The Role of Government: Keeping the Wealthy Rich
For some reason most of the discussion in Washington and the media of the bank bailouts is overlooking their central feature: taxpayer dollars are being used to sustain the income of incredibly rich bankers. The public should be furious over this upward redistribution of income.
The basic story here is very simple. If we got the government out and left things to the market, virtually the entire banking sector would be bankrupt. Citigroup, Bank of America, Goldman Sachs, Morgan Stanley and almost all the other big banks, and thousands of smaller ones, would be out of business. (My bet is that even "healthy" banks like Wells Fargo would be in bankruptcy before too long. They hold plenty of bad debts, too.)
Most of the top executives of these banks would likely be sent packing, while those remaining would have their compensation (including "golden parachutes" and bonuses) set by bankruptcy judges who would be running the companies in the interest of the creditors, not the shareholders. The shareholders themselves would be out of luck for the most part. Many bank stocks have already lost 80-90 percent of their value over the last 18 months. Bankruptcy would likely eliminate what little remains.
However the banks are not in bankruptcy because the confused state of affairs and potential lost of creditors' wealth created by large-scale bankruptcies in the financial sector would be a devastating hit to the economy. This is the rationale for the TARP, the various special lending facilities created by the Fed, and other measures to ensure the survival of the banking system.
The government has intervened in a huge way to keep the market from taking its course. But the key issue that has been buried in the debate in the media and political circles is the separation of the interest of the public in a functional financial system and the interests of bank executives in high salaries and shareholders in getting returns on their capital.
At this point, the banks are desperate -- they would be dead without government handouts. This means that the government can set whatever terms it wants. And, for both economic and moral reasons, it has an obligation to set terms that do not reward the bank executives and shareholders.
The bank executives and shareholders took big risks that went bad. If they are rewarded with taxpayer handouts, then the message this sends to the financial sector is to keep taking irresponsible risks. The game becomes heads they win, tails we lose. If the bets pay off, then they are incredibly rich. When the bets go bad, the taxpayer gets the tab.
The moral reason for not rewarding executives and shareholders is that these rewards require the taxation of middle income people, like truck drivers and nurses, to transfer money to some of the richest people in country.
This sort of upward redistribution is difficult to justify. Usually people in the United States like to believe that the market determines the distribution of income. Many get outraged over the idea that a mother on TANF can get a check for a few hundred dollars a month from the government. In this case, the government is effectively handing checks of millions of dollars to bank executives who would be out of work if the market was left to run its course.
We have to keep the financial system functioning, but we can do this without transferring hundreds of billions of dollars from middle class taxpayers to the wealthiest people in the country. If the bailout conditions imposed by the Obama administration and Congress don't effectively eliminate shareholder wealth in the bankrupt banks and bring compensation (in whatever form) of bank executives back down to main street levels then it is can only be explained by corruption. There is no excuse for this massive intervention to redistribute income upward.
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Diogenes
Because I think it gets to the heart of the matter......... a comment from you a couple of pages back....
I quote you......"The solution of the problems arising from insider positions, favoritism and failing oversight are extremely difficult to solve precisely BECAUSE it is IMPOSSIBLE to solve them from the outside. You cannot simply abolish the banking sector. This 'solution' is not available".
I disagree with the basic premise of your assertion. If you look at history you will see that major change NEVER comes from WITHIN. People in positions of power and priviledge are NEVER willing to make choices that will work to their own detriment. It just does not happen that way. It's never happened that way.....ever.
Thus we end up with The American Revolution, The French Revolution, The Russian Revolution, The Spanish Revolution, The Chinese Revolution, and on and on.......................
The one thing all these revolutions have in common is that change was FORCED upon the intrenched powers from the OUTSIDE.
Your premise is incorrect in that it is exactly backwards.
Real change will only come to our banking system from the OUTSIDE.
This is precisly why Barack Obama's economic team is such a disaster...... their ALL insiders and thus have no intentions of making any real change.
I am a lot more optimistic, as you know.
To consider Obama and his economic team too much part of 'the establishment' is a bit odd, asking a bit much.
Consider the fact that in most G20 countries banks are not only too big to fail but too big to be helped. Consider Iceland, and Britain. Where do you take all the power and all the money from?
Even wars had to be funded. At all times. Reformation brought into existence the protestants (partly) because of financing issues of the pope.
Then why am I optimistic? Because the banking and finance sector is not rounded up in a conspiracy. It's an exaggeration to think in such terms.
WOW !
""To consider Obama and his economic team too much part of 'the establishment' is a bit odd, asking a bit much.""
Please identify one member of Obama's economic team that is NOT a member of , or hasn't worked for, the international establishment elite known as the Council on Foreign Relations.
Or ANY other standard of non-establishment that you may care to use.
""Because the banking and finance sector is not rounded up in a conspiracy.""
First, you are the ONLY one to raise the issue of a conspiracy in this dialogue.
Second, since you have, I fail to see why the secreting of the heads of the WORLD's biggest banks down to Jekyll Island to secretly meet with Senate Finance Committee Chair Nelson Aldrich, who was head of the National Monetary Commission, for the purpose of DRAFTING the Federal Reserve Act does not meet the definition of a conspiracy.
Not that I care.
That confiscation of the people's rights to control their own money system was ultimately done with a pen.
And, it can be undone with another pen.
Which is exactly what I propose.
DiogenesofAlaska and I have been repartee-ing on a comment I made calling for establishment of a debt-free money system to solve the problem of the financial abyss we are approaching.
Some of that is not for the monetarily faint-of-heart.
To re-begin – from that end…
For the sake of discussion, Di may recognize the limitations of debt-money and possibly the benefits of a system of Treasury-issue, but he deigns the latter infeasible because “you cannot get there without unpredictable disruptions”.
At one point he opined it difficult for even the LosAlamos staff to make those disruptions more predictable.
Supporters of the FED and debt-money are guilty of not having an exit strategy.
I recognized that shortcoming a long time ago.
There’s a lot of hand-wringing in Di’s writings claiming that people didn’t know what they were doing, and THIS is what caused the crisis.
If you know what you’re doing RIGHT NOW, the work is to clarify the transition.
The debt-money system is broke. We reached the point of not only unsustainability in debt-service obligations, we are at the point of near-collapse.
Di, Bernanke, Paulson, Summers and Geithner would have us believe it was good people working hard and making mistakes that they didn’t know were coming.
They should have known.
A link to a paper by financial linguist Steven Lachance on “How Debt Money Goes Broke”
http://www.financialsense.com/fsu/editorials/2005/1212b.html
It's a bit funny that you put me in that list of names. Rest assured that you are exaggerating.
I rest my case on the record in this blog.
You have clearly stated many times here that it was just as I wrote; people not knowing what they were doing.
And, if you have never heard that exact same theme from the rest of that crew, well, then , you are the only one.
I'm making those Los Alamos comparisons for the simple reason that the computing problems in valueing derivatives and 'calculating' policy consequences are at that scale (in the sense of: occupy a large fraction of computing power available on the planet).
This goes to show that there is a lot of uncertainty in the calculation, and this uncertainty was already very big in the build-up of the crisis. Risk management has failed because they didn't (often enough) blow the whistle. Management has failed because they didn't encourage risk management to do what they're supposed to do: blowing the whistle.
It was a classic failure of governance within banks. And of epic proportions. All these things indeed could have been foreseen. And they were foreseen. By many people, including me.
But that doesn't make me part of it. The reason I post not under my real name is simply that I cannot afford people wondering about how I spend my time. I blog outside working hours, but I don't want to get myself into a situation where I need to prove it. It's that simple. I'm a teacher and researcher now, but have worked in the oversight and regulation business.
Creative Conflation.
You are taking the problems that exist right now in the high-leveraged commercial and investment banking world, and making it a consequence of changing to an honest debt-free money system.
You have to work ALL that stuff out regardless of the monetary system you are using.
It is the problem of the impossibility of valuations, caused by the intentional lack of transparency in all SIV-based transactions, that has caused the true lack of trust and confidence in the financial and credit markets, here in this country and throughout the globe.
NONE OF THAT is a problem caused by transitioning to honest money.
Au contraire, otra vez, the transition to an honest money system will make all of that stuff IMPOSSIBLE in the future.
Even if you know the guys with the computers at LosAlamos, it is not going to solve the problem of hyper-leveraging and financial exotica.
Just put it off for another day.
To begin again.
It isn't just the banks. That big 3 letter company that rises 11% in one day on what's arguably one of the best set of numbers to come out this month axes plenty of people the following day. Shareholders are all that matters, not the customers and certainly not the employees that provide those profits:
http://www.allianceibm.org/jobcutstatusandcomments.php
Yesterday the stock market went down big - today it went up big..... on news that the chairman of some of the largest banks had bought hundreds of thousands of shares of thier own companies stock....... the FIX is in folks...... these people would not have bought their own shares if another HUGE
BANK BAILOUT was not in the works by the Obama administration.... the decision has been made... get ready for TARP II.....
"the FIX is in folks"
No. The fix has been in, for a long long time.
If you don't believe it, get to know - in depth - the people Mr Change is bringing in to lead our economy. Good god.
If you still don't believe it, watch CSPAN today........and Mr (said tween clenched teeth) Geithner. If people don't already know of Geithner, I suggest they do quite a bit of research on the man. That doesn't mean google 1 or or even 10 articles. I mean, research. In depth. You will NOT like it. In fact, you'll toss yer cookies that this man is now back in control. He should be behind bars. Holy Cow.
I gotta agree.
There was no advice to Obama that he needed to go outside the Council if he was going to get any real change to the financial system.
And, let's face it, Obama is a smart guy.
So, growing up in politics as he did, he "learned" the ways of the world.
If you read Volcker's report on the international financial imbroglio, we find a little excess in the capitalist system that we will take care of.
It is oft repeated on these pages.
Begin again.
I hear lots of good things coming out of Obama each day, but I have very little hope in regards to what economists call, you know, the economy.
I posted this comment on DEC 25 2008.........perhaps you missed it
Unfortunatly it appears that Barak Obama has planted one of his two feet in his own political grave and he hasnt even been sworn in yet. The people he has hired for his economic team are the very same people who caused these problems. The very same people the Bush administration was using. Like too many other poloticians he took campaign money from wall street and we are seeing the result.
Dean Baker: The basic story here is very simple. If we got the government out and left things to the market, virtually the entire banking sector would be bankrupt. Citigroup, Bank of America, Goldman Sachs, Morgan Stanley and almost all the other big banks, and thousands of smaller ones, would be out of business. (My bet is that even "healthy" banks like Wells Fargo would be in bankruptcy before too long. They hold plenty of bad debts, too.)
===
You just answered your own question as to why the market tumbled below 7000 as America cheered on Obama's ascension.
He himself said we're in for a long, hard slog. He's also said that things will get worse before they get better.
Since the market is a future projecting mechanism, those comments, and the stark truth behind them, give the bulls nothing to cheer about and the bears everything to cheer about. When a long hard winter is coming in, you buy mittens, not suntan lotion.
Unless, of course, you're going on a vacation. But there ain't no vacation coming to the economy, that's for sure.
Not necessarily true. Many small banks aren't in trouble at all. In fact there have been a lot less bank failures this time around than during the 1987 1990 Real estate bust. If we had smaller banks , we won't have to worry about a single failure because there would be others to take its place But the Gov't promotes large companies so it can do business with a single entity and not a bunch of independent companies.
Peter007: If we had smaller banks , we won't have to worry about a single failure because there would be others to take its place
===
And if wishes were horses, beggars would ride.
The reality is that the banking industry has gone through a massive consolidation, leaving a small number of huge financial institutions s as the critical links in the chain. If they go down, the relative stability and health of some small regional won't mean much - as we've seen already.
Does it suck? Of course. That's what the markets are reacting to.
Conservative economics-101: "Reverse Robinhood"
I was hoping the article would be far more reaching than just an examination of the banking bail out. I was hoping it might examine the military-industrial complex. The special interest groups in Washington, ( mainly lawyers ) that dictate legislation.
The government likes big companies . Its easier to do business with large corporation. The owners appreciate the business and political contributions are easier to get.
Most people that are screaming for more regulation don't understand that the new regulations are written by the business that are being regulated. The increased regulations, create additional costs that large companies are able to absorb due the the economies of scale. Small firms can't operate in a sea of red tape, paper work, and burdensome regulations. It's how the big companies get bigger and the small ones are put out of business.
We end up with a situation like we have today where only big companies are in the market. Now if a big company fails, it brings down the entire economy. Too big to fail comes into play.
If we had a level playing field, smaller companies would prosper and bail outs won't be necessary.
I agree with you 100% Mr. Baker. The deep social consequences of profiteering in good times goes unnoticed, but during and economic downturn it is all too evident and vile. Let the for-profits bank fail and restructure along the lines of credit unions. Let's bring back some trust in banking as in Public Trust.
Dean
In the last paragraph of your article you wondered how the Obama admin would deal with bank bailouts and accountability..... Tim Geithner - nominee for Treasury Secretary
"The Obama administration has its first test of its open doors policy," said Lawrence Jacobs, the director of the University of Minnesota's Center for the Study of Politics and Governance. "Serious mistakes have been found in Geithner's tax filings. Will the administration come clean to reassure Americans that everything else is in order?
Obama aides and Treasury officials didn't respond to requests for more financial information about Geithner, but without greater disclosure, some observers see possible future problems.
"The risk here is that the Obama administration, only hours old, could be tainted by the stain of hypocrisy, claiming to be open, but practicing the same old game of secrecy."
Questions about Geithner's mishandling of his tax matters could dominate the hearing before the Senate Finance Committee because of some of the circumstances. Among them:
_ The IMF circulated documents to Geithner offering extra pay to cover his U.S. self-employment taxes. He filled out the forms and received the extra cash, but he didn't pay the taxes.
http://www.mcclatchydc.com/331/story/60357.html
What function doe the FED perform for us that we could not do without them?
Why should we pay them interest to print our money and regulate our interest rate?
Simply stated, but profound questions.
Anyone?
Perhaps the more pertinent question is why do we need the middlemen, i.e., the banks? Why not eliminate them and let the Fed be our nation's bank?
Keep it up.
They know we're out here.
Social Credit.
Public money.
Bankers lend their own money.
A positive example of sound banking exists, it's the Credit Union. They can be independently run and regulated, pay it's workers fair wages and manage their assets in a positive way. Credit Unions cut out the profiteering middlemen.
First look at the money in your pocket. Its a Federal Reserve note. Its not backed by anything. Old money was either gold and silver coins or paper money backed by gold or other valuable metal.
Read the history of the Federal Reserve. Its very interesting. Some claim it was the bankers that created it so they could always create money and charge interest on it. The government liked the idea because it supplied them with an endless stream of cash free of charge.
Most people don't know what money is. How is it different from wealth?
No currencies in the entire world are backed by gold. It is not even practical as there is a limited amount of gold in the world and much of it comes from places like Russia and Africa. Do you want those places controlling our money supply and thus the economic and job growth in this country?
I do like what I am seeing here folks . . .
Lets continue the mindful vollies,
mass awareness builds.
I like this article and the evocative
blog that is developing.
I am (typically) half afraid to post many
of my thoughts while here, yet I see
a likeminded thought process expressed
within the body of people here.
Kudos'
Well said. Any suggestions as to how to stop them????
Big Wall Street Banks are Dinosaurs and must be simplified, regulated, automated, and downsized!
1. Put FED under control of US government who sets its policies
2. Let Banks compete with Government Owned Basil II compliant Bank integrated with the FED
3. Declare all existing Credit Default Swaps NULL and VOID
4. Set up temporary market to trade Derivatives and find their market values
5. Force Off-Balance-Sheet items onto Balance Sheets and Banks with negative balances, liquidate
6. Set up a program comparable to the Reconstruction Finance Corporation of 1932.
7. Automate Government Bank to serve consumers and small business directly via Internet
8. Set up new Home Owners' Loan Corporation to stop foreclosures and stabilize housing prices.
9. Set up a review system for all NEW products to insure proper regulations and trading.
10. Regulate all markets, Hedge Funds, and enforce regulations
11. Issue currency directly backed by the full faith and credit of the United States Treasury.
Set prices on TOXIC paper products and get rid of them or they will haunt us for a decade.
The Elite Bank Controlled FED raised rates when Gore ran to 6.5% and cause a 2001 to 2002 recession. Then the Big Bank controlled FED lowered interest rates to historic lows causing this CRISIS. The FED must be regulated and remove the elite Big Banks from control.
The very richest 1% have moved from controlling 8% of our wealth in 1930 to over 40% now!
Yer DAARNED Tootin' !!
Lot's of great suggestions here.
Just to be clear on 1 and 2, I assume the FED has actually become under complete public control as the nation's central bank, having eradicated the private fractional-reserve banking system completely.
Otherwise, you can add: Begin again.
And, when you talk about stabilizing housing prices, I assume you mean AFTER those housing prices have reached an equilibrium of affordability to the average wage of the people buying and renting those houses.
Some VERY good ideas, indeed.
My only quibble would be with number nine, and maybe ten. The new products are all just forms of gambling, not true equity stakes in publicly held companies. If folks want to gamble, they should go to Vegas. These credit defaults and hedge funds have too great an impact on the underlying value of the companies that we little people invest in. They make the market to prone to manipulation through timed bloc computerized buys and sells in volumes that were unheard of just 20 years ago.
Like I said, if folks want to gamble then they could have an off the books market that would in no way impact the underlying security, and that would be the same as playing blackjack or roulette. Just a thought.
I do love number 3, btw!
Trickle Down anyone, new phrase for the bush era is trickle up.
More like trickled on
It seems to me, alot of these "layoffs" are businesses hurrying up and outsourcing now to other countries before regulations, etc change.
"...Of the 800 positions being eliminated by Time Warner Inc.'s Warner Bros., about 600 people will be laid off across all divisions of the studio's operations. Another 200 open positions will not be filled. About 300 positions in management information systems, finance and accounting will be outsourced to India and Poland. In addition, about 155 people who work in "back office" positions will be offered jobs with a third-party outsourcing company on the Burbank lot, according to a person familiar with the matter..."
Sigh...still haven't learned....
The banking system should remain privately owned. Period! It should be radically altered to bear no resemblance to the creature it has been allowed to become. And regulated in ways that will forever prevent it from becoming "too big to fail!"
The job of the Federal Government is not to be in "business." It is to govern. Provide for the security, welfare and create the environment in which any of us can go into business and with enough hard work, succeed.
The government should stay as far away from ownership of any industry as possible, because if you look at the word "Fascism," you find that it is a marriage between the Corporate state (most especially Finance) and the Government. And when that happens, we, the people, end up working for a corporate state with unlimited access to the powers that rule us.
Jefferson knew corporations were the greatest threat we would face. We should do as one of the top Swedish government people was quoted as saying about their banks--break them on the wheel! Downsize them to the point where they will never be a threat. At that point, we will have the closest thing to a truly free and competitive market, but operating with some strong new and socially responsible laws enacted for the good of the People, not the banks.
"..look at the word "Fascism," you find that it is a marriage between the Corporate state (most especially Finance) and the Government..."
But Rule of Law, we already have that. We have limited access to power and the corporations have that, hence, they think it's THEIR US Treasury, not the citizens of the US. On top of it, corporations are citizens of the world, we are restricted pretty much to being citizens of one country at a time. That's why we need the government on the people's side....the multi-national corporations only interest in the US is the money in that US Treasury. They care NOTHING about the state of the people here in this country, because they are invested in the world.
The destruction of anti-trust laws, as you described, are one the main reason for the complete failure of capitalism. I believe one of the main tenants of capitalism was fair competition. That's been completely, thoroughly, utterly destroyed.
Yes, the very necessary protections have been eliminated and new rules drawn that favor the already hugely wealthy and powerful. But government "ownership," and I use that word loosely as I believe that the true ownership would be in the other direction, would cement Fascism here and make disassembling it even more problematic. Break 'em all up. Scatter them to the winds. Let the survival of the fittest--but always only to a pre-determined size--prevail. We don't drive on the roads without rules and we shouldn't allow business to drive the country without rules either.
Rule,
I thought I always agreed with you.
I was misinformed by myself.
There is, on the one hand, the "business" of banking.
That is a business where bankers accept deposits and make loans, and operate on the interest spread, which needs to make business sense.
I completely agree that this banking system MUST not be nationalized and must remain a private system
But, only after we ensure that the means to another financial conflagration has been removed from our national economy.
To achieve this, banks must operate on a 100 percent reserve basis, meaning they can only lend money exactly equal to their deposits.
Then, there is the monetary system.
The monetary system is properly run completely by the people, acting through their government.
Sometimes the words, business, economy and financial system taint the discussion.
Your objective of "rationalizing" the operation of the banking system is one that I applaud.
But the vehicle for achieving that soundness and stability in the banking system is to keep their hands off the money system.
Money creation should be a function of the money system.
After money is deposited "wherever", it becomes the tool of the community and its bankers to put it to good use.
Public credit.
Treasury-issue.
Debt-free money.
Joe, I've reread your post 4 times and still think we're saying basically the same things. Banking should be broken back up into its constituent parts--Commercial, savings, investment, whatever. You want to start a bank--you get to pick one kind. That's it!
Banks are once again restricted geographically, just like the media used to be, as well. No financial supermarkets like Citi will be allowed that cross state lines or offer more than one type of banking or more than one type of financial product. Insurance remains insurance, banking stays banking, and the sale of stocks and bonds or other instruments stays with brokers. No cross pollination.
The monetary system--minting, distribution and setting of interest rates reverts back to the people through their reps in Congress--Just as the Constitution demands! The FED is eliminated as a parasitic, middle man taking a cut on the People's money and sanity is restored. All the imaginary "debt" we have totaled up borrowing our own money from the FED is forgiven. Oh, and we should overrhaul Wall Street, eliminate the Casino it has become, and all the gambling products--CDO's etc. They can buy or sell equity in listed companies or bonds. That's it.
I agree that the entire bogus notion of the fractional reserve banking system should go in the toilet. You should only be able to lend what you've got. And those loans should conform to every requirement and be carried by the bank that originates them!
I also agree that when the banks--The FED--got its hands on the distribution of our Treasury's money as well as setting interest rates, THAT is when it all went downhill fast. It must be stopped.
A simple question:
Why with the internet, links to databases, automation software, and the government owning banks would you want traditional banks to continue as they have in the past laying on USURY FEES, when the alternative is the government bank providing direct fixed low interest (FED rate +2.5 to 3%), low fees, and simple contracts to customers; small businesses and Consumers?
The government bank (perhaps F/F) would be a 98% automated internet bank handling all the functions of a bank but operating at low cost to enable increased monthly family cash flows that stimulate the economy.
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