"Bailouts for Bunglers
Question: what happens if you lose vast amounts of other people’s money? Answer: you get a big gift from the federal government — but the president says some very harsh things about you before forking over the cash.
Am I being unfair? I hope so. But right now that’s what seems to be happening.
Just to be clear, I’m not talking about the Obama administration’s plan to support jobs and output with a large, temporary rise in federal spending, which is very much the right thing to do. I’m talking, instead, about the administration’s plans for a banking system rescue — plans that are shaping up as a classic exercise in “lemon socialism”: taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right.
When I read recent remarks on financial policy by top Obama administration officials, I feel as if I’ve entered a time warp — as if it’s still 2005, Alan Greenspan is still the Maestro, and bankers are still heroes of capitalism.
“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” says Timothy Geithner, the Treasury secretary — as he prepares to put taxpayers on the hook for that system’s immense losses.
Meanwhile, a Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers, President Obama’s top economic adviser, “think governments make poor bank managers” — as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.
And this prejudice in favor of private control, even when the government is putting up all the money, seems to be warping the administration’s response to the financial crisis.
Now, something must be done to shore up the financial system. The chaos after Lehman Brothers failed showed that letting major financial institutions collapse can be very bad for the economy’s health. And a number of major institutions are dangerously close to the edge.
So banks need more capital. In normal times, banks raise capital by selling stock to private investors, who receive a share in the bank’s ownership in return. You might think, then, that if banks currently can’t or won’t raise enough capital from private investors, the government should do what a private investor would: provide capital in return for partial ownership.
But bank stocks are worth so little these days — Citigroup and Bank of America have a combined market value of only $52 billion — that the ownership wouldn’t be partial: pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.
My response to this prospect is: so? If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome.
If news reports are right, the bank rescue plan will contain two main elements: government purchases of some troubled bank assets and guarantees against losses on other assets. The guarantees would represent a big gift to bank stockholders; the purchases might not, if the price was fair — but prices would, The Financial Times reports, probably be based on “valuation models” rather than market prices, suggesting that the government would be making a big gift here, too.
And in return for what is likely to be a huge subsidy to stockholders, taxpayers will get, well, nothing.
Will there at least be limits on executive compensation, to prevent more of the rip-offs that have enraged the public? President Obama denounced Wall Street bonuses in his latest weekly address — but according to The Washington Post, “the administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid” because “harsh limits could discourage some firms from asking for aid.” This suggests that Mr. Obama’s tough talk is just for show.
Meanwhile, Wall Street’s culture of excess seems to have been barely dented by the crisis. “Say I’m a banker and I created $30 million. I should get a part of that,” one banker told The New York Times. And if you’re a banker and you destroyed $30 billion? Uncle Sam to the rescue!
There’s more at stake here than fairness, although that matters too. Saving the economy is going to be very expensive: that $800 billion stimulus plan is probably just a down payment, and rescuing the financial system, even if it’s done right, is going to cost hundreds of billions more. We can’t afford to squander money giving huge windfalls to banks and their executives, merely to preserve the illusion of private ownership."
Me:
“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” says Timothy Geithner, the Treasury secretary"
Sorry Tim, but that's not our system. We have a hybrid economy. Our version of the welfare state. In our system, bankers and investors count on government support in a crisis. With their lobbying, the buy insurance from the government. They've been calling it in.
TARP failed because it was a hybrid. The government and banks did not and do not have the same aims. Hence, a costly mess.
We must nationalize for moral hazard. Banks fear, loathe, despise, and hoard cash, that's right, actually hoard cash to avoid nationalization. Case closed on moral hazard.
Then we can throw the banks back into the private realm ASAP. Along with a healthy dose of moral hazard.
Don the libertarian Democrat
— Don, Tacoma, WA
Posts
February 2nd, 2009 at 7:19 am
“The general idea is that, the more highly owners of capital and highly-skilled managers are rewarded, the more productive they will be. This will lead both to the provision of goods and services at lower cost and to higher demand for the services of less-skilled workers who will therefore earn higher wages.”
Like a lot of theories, this one has taken on a much wider meaning. In some sense, it is true that more investment leads to more jobs. Hence, if you encourage investment with tax breaks, that should lead to more jobs. It seems to me that the real question you’re asking, which is a very good one, is why the middle and lower income earners seem stagnant? Shouldn’t the standard of living be going up? As I understand most free market theories, it should.
Of course, unlike you, I believe that we have a welfare state. Here’s a paper similar to my view:
http://www.petersoninstitute.org/publications/interstitial.cfm?ResearchID=1096
Most likely, lobbying accounts for much of the problem. In other words, contrary to what people believe in theory, the Investor Class, say, is simply far more effective at getting policies in their favor adopted. They are not all free market, as tariffs and professional standards will often attest.
My solution is simple: we need to focus on the problem and try whatever we can to alleviate this problem. Sometimes, lowering government requirements, based on large industries, for example, will encourage competition from smaller businesses. Michael Pollan and Barbara Kingsolver’s recent books both mention this problem, for example.
In other words, I see the problem as political. You can call my approach class based if you’d like. I prefer to call it an approach that leads to a wealthier and more stable society. When people are wealthy enough, including the middle class and lower class, government will have far less to do. For me, there is no diminution of government power and interference that doesn’t involve the rising economic tide of the middle and lower classes. At some point along this path, we will, as Thoreau said, have the kind of government we deserve. Namely, confined to helping the truly needy, which will hopefully keep getting smaller and smaller.