective control rights over large banks to private investors - providing them with at least temporary permission to become concentrated owners. Antitrust provisions must ensure that the large banks are dismantled in this process. Whether the executives stay or go is a matter for the new owners to decide. (For an example of how to organize the technical details of acquiring and disposing of government ownership, see our previous suggestions; there are other ways to do this that would also be quite straightforward.)
One pushback response to this proposal is: it's too different, too risky, and there's a good reason we've never been able to do this before. Fortunately, we have a serious crisis and Rahm's Doctrine is in effect. And, really, it's just an application to the US context of what other well-run countries have done when faced by a collective breakdown of bank executive competence.
Progress on the healthcare and education fronts will take many years, and the right way to measure success may well prove controversial. Progress on banking can be swift and the relevant metrics are straightforward - are the big banks broken up and placed under new, more effective ownership? And does the taxpayer finally get some upside?
Enough Bad Banks; We Need Good Ones in a New System
by John Hoefle
January 31, 2009--We have said, repeatedly, that the attempts to bail out the global banking system, including the U.S. banks, are not working, will not work, and can not work. Not only will they not restore the banking system to solvency, but they are actually making the economic crisis worse.
There are several problems with the bailout process. One is that the global financial system, with its quadrillion dollars-plus derivatives bets and hundreds of trillions of dollars of worthless securities and unpayable debts, is hopelessly insolvent. This is, and has been from the beginning, a full-blown banking crisis; the widely touted ``subprime crisis'' and ``credit crunch'' were marketing slogans created for the purpose of hiding the true nature of the problem, and positioning the banks to lobby for a public bailout under the guise of protecting the so-called ``little guy.''
The more fundamental problem is that it is not the financial system which is killing us, but the collapse of the physical economy, that system of infrastructure and productive activity upon which human life depends. Financial systems come and go, but the pain of their passing is nothing compared to the damage to humanity which results from the collapse of the physical economy.
It is said, over and over as if it were some sort of spiritual mantra, that we must save the banking system to save the economy. That is both true and false at the same time. True, because an economy needs a banking system to serve as an intermediary for the distribution of credit. False, because what the bailouts are attempting to save is not that sort of banking system at all, but a giant speculative casino which should have been shut down long before it blew up. The resources which are being thrown down the bailout rathole would be far better used in rebuilding our physical plant.
The discussions now underway in the political and financial capitals about escalating the bailout schemes through the nationalization of banks, the creation of ``bad banks,'' and government purchases of worthless paper, are proof that the bailouts have failed. What are we left with? Accelerating job losses, deepening government budget deficits at all levels, rising levels of home foreclosures, and corporate and personal bankruptcies. The more we expand the bailout schemes, the more money we suck out of a failing physical economy, and the more it collapses. The bailouts are not only incompetent from an economic standpoint and criminal from a social one, they are also destroying the economic structures upon which our very lives depend.
We have enough bad banks. What we need are some good ones.
- Fix the Problem -
The global economy is unsustainable in its current state. It requires an immediate boost in economic activity. That means we must launch an immediate program to build infrastructure, both nationally and internationally, from mundane projects, such as building and repairing sewer systems, to great projects such as an intercontinental maglev rail network. It means building state-of-the-art nuclear power plants to generate the electricity we need to power the increased economic activity, new steel plants to produce the steel we need, and a greatly expanded machine-tool sector to build the machines we need to build our new economy.
To accomplish that task requires a functioning credit system. We can not simply close all the insolvent banks, clean them up, and feed them back into a banking system which does not work. We must fix the banking system, itself, first. That means putting not only the banks, but the Federal Reserve System, through bankruptcy. We must put the Federal Reserve down.
The method by which this can be done is based on the approach laid out by Lyndon LaRouche in his Homeowners and Bank Protection Act. We close the banks, put all the speculative crap off to the side, to be dealt with later, and reorganize the banks into regulated, functioning entities. Then we take the Federal Reserve, do the same with it, and reorganize its necessary functions into a new version of Alexander Hamilton's Bank of the United States.
At the same time that we freeze the speculative paper, we declare a moratorium on home foreclosures so that people don't lose their homes while we reorganize the economy. We take steps to make sure that essential services such as health care, education, public safety, and similar activities are maintained--that the electricity stays on, the grocery stores stay stocked, and that people whose pensions were lost in the financial crash are protected. The principle is, do what is necessary to ensure the welfare of the population, while we deal with the mess the financiers have created, and rebuild our economy.
- Credit System -
The Anglo-Dutch imperial central banking system--the one that has died and whose rotting corpse is stinking up the joint--must be replaced with a global system based upon sovereign national credit. There is a vast difference between an oligarchic central banking system and a sovereign credit system, beginning with intent of the people who create them. The oligarchic system, in which the central banks are supposedly ``independent,'' is designed to allow the international financiers to control nations. This is what Mayer Amschel Rothschild had in mind when he said he cared not who made a country's laws, as long as he could control its money. The sovereign credit system, in contrast, was designed by Alexander Hamilton to free the nation from such imperial predations.
Under the Hamiltonian American System, as outlined in our Constitution, the Congress authorizes the issuance of credit for specific purposes such as infrastructure projects, and the Treasury handles the distribution of the funds.
The Treasury will do so through a new Bank of the United States, which will act as a intermediary between the Treasury and the private sector, and other governments. The Bank will monetize Federal debt, and pass the government funds into the reorganized private banking system. The banks, in turn, as intermediaries, will distribute the credit to the private sector entities, which had been selected to carry out the projects authorized by Congress.
The Federal government will do what it does best, which is to run large-scale infrastructure projects, while providing credit through the national bank to the private companies who will rebuild our productive base. In this way, the balance between the proper roles of government and the private sector can be maintained, with the government helping create the environment in which the entrepreneurial talents of the private sector can be maximized.
- Do It Now -
There is no time like the present to implement such a program. The bankers and functionaries of the oligarchic system will howl, and raise the specter of great calamity, but their system is bankrupt, and so are they. Let them scream--they probably need the oxygen anyway.
The Obama Administration has the perfect opportunity to act, to cast out the failed policies of the Bush Administration and its Treasury Secretary, and to correct the damage done by Speaker of the House Nancy Pelosi's supporting the Bush bailout scam. The people are outraged at the bailouts, and will support a return to national sovereignty and productivity--if the President takes the lead in explaining the new policy.
The alternative is to watch the economy continue to collapse, leaving the people at the mercy of forces beyond their control. We cannot allow that to happen, and it need not happen, if our government acts.
johnhoefle@larouchepub.com
February 1, 2009 10:38 PM | Reply | Permalink
That looks like spam. I got sick of it part way through. But I agree that it's not just an isolated banking crisis, there is a fundamental (structural or physical) shift going on too.
February 2, 2009 3:17 AM | Reply | Permalink
eds,
It is. Note the LaRouchie domain in the footer.
February 2, 2009 5:15 PM | Reply | Permalink
If you are an economist, then you must know that banks (at least commercial banks) use and always have used public money - its called fractional banking. Up until the 1980s, bankers were as staid and boring as accountants (sorry accountants), but then "financial innovation" and "entrepeneurship" came into vogue.
Commercial banks are essentially a franchise of the federal government and should be treated as such. If someone wants to run an investment bank or hedge fund, fine - but let them borrow from commercial banks only under tightly controlled conditions.
February 1, 2009 10:39 PM | Reply | Permalink
""You never want a serious crisis to go to waste,"
Does this remind anyone else of Karl Rove's attitude toward 9/11?
February 1, 2009 11:51 PM | Reply | Permalink
Power is power.
February 2, 2009 1:05 AM | Reply | Permalink
From the Project for a New American Century document "Rebuilding America's Defenses, written in 2000:
"
“the process of transformation, even if it brings revolutionary change, is likely to be a long one, absent some catastrophic and catalyzing event – like a new Pearl Harbor.”
Full coverage of Woolsey and PNAC in the Bill Moyer’s film: “Buying the War”.
It’s funny they might say that, because on 9/11 they got just that, including a green light to exploit their Iraqi imperial ambitions. At least 16 memebers of PNAC are or were in the Bush administration, including Dick Cheney, Don Rumsfeld, Paul Wolfowitz and even little brother Jeb Bush. It’s of little surprise that they didn’t ensure that “a new Pearl Harbor” didn’t happen. It’s not like they didn’t have some idea, as according to the 9/11 Commission Report the government had “tens of thousands if not hundreds of thousands” of terrorism warnings, yet GWB wasn’t that concerned about terrorism.
Then on the night of 9/11, at 2:26AM, James Woolsey, a frontman stooge of Neo-American Imperialism, was already thumbing Iraq as a suspect sponser state of the 9/11 attacks.
“The Pearl Harbor of the 21st century took place today.” -GWB"
February 2, 2009 1:28 AM | Reply | Permalink
You may not need references to "imperialism" in your note, but obviously you are exactly right.
We all know that they callously used our national calamity of 9/11 (after ignoring its imminent occurence) to do something they lusted for all along, go mess with Saddam, whom Bush's father could'nt/wouldn't fell. If Rahm is equally cynical, I hope he at least has some useful ideas to pursue, and will follow-up on them in less idiotic/incompetent ways than the failed Bush team. (I have no doubt that he would, but such is my take.)
February 3, 2009 9:12 AM | Reply | Permalink
It reminds me of Naomi Klein's book, The Shock Doctrine but I am not yet past chapter 9. She's mostly talking about "disaster capitalism" but it's at least a very similar idea, stepping in to remake economic systems at weak points in political history.
Bold is often good, esp. when good will is involved. I don't see Rove as a "good will" type.
February 2, 2009 2:37 AM | Reply | Permalink
Rahm's doctrine is Klein's Shock Doctrine with an ironic twist (if Johnson's interpretation is correct). In the Shock Doctrine Naomi points out how crises (shock and awe in Baghdad, Katrina, the Tsunami, etc) have been exploited by capitalists to remove traditional societal obstacles to new profit making schemes. What Johnson is suggesting is that we use this crisis in the credit markets to slap finance capitalists up side the head and force some change on them. I don't object.
February 2, 2009 7:05 PM | Reply | Permalink
only is too pessimistic. Imagine the effect of just returning to the 90% tax on incremental income and the protective trade policies Ike inherited from Truman. When unemployment was 2% and crime so low my mother in law remembered dancing in Central Park at midnight- like a Fred amd Ginger musical.
Not to deny the disasterous social policies of the time but that's a separate subject.
February 2, 2009 4:44 AM | Reply | Permalink
This will be a hard sell in congress. I remember writing my senator, the Honorable HRC, about big bank mergers that in my view weren't a good idea. Specifically, when B of A and Fleet were doing their merger I was very much against it. I wrote and called but in the end the merger went through. That merger gave B of A too big a piece of the overall financial marketplace east of the Mississippi.
I am 100% behind breaking up the banking system as it now exists. It is absolutely monopolistic and in the annals of monopolies of the past, has no peer.
The problem with trying to achieve this is we have a situation where there is an integral relationship between sitting congresspersons and senators and the financial community. This relationship is incestuous and very harmful.
Unless there is legislation that advances the complete isolation of the deep pockets of the financial sector and corporate America from campaign finance this will not get corrected.
The strongest argument I can think to make to get to where we need to be is these corporate interests are no longer American companies more than they are global, and have conflicted interests which collide with the interests of the country. You simply cannot escape the fact that their overall revenue stream is derived from global operations. In that regard I can't see how you can justify them having any right to lobby our lawmakers or participate politically. In fact they routinely act in ways that have the explicit intent of mitigating U.S. tax liabilities via their foreign operations. Nor can you minimize the influence of their decisions on the U.S. workforce and the overall impact on our economy.
While these corporations undoubtedly pay taxes, I would suggest that the overall conduct of their operations resolves to a wash or possibly even a net loss for the country.
It must also be taken into account that while their net profits are taxed at 35% their actual tax liability is very typically half that value. That half value, 17.5%, falls right on the mark of federal revenues where the percentage of taxes collected from businesses represents approximately 16% of overall federal tax revenue.
No matter how you slice it there is a lot wrong with this overall picture. It is in dire need of an overhaul to restore equity to our so very broken financial system. It will take some very heavy lifting to fix this. Most people have no idea. Unless taxpayers get a clue about this and are very vocal with congress, it probably won't happen. And who is to say if congress would listen even then? HRC didn't listen when I begged her to do something to stop the merger of B of A and Fleet. I'm not naive that a U.S. senator from NY necessarily has to be very sensitive to the realities of the circumstance but that circumstance is wrong to begin with.
February 2, 2009 4:46 AM | Reply | Permalink
There seems to be an emerging consensus that uber-banks are not a great idea. There is a lot of merit to this arguement. Let's not forget that prior to the current market meltdown, Citi was already showing signs of buckling under its own weight.
Yet here we are in an economic quandary where one of the few options for financial organizations to survive is to merge. B of A takes ML, JPMC grabs what's left of Bear, Barclays picks over the bones of Lehman. Meanwhile, GS and MS are granted financial holding company status, which means they are on the market for depository business (i.e. retail and commercial banks). All of this done with the help of the Treasury, and nothing to off-set this trend with Treasury's new management.
Furthermore, we hear a regular cry to just nationalize the bastards, which is in effect the ultimate bank consolidation. I think the populist outrage is warranted, what with hundreds of billions invested in the banks and no thaw in credit markets; not to mention the unsavory and unending headlines about ponzi schemes, luxury jets, executive redecorating and bonuses. Still, once we get beyond outrage we are left with a financial system, big bank or little bank, that is broken: able to bubble itself to death with no guage of real risk, and a crippling accounting system that struggles to assess value in a mercurial market of its own making.
So folks, it's time to decide whether we shall continue this rhetorical orgasm, or decide that it is indeed time fix this problem. There are too many ineffective and too few effective regulations. The mark-to-market accounting requirements promote the roller coaster effect on the markets. There is little transparency in complicated instruments, and too few government overseers who understand them. There is fraud up and down the stack. Disclosure and reporting is the wild west so that even seasoned analysts struggle, and pedestrians haven't a chance. Despite huge investment by the government, there is no targeted investment that would alleviate the credit market freeze. There is little understanding of the globalized capital market. There is poor coordination between regional regulators.
As for our leaders, leave the outrage to Count Down (KE does it better anyway), less pander more solutions would be nice.
February 2, 2009 9:00 AM | Reply | Permalink
The big banks should not be broken up. They should be reformed, regulated, and managed on behalf of American public interests.
If they are broken up, we loose the only institutions capable of being used to control the real financial powers: the hedge funds, the sovereign wealth funds, family wealth offices, venture capital firms, etc.
The latter are also global. Breaking up the big US banks would put us at a severe disadvantage to the other money centers such as London, Zurich, Dubai, Singapore, Hong Kong, etc. as well as the offshore havens such as Cayman Islands, Bermuda, Channel Islands, etc.
February 2, 2009 10:16 AM | Reply | Permalink
If you're right, it seems to me that the loss of American banking predominance is to be feared, principally, if it threatens to undermine the USD as the international reserve currency.
Another way of saying the same thing is to assert that "control" comes via the special relationship large American banks have with the Fed. The banks power comes second hand from the Fed's power which comes second hand from the fact that the Fed "controls" the reserve currency.
If the USD is sound, I don't see worrying about whether USB grabs a bigger share of private wealth management or whether Mizuho funds more new ventures.
As an aside we do have quite a bit of influence over foreign banks which wish to be or remain primary dealers.
February 2, 2009 11:05 AM | Reply | Permalink
How to solve the deficit and FREE the country: GET RID OF fractional interest and the powers of international banking it has over peoples and governments (the facts are in history: http://video.google.com/videoplay?docid=-515319560256183936 or visit their web site: www.themoneymasters.com regarding the recent Wall Street bailouts)
February 2, 2009 11:43 AM | Reply | Permalink
It would be good if we were to return to a time when banks and financial institutions were thought sufficiently important to be regulated with the same rigor as we apply to, say, infants' toys, rather than the "pay the bribes and try not to be too obvious" approach we take to the gun lobby. Problem being, it is difficult to praise the sort of edge-skating practiced by financial institutions one day and ask them to act like responsible corporate citizens the next.
Of more import, in the long run, is the Rahm Doctrine and its implications for changing the way the Legislative Branch does business. We finally have somebody admitting that the American People, in their cute little mayfly-like attention spans, only consider a given matter important while it is front and center of Network News, or the first segment of The View, or Oprah.
When a bridge collapses, we hear about the pressing need for infrastructure. But when the Fed goes to the several states to ask about shovel-ready projects, it's crickets time. Nobody was interested enough to press government (at any level) into making the necessarily lengthy preparations to be ready to move when the money becomes available.
When several children are killed as the result of untrained people shooting in the general direction of an imagined threat, we talk about how we need to prosecute such things, but public pressure never rises to the level that might encourage some level of government to do the groundwork to bring weapons laws into the current social realities in the same way that private transportation laws changed when we moved from horses to automobiles.
Government needs to make no bones about preparing responses to crises so that the brief attention and public support for a solution does not flicker out while politicians run through their "good idea, but I don't want to have my name on it so that I can blame you if it's not perfect" gyrations.
February 2, 2009 2:22 PM | Reply | Permalink
The megabanks should be broken up, along with a lot of other megabusinesses. There may be efficiencies of size to support the conglomeration that has taken place, but it is only to the benefit of the bottom line of the surviving entity in a merger. The consumer suffers, every time. Don't give me the nonsense about greater access and more products to choose from. Higher prices are the cost to consumers, and less competition is a result. Break them up, regionally, and by function.
February 2, 2009 4:53 PM | Reply | Permalink
Hear, hear!
Step one, inject dollars to shore up the FDIC and head off any sense of panic.
Step two, allow insolvent banks to fail, and be taken over by the FDIC.
Step three, pass new regulations limiting the size of banks and the mix of businesses any one bank can be in.
Step four, chop into pieces those previously insovent banks, and allow the smaller entities to gradually emerge as individual regional and/or specialty banks (under non-governmental control -- probably via IPOs with the capital raised going to de-fray the FDIC's costs).
-- ARG
February 2, 2009 6:09 PM | Reply | Permalink
. . . allow insolvent banks to fail . . . .
Do you mean "force"?
And do you include within the phrase "insolvent banks" Citibank (and its holding company), Bank of America, JPMorganChase, and/or Wells Fargo?
February 2, 2009 8:27 PM | Reply | Permalink
BAC and Citi are apparently in different shape than are JPM and WF.
in re your other comment, how is "conservator" something new? Citi may be large and poisoned (probably by GS and other market players), but what of it? Cover the domestic FDIC liabilities at 100%, apportion what's left to the rest of the creditors. The only problems I see are 1) international subsidiaries/investors, and 2) putting prices on synthetics and "insured" real assets (real estate and direct loans on real property).
If a mortgage is covered by mortgage insurance, and the homeowner defaults, then the question is whether the insurance company will pay up.
February 2, 2009 10:13 PM | Reply | Permalink
The only problems I see . . . . eds
I gather you don't worry about a "pervasive loss of trust" between banks or a "crisis of confidence" about their ability to repay debts as did Krugman during last fall's interbank lending so-called credit crunch.
Given the claim priorities under the FDIA it is the case that unsecured creditors of a bank (almost all creditors other than depositors) will not get repaid unless the insolvent bank is transferred to a sound bank that assumes the obligations or a successful conservatorship is accomplished by the FDIC.
Big insolvent banks aren't candidates for being taken over by sound banks; they're too big.
My ultimate point, though, is that any action taken by the FDIC against a big bank threatens to generate a "pervasive loss of trust" between banks or a "crisis of confidence" about their ability to repay debts.
February 3, 2009 12:29 AM | Reply | Permalink
Actually that Krugman article was two falls ago, one month before the now official start of the recession. K. writes in generalities, but no, I don't see the further loss of trust as a problem; there's been plenty of disclosure. What I see is a need for a clear sense of current reality to set in along with a dose of sound optimism for the future.
Where I would want more data would be in the valuation of assets (and liabilities!) which lead to a bank being declared insolvent. If assets are artificially depressed, or liabilities artificially inflated, a bank might look very sick but have a lot of potential due to pricing anomalies (manipulation such as short selling, panic, ...).
A huge failure is more scary than a small failure of the same kind, but it's still just accounting and bookeeping entries grounded in real assets (except as noted in my prior comment). However, Citi and BAC now have huge loan guarantee cushions, deserved or not, thanks to Paulson and Bernanke. It seems to me that those cushions moot the FDIC. Will other banks get similar treatment?
Don't think of it as being the FDIC taking action against a bank, think of it as the FDIC taking long delayed steps to aid in recovering trust and confidence.
February 3, 2009 5:13 AM | Reply | Permalink
If we don't let C and BAC go, I don't see the point of ARG of Chicago's "step two," the point to which I was directing my consternation. If we're only talking about letting some regional and community banks go under -- something that seems to be happening regularly every Friday -- then, the discussion is pretty well mooted.
While I would prefer doing the first, given the common interpretation* of the Lehman experience which subsists in the minds of our dear leaders I cannot imagine them allowing Citibank (Citigroup) or Bank of America "to fail."
* That is, that allowing the failure of a systemically significant institution results in the freezing up of the credit markets due to a "pervasive loss of trust" between banks or a "crisis of confidence" about their ability to repay debts.
February 3, 2009 6:13 AM | Reply | Permalink
See my comment below as well.
I say, "Let 'em crash!"
Yes, I'm talking about Bank of America and Citi. If they are insolvent, then friendly FDIC steps in to take care of things, and runs these banks for a year or ten, until they can be reconstituted as many smaller banks and released into the wild again.
If that's beyond FDIC's charter, then let's extend their charter.
-- ARG
February 3, 2009 11:10 AM | Reply | Permalink
How can they crash now, unless the losses greatly exceed the loan guarantees?
My main concern is to keep government funds from going to criminals and gamblers, here. The loan guarantees, which I admit I don't understand, appear to offer massive money transfers into dark corners. That doesn't bring light to darkness, it flushes currency and the supposed value thereof down the drain.
If BAC owes GS, should the US fund BAC to pay off GS?
Dean Baker made a similar point about a housing/tax-credit proposal. Revolving door giveaways are wrong, whether for families of individuals or families of corporations.
February 3, 2009 4:14 PM | Reply | Permalink
Don't know how many loan guarantees we (the government) are on the hook for already. More are being proposed now, as part of this "bad bank" plan. I don't like 'em.
Seems (to me, anyway) simpler and cleaner to just let the banks come under the wing of the FDIC, and then FDIC can decide whom to pay and how much.
-- ARG
February 3, 2009 5:07 PM | Reply | Permalink
The two big ones are to BAC and Citi, about $300-400B total. BAC got something like $118B after it came out that Merrill had screwed us in the fall by losing even more billions. Citi got theirs earlier.
As far as I know, they were both done on the sly, out of nowhere except from some orifices of Paulson&Co.
If they can be revoked, we should get right on it.
February 3, 2009 5:43 PM | Reply | Permalink
Or maybe, if we're on the hook to "guarantee" these particular loans anyway, we won't be any worse off taking over and running these specific banks. (We'd be more directly looking after our investments, in a way.)
-- ARG
February 4, 2009 11:49 AM | Reply | Permalink
The first step is always the hardest, but the time is long past in taking action. NATIONALIZE the banks just as Sweden did in the 90's. Anything else is a waste of precious time as well as hard earned tax payer dollars.
Jefferson....I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
In his own words President Wilson stated that the biggest mistake of his career was allowing the creation of the Federal Reserve. Show some guts Obama and do the right thing. The 100 year fiat experiment is a failure and has brought the country to the abyss. Shutter the Federal Reserve now and return the power of money to the people through US Treasury dollars backed by gold and silver.
February 2, 2009 6:02 PM | Reply | Permalink
Allowing the FDIC to take over failed banks (per current law, and the plan I suggested above) could be done without the negative connotation of "nationalizing" them.
When IndyMac failed last year, did anybody cry about us "nationalizing" that bank?
Just let the mechanism we have now work the way it was supposed to. Shareholders in these banks deserve to lose their money, I'm afraid, because they own insolvent businesses. It's that simple.
-- ARG
February 2, 2009 6:12 PM | Reply | Permalink
I can't recall whether the FDIC acted as receiver, conservator, or liquidator in the Indybank case.
But when the FDIC acts as a "conservator" with the expectation (hope?) of rehabilitating the failed bank, it seems to me that the word "nationalization" (as with the Swedish experience) is apropos.
When the isue is what to do with a bank the size and financial significance of Citibank (Citigroup) I suspect "conservatorship" would be the only choice available in the event of its failure.
The other two resolution procedures would wipe out the unsecured creditors (interbank loans, for example) and would, thus, threaten* interbank and other forms of short-term lending to banks throughout the rest of the banking system -- something Treasury, the Fed, OCC, and the FDIC would be loath to gamble about.
* "My God, Joe; if it can happen to Citi, it can happen to UST or BB&T or Mellon. Buddy, it ain't worth the extra quarter point overnight. Tell that bank on the line no way, no money."
February 2, 2009 8:45 PM | Reply | Permalink
When Congress passes a bill to add some money to FDIC's reserves, they can also quietly add whatever expanded powers FDIC might need to act as a conservator.
The goal would not be to "rehabilitate" the big banks in their current form, but to break them up and recreate them as smaller, regional (or specialty) banks.
I understand the risk of loss of trust. That's the "too big to fail" problem. That's why the ultimate goal would be to break them down into smaller entities, while passing necessary reforms to prevent this from ever happening again.
My only point is that allowing FDIC to step in and take over insovent banks (you know, for the good of the depositors) does not sound as bad as "nationalization", which (to some) connotes the government's assertion of domain over what should be a private corporate enterprise.
I suppose it's just spin, or marketing. (And you know I believe that marketing is the root of all evil.) But I think the public at large will find it more palatable if the FDIC, which is there to protect us (the little guys), just steps in and does what it is supposed to do.
-- ARG
February 3, 2009 11:07 AM | Reply | Permalink
"just steps in and does what it is supposed to do"
Your closing remark is right on. Government is failing because it fails to govern effectively and efficiently. Under Bush this could be partly understood as mere anti-government sentiment ruling the day. Now I don't see any excuse. Well, if incompetence is an excuse, I sure hope Obama's Admin. doesn't need that one.
Obama called for smart government. Well, let's see some progress on this sooner rather than later.
February 3, 2009 4:22 PM | Reply | Permalink