THE BLOG
04/29/2009 05:12 am ET Updated May 25, 2011

Will 'Trickle Down' Banking Work Better than 'Trickle Down' Economics: Thoughts from a Non-Wall Street CEO

("If you owe a bank a small amount of money, the banks owns you. If you owe them a large amount of money, you own the bank".--The Donald).

Last week CNBC's Erin Burnett told us Wall Street CEOs told her that Secretary Geithner seeks their proposals and opinions, demonstrating whose opinions he considers valuable. They, as expected, tell him how to fix them, equating themselves with banking and credit. (Humility does not exactly run rampant on Wall Street). That is not necessarily the best way to fix banking, or the economy, but that is the feedback he is getting--the same self-interest that brought the system crashing down around us.

He ought to try talking to some non-Wall Street CEOs. He will get different perspectives.

For the last 8 years we had another failed experiment with trickle down economics. The Bush administration asserted that cutting taxes for the wealthy would result in investment and job growth. [Amazingly, Congressional Republicans now want to double-down on trickle-down].

The result of the Bush experiment was the most anemic recovery in the post-war era. Real median incomes actually fell. Income disparity widened to levels not seen since 1929. One of the many lessons of the Great Depression, that only a strong middle class can sustain prosperity, was lost, victims of the triplet sins of arrogance, ideology and greed.

Republicans often argue, erroneously, that the New Deal did not work, and that only World War II got us out of the depression. In "Winning the Economic Argument: Show this Graph to Opponents and Ask them to Explain" (February 19, 2009), and earlier articles ("Wanted: A Good Keynesian. Massive Pubic Investment Will Fix the Economy, October 13, 2008; "McCain's Plan: Not Just Worse Than Alternatives, But the Dumbest Plan Since Putin Reared His Head:, October 16; 2009), I have shown that it was not the New Deal that was inadequate, but Roosevelt's decision to cut back on spending in 1936.

Nonetheless, Republicans keep insisting on World War II (massive government spending, tax increases, rationing) that got us out of the Depression, and that the New Deal actually hindered it.

Well, for the last 8 years the Republicans had their tax cuts for the wealthy plus war. They coupled trickle down economics with 2 wars ("when you to go war, nothing is as important as cutting taxes"--Tom DeLay). They produced a feeble recovery, enabled only by the extraordinary growth of consumer debt based on the factitious increased value in peoples' homes, making them feel wealthier and providing the opportunity to borrow to purchase big-ticket items. Absent the housing bubble, absent 2 wars, trickle down would not likely have produced any growth at all.

Now, with the banking and credit system in turmoil, the proposed solution appears to be 'trickle down' banking: fix the big banks, and the rest of the system will purr. (See, "Son of TARP: Don't Do 'Bad Bank', Do Only 'Good Bank',"February 2, 2009).

Doubt it. If it does work, it will not be as efficient or as potent as it could be for a very simple reason: much of the money will go to repair balance sheets, neither loaned nor spent.

Consider this: $700B loaned at the old conservative 10:1 ratio, could create $7T in credit. That's $7 Trillion. Compare that to the money going to purchase toxic waste improving the balance sheets and the viability of the big banks, and continuing to shovel money to AIG so it can pay "insurance" to the other financial institutions that own the toxic assets-- but doing nothing other than keeping the big banks afloat. (See, "It"s the Liquidity Stupid: Why Not Put the $700B into Good Banks?", September 24,2008--note date of this article!).

When I mentioned this to a former (elder) Bush senior economic advisor at the recent Stanford (Institute of Economic Policy Research) Summit, he countered with the example of Lehman Brothers' failure. He omitted that, when Lehman failed, there were no alternative sources of credit as proposed in the above paragraph. But, then again, one might expect this of a Bush economic advisor--the economy was not very good under Bush the elder either.

Because of AIG's machinations with so-called "insurance" (with flimsy-at-best collateral to back it), many of the big banks have credit default swaps and mortgage-backed securities on their balance sheets. We have now learned that AIG is a mere conduit for government bailout money to firms like Goldman Sachs who are seeking the insurance they bought for these troubled assets.

Unfortunately, AIG ain't got the dough. AIG should be forced to do what all companies do in such situations--negotiate settlements with its creditors such as Goldman. Remember The Donald's adage (above).

Instead of providing government money and guarantees to hedge funds that will supposedly price those assets, put the money to good use on main street through good regional banks (good = no CDS or MBS on the balance sheet), and invite the creation of new banks that will have no bad debts from the past by offering the government to use some TARP money to purchase preferred stock.

I would take that offer...and, I would be willing to abide by restrictions on total compensation. If one is building a good, solid, institution for the ages, that would be reward enough. I would call it, "Western Civilization Savings." For good reason.

Main street CEOs have a lot more to offer Geithner than their Wall Street brethren.

He ought to make the phone calls.