From the New York Times 5/6/09
Investors see banks as the recession's biggest prize: potential money machines that could one day generate fabulous returns, particularly after the federal government eats the losses of failed banks, then heavily subsidizes their sale.
When banks are too big too fail, we have to bail them out. Why? Because the financial sector is not like any other sector. It's more like the air the real economy needs in order to breathe. Every business of any size runs on credit. Should that credit freeze up as it did this fall, production collapses and the economy goes into a tailspin. We've got to keep reminding ourselves that the real economy (think automobile sector) didn't crash on its own. The financial sector meltdown destroyed overall demand, which in turn crashed the real economy (GM and Chrysler, weak enough already, were pushed over the edge by the financial collapse. But even the powerhouse importers like Toyota and Honda are suffering record losses.)
When that happens governments around the world have little choice but to bail out their major financial institutions. Letting them go down as happened with Lehman Brothers shook the world's economy. Had AIG failed, we'd be in the next Great Depression.
In short, the financial sector has a financial gun to our heads...and a hand stuck deep into taxpayer pockets. Because financial institutions have to be salvaged, shrewd investors are waiting for the government to "eat the losses...and heavily subsidize their sale." Private equity firms are hungry for the 35% plus returns awaiting them.
But the logic of all this is galling:
1)The financial institutions fail.
2)We bail them out to avoid a major depression.
3)We clean up the banks by eating their losses.
4)Then we sell them to private investors who make big money?
Question: Why the last step? Why are we, in effect, subsidizing outrageous returns for the private equity firms and other investors?
Here's my answer and I don't like it: The Obama administration wants to avoid nationalizing banks at all costs. Better to subsidize speculators and then let others reap enormous profits again. Better to pour trillions of tax payer money into the banking system than to run "too big to fail" banks as vital public utilities. Clearly, the administration reflects a broad deep-seated fear and loathing of big government as well as an abiding faith in free markets --- even though our financial free markets directly caused the current crash and the need for trillion dollar bail outs.
What a way to lose your tax dollars.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed our Jobs, Pensions and Prosperity, and What we can do about it (Chelsea Green Publishing, June 2009)