Politicians in Washington are mesmerized by Wall Street campaign dollars and terrified by being branded “socialists”. That seems to be the most likely explanation for the failure of the Congress to pass a second stimulus bill despite continuing high levels of unemployment -especially long-term unemployment - that are absolutely catastrophic for millions of families.
In fact, politicians are leaning in the other direction. Instead of a jobs bill, they are promoting deficit reduction. Instead of promoting stimulation of the economy there has been a stunning revival of Herbert Hoover financial orthodoxy: hard money, balanced budget, and deficit reduction.
Yes, long-term fiscal responsibility is important but cutting spending in the midst of a recession is more likely to lead to deflation of prices, business activity and jobs than to the inflation that worries the financial elite. Social stability is promoted by full employment policies, diminishing crime, sickness and chronic unhappiness. Didn’t we learn from bitter experience?
The same politicians have just completed a financial overhaul bill that will be known as the Dodd - Frank Act. The outcome of this so-called reform is particularly relevant to taxpayers who spent and pledged trillions of dollars to bail out the banking system, especially the five US banks with the most assets: Bank of America $2.34 trillion, J.P. Morgan Chase $2.14 trillion, Citigroup $2 trillion, Wells Fargo $1.2 trillion, Goldman Sachs $0.88 trillion. The 10 largest banks have $10.4 trillion in assets, equivalent to 80% of the gross domestic product of the entire US
The most important failing of the Dodd-Frank Act is that it does not resolve the biggest problem and the greatest danger in the recent financial crisis.. If any one of the largest banks falls into serious financial trouble, by mistakes or by excessive risk, the federal government would be compelled to rescue to prevent collapse of the entire financial system. The concentration of wealth and power is the greatest danger to our capitalist system.
The Act reduces proprietary trading and regulates derivatives but we have had regulators and regulations for 100 years of ineffectiveness as low paid civil servants are overcome by the richest financial institutions in world history. There are two ways to reduce the risk of “too big and too powerful to fail”. First, cut the enormous and interconnected financial firms down to size by requiring them to sell off their various divisions. Alternatively, let them remain large but have the federal government take them over to be treated as public utilities run by salaried employees without the tempting bonuses realized by anti-social risks and gambling with other people’s money. If the taxpayer assumes the ultimate risk by bailout, he should have the ownership as well as the profits generated by the rise and fall of the various markets, often manipulated by the big boys in their seats of power
Showing posts with label banks. Show all posts
Showing posts with label banks. Show all posts
Thursday, July 1, 2010
Saturday, June 12, 2010
Breaking Up the Super Banks
What made this recession a "great recession" isn't only its depth and duration. Most importantly, it has forced changes in the role of government in the economy, in rules for finance and banking. In addition, and just as far-reaching, it has changed American attitudes toward spending and thrift, retirement and homeownership, as well as finance and government.
Public attitudes toward the super-banks may have changed the most. "Bailout" has become a nasty word describing the incestuous relationship between the banks and the U.S. Treasury. It is a scandal that certain bankers had a private window at the Treasury for their financial convenience when money was needed to bail them out of their gambling and mistakes. The unfairness of the government subsidizing the errors of a particular industry is obvious but it is compounded by the subsidizing of only a part of that industry, the super-banks.
Don't think that this favoritism is due to family connections or college chums or drinking buddies, although there are favorites everywhere, even in Hell. Surprise: there was also the profit motive. Banks deemed by the government as too big to fail can borrow money for normal operations at lower rates of interest. The lender knows that this borrower is virtually guaranteed by Uncle Sam. The hazard, always a factor, is greatly diminished because the US Treasury is just over the horizon to bailout the deal. As a consequence, business practices are distorted, extra risks are taken and super-banks profits are dramatically increased. They can afford more political contributions and lobbyists. The banks can use the extra profits to acquire other banks making them even more essential to the national economy.
The big banks that dominate the economy do not lack defenders in high places, defenders whose influence offsets the qualms of the average citizen. Heavyweights such as Treasury Secretary Timothy Geithner, presidential advisor Lawrence Summers, Robert Rubin, former Treasury Secretary and chief executive at Goldman Sachs and Citibank, would prefer strengthening regulation of banks rather than breaking them up by congressional law. Regulators can be pressured in a variety of ways; by the White House, by Members of Congress, by the prospect of future jobs, by the intricacies of the regulations, etc.
Finally, if the super-banks are divided so that they are not too big to fail, if a version of the New Deal Glass-Steagall Act of 1930’s was reenacted, separating commercial banks from investment banks, the question would remain whether that would be enough to prevent bank growth in unforeseen ways to the level that would command the subsidy of "too big to fail". We need to monitor these guys - in the public interest - to protect fair competition and to guard our national treasury.
Public attitudes toward the super-banks may have changed the most. "Bailout" has become a nasty word describing the incestuous relationship between the banks and the U.S. Treasury. It is a scandal that certain bankers had a private window at the Treasury for their financial convenience when money was needed to bail them out of their gambling and mistakes. The unfairness of the government subsidizing the errors of a particular industry is obvious but it is compounded by the subsidizing of only a part of that industry, the super-banks.
Don't think that this favoritism is due to family connections or college chums or drinking buddies, although there are favorites everywhere, even in Hell. Surprise: there was also the profit motive. Banks deemed by the government as too big to fail can borrow money for normal operations at lower rates of interest. The lender knows that this borrower is virtually guaranteed by Uncle Sam. The hazard, always a factor, is greatly diminished because the US Treasury is just over the horizon to bailout the deal. As a consequence, business practices are distorted, extra risks are taken and super-banks profits are dramatically increased. They can afford more political contributions and lobbyists. The banks can use the extra profits to acquire other banks making them even more essential to the national economy.
The big banks that dominate the economy do not lack defenders in high places, defenders whose influence offsets the qualms of the average citizen. Heavyweights such as Treasury Secretary Timothy Geithner, presidential advisor Lawrence Summers, Robert Rubin, former Treasury Secretary and chief executive at Goldman Sachs and Citibank, would prefer strengthening regulation of banks rather than breaking them up by congressional law. Regulators can be pressured in a variety of ways; by the White House, by Members of Congress, by the prospect of future jobs, by the intricacies of the regulations, etc.
Finally, if the super-banks are divided so that they are not too big to fail, if a version of the New Deal Glass-Steagall Act of 1930’s was reenacted, separating commercial banks from investment banks, the question would remain whether that would be enough to prevent bank growth in unforeseen ways to the level that would command the subsidy of "too big to fail". We need to monitor these guys - in the public interest - to protect fair competition and to guard our national treasury.
Monday, April 19, 2010
Bailing Out the Gambling Financiers
Why shouldn't banks be limited to a certain size that would not pose a threat to the entire economy? Why shouldn't they be restricted to specific activities that support personal savings and the financial needs of real businesses? Why shouldn't banks be forbidden to gamble with depositors’ cash, also known as other peoples' money?
It doesn't happen because the government is addicted to the tax revenues from the financial services and doesn't want the banks to go overseas. Let them go overseas: they won't find another country with the cash to bail them out nor the political vulnerability to their lobbyists and cash donations.
The subprime mortgage derivatives generated trillions of investment dollars by bank professionals who failed to research the package offered, failed to assess the viability of the sponsors, and ignored the underfunded reserves. Investment banks are a lot closer to spreadbetting indexes than your traditional gambling bookmaker as they simply let everyone else take the risk secure in the knowledge that the government will bail them out with taxpayer money. At least we should separate retail banking from the pure gambling that is often called investment banking. Another alternative would be to nationalize the banks. If the taxpayer assumes the ultimate risk, he should have ownership.
If Congress actually passes a bill forbidding bailouts but does not break up the enormous banks to a reasonable size, the next financial crisis will again be called a threat to the entire economy and the bailouts repeated. Never before has the intertwined relationship between big business and big government been so obvious to so many Americans. They are demanding change and they will get something that looks like change - but it won’t be adequate to contain the continuing crisis.
It doesn't happen because the government is addicted to the tax revenues from the financial services and doesn't want the banks to go overseas. Let them go overseas: they won't find another country with the cash to bail them out nor the political vulnerability to their lobbyists and cash donations.
The subprime mortgage derivatives generated trillions of investment dollars by bank professionals who failed to research the package offered, failed to assess the viability of the sponsors, and ignored the underfunded reserves. Investment banks are a lot closer to spreadbetting indexes than your traditional gambling bookmaker as they simply let everyone else take the risk secure in the knowledge that the government will bail them out with taxpayer money. At least we should separate retail banking from the pure gambling that is often called investment banking. Another alternative would be to nationalize the banks. If the taxpayer assumes the ultimate risk, he should have ownership.
If Congress actually passes a bill forbidding bailouts but does not break up the enormous banks to a reasonable size, the next financial crisis will again be called a threat to the entire economy and the bailouts repeated. Never before has the intertwined relationship between big business and big government been so obvious to so many Americans. They are demanding change and they will get something that looks like change - but it won’t be adequate to contain the continuing crisis.
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