by Frank James
Now that President Barack Obama has had his first taste of CEO blood via the sacking of GM's Rick Wagoner, maybe he will go after others, particularly in the financial services sector.
That would be just fine with Simon Johnson, the MIT professor and former International Monetary Fund chief economist, who proposes that the administration and Congress take on the oligarchs who run the nation's banks.
Indeed, in a piece in the Atlantic Johnson suggests that breaking up the power of the large banks is the only way the U.S. can avoid a recession that's longer and more painful than it's already experiencing.
Johnson's thesis is that the financial sector benefited greatly from decades of increasingly lax regulations, low interest rates, global surges in available cash and easy credit, the very things that led to the current crisis.
The crisis has only given them more power since they are seen as not only the key path out of the recession but, because of their size, too big to fail. Thus, the banking oligarchs continue to drive federal policy in a direction that benefits them at the expense of the rest of the economy.
An excerpt:
Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause--Lehman was small relative to Citigroup or Bank of America--is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.
The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy--the function that the private banking sector is supposed to be performing, but isn't. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.
At the root of the banks' problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don't want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren't enough to make them healthy (again, they can't reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don't lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won't pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate--creating a highly destructive vicious cycle.
To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards--contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.
One of the most fascinating and compelling parts of Johnson's analysis is the way he examines the U.S. situation through the eyes of IMF officials. He prompts the question: if breaking the power of oligarchic financial sector is good enough for an emerging nation's economy to put it on a sounder footing and allow it to receive IMF help, then shouldn't it be good enough for the U.S.?
Comments
How about Obama fire up our version of the French Revelution and just start taking off all of their heads (figuratively of course) of any company that has abused the market. Too bad the sharholders don't have the spine to do it themselves. I hope he slaps serious regulations on the whole mess and shows these idiots why the regulations were put there in place the first time, and why they should've never been allowed to be relaxed under the pug's watch.
Posted by: Xcellentform | March 31, 2009 9:27 AM
Horrible Form,
.
Do you mean the Gramm-Leach-Billey act that passed the House by a vote of 362-57 and the Seante in 1998 by a vote of 90-8 and signed into law by President Clinton? Is that the relaxing of the law you mean?
.
Are you talking about the accounting irregularities at Fannie Mae that generated record profits and therefore record bonuses for Franklin Raines? Those relaxed standards?
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Are you talking about the Brothel Barney Frank telling everyone, just this past summer, that Fannie and Freddie were in good shape?
.
Are you referring to Chris Dodd's sweetheart deals with Countrywide or securing bonuses for AIG?
.
Are you referring to Presdeint Bush calling for housing finance regulation in 2003 only to be sytmied by Brothel Barney?
.
http://www.nytimes.com/2003/09/11/business/new-agency-proposed-to-oversee-freddie-mac-and-fannie-mae.html
.
I could see how you would think the "pugs" relaxed all the regulation of the financial sector.
Posted by: Terry | March 31, 2009 10:33 AM
In the interests of balance and equal time, I'll link to a video of an expert who isn't Frank James-style far left--Professor Richard Epstein of the U. of Chicago. Professor Epstein demonstrates how perverse government regulations caused the bank failures. See http://tv.nationalreview.com/uncommonknowledge/ for the "other side" The Swamp won't present.
Posted by: Hope N. Change | March 31, 2009 11:12 AM
Terry is right about Billybob Clinton.
Takes one to know one, I reckon.
Billybob's record contains many actions contrary to the base of the Democratic Party.
Start with
NAFTA.
Then random recollection adds:
RUANDA
DOMA
IRAIRA
ADPA
Etc.
And don't forget Bush.
Clinton paved the way for Bush.
If Billybob had done the right thing, as Spitzer did, and resigned rather than dragging the Democratic Party through Monicagate, Gore would have been president for 10 years and we wouldn't be where we are today.
As to banks: there ya go, Billybob.
Very little enforcement of the antitrust laws since 1980.
So easy for firms to get to be "too big to fail"!
So, yes, they should now be broken up, either voluntarily or in the Bankruptcy Court.
AIG should have been sent to the Bankruptcy Court.
But, as we now know, Goldman Sachs was a big counterparty to AIG's crumbling CDO's.
And Paulson was CEO of Goldman Sachs before W put him in at Treasury.
Goldman had to be bailed out, indirectly, through AIG, didn't it, Hank?
By the way, who is running the Antitrust Division nowadays??
Posted by: ornery | March 31, 2009 11:27 AM
H&C, get your hand out of that cookie jar!
Richard Epstein ?
His students' nickname for him at U of Chicago was "Jerry Lewis", after his, er, ah, distinctive style in the classroom.
He who "mentored" Grover Norquist and promoted the "Starve the Beast" theory of govt. finance?
He who preaches that all regulation (zoning, environmental regulation, etc.) is an "unconstitutional taking" of property without due process of law?
I don't think Jerry Lewis is at the U. of Chicago any more.
I think he moved to NYC where he can rub elbows with his patrons, the Masters of the Universe (or what is left of them).
Posted by: ornery | March 31, 2009 11:35 AM
H&C, get your hand out of that cookie jar!
Richard Epstein ?
His students' nickname for him at U of Chicago was "Jerry Lewis", after his, er, ah, distinctive style in the classroom.
He who "mentored" Grover Norquist and promoted the "Starve the Beast" theory of govt. finance?
He who preaches that all regulation (zoning, environmental regulation, etc.) is an "unconstitutional taking" of property without due process of law?
I don't think Jerry Lewis is at the U. of Chicago any more.
I think he moved to NYC where he can rub elbows with his patrons, the Masters of the Universe (or what is left of them).
Posted by: ornery | March 31, 2009 12:12 PM
Biggest lie re. Clinton; 'He's a liberal.'
He proved it by sighing the Glass/Steagall repeal and the so called 'Telecommunications Reform Act'.
Of course these laws were written, directed and produced by the Republican Politburo Cong.
Posted by: C.Morris✈ | March 31, 2009 12:56 PM
* * * * *
“Of course these laws were written, directed and produced by the Republican Politburo Cong.”
.
Posted by: C.Morris✈ | March 31, 2009 12:56 PM
.
And, as President, Bill Clinton had the power to veto them if he didn’t like them. Not only did he sign them into law, he has gone on record (even lately) telling people how much he liked them and how good they were for the country.
Posted by: John W. | March 31, 2009 2:13 PM
CM,
.
Did you notice the vote count it passed by: 362-57 & 90-8. It had democratic support. However, it didn't have the dems backing at first. Only 54 senators voted for it at first, not enough to clear the filabuster. So what got the dems behind the bill? Democrats agreed to support the bill after Republicans agreed to strengthen provisions of the anti-redlining Community Reinvestment Act. And thus began the start of sub-prime mess.
Posted by: Terry | March 31, 2009 9:18 PM