The U.S. Political Economy, Wall Street, and the Ongoing Banking Crisis

http://www.nytimes.com/2009/10/19/opinion/19krugman.html?em

All,

Paul Krugman remains one of the very few major economists and political journalists in this country who is consistently telling us the WHOLE TRUTH AND NOTHING BUT with regard to the banks, Wall Street, corporate domination and the pathetically weak and accomodating policies of the Obama administration in addressing this ongoing major crisis...

Kofi


October 19, 2009

OP-ED COLUMNIST

The Banks Are Not All Right
By Paul Krugman
New York Times

It was the best of times, it was the worst of times. O.K., maybe not literally the worst, but definitely bad. And the contrast between the immense good fortune of a few and the continuing suffering of all too many boded ill for the future.

I’m talking, of course, about the state of the banks.

The lucky few garnered most of the headlines, as many reacted with fury to the spectacle of Goldman Sachs making record profits and paying huge bonuses even as the rest of America, the victim of a slump made on Wall Street, continues to bleed jobs.

But it’s not a simple case of flourishing banks versus ailing workers: banks that are actually in the business of lending, as opposed to trading, are still in trouble. Most notably, Citigroup and Bank of America, which silenced talk of nationalization earlier this year by claiming that they had returned to profitability, are now — you guessed it — back to reporting losses.

Ask the people at Goldman, and they’ll tell you that it’s nobody’s business but their own how much they earn. But as one critic recently put it: “There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.” Indeed: Goldman has made a lot of money in its trading operations, but it was only able to stay in that game thanks to policies that put vast amounts of public money at risk, from the bailout of A.I.G. to the guarantees extended to many of Goldman’s bonds.

So who was this thundering bank critic? None other than Lawrence Summers, the Obama administration’s chief economist — and one of the architects of the administration’s bank policy, which up until now has been to go easy on financial institutions and hope that they mend themselves.

Why the change in tone? Administration officials are furious at the way the financial industry, just months after receiving a gigantic taxpayer bailout, is lobbying fiercely against serious reform. But you have to wonder what they expected to happen. They followed a softly, softly policy, providing aid with few strings, back when all of Wall Street was on the ropes; this left them with very little leverage over firms like Goldman that are now, once again, making a lot of money.

But there’s an even bigger problem: while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not. Key banks remain financially weak, and their weakness is hurting the economy as a whole.

You may recall that earlier this year there was a big debate about how to get the banks lending again. Some analysts, myself included, argued that at least some major banks needed a large injection of capital from taxpayers, and that the only way to do this was to temporarily nationalize the most troubled banks. The debate faded out, however, after Citigroup and Bank of America, the banking system’s weakest links, announced surprise profits. All was well, we were told, now that the banks were profitable again.

But a funny thing happened on the way back to a sound banking system: last week both Citi and BofA announced losses in the third quarter. What happened?

Part of the answer is that those earlier profits were in part a figment of the accountants’ imaginations. More broadly, however, we’re looking at payback from the real economy. In the first phase of the crisis, Main Street was punished for Wall Street’s misdeeds; now broad economic distress, especially persistent high unemployment, is leading to big losses on mortgage loans and credit cards.

And here’s the thing: The continuing weakness of many banks is helping to perpetuate that economic distress. Banks remain reluctant to lend, and tight credit, especially for small businesses, stands in the way of the strong recovery we need.

So now what? Mr. Summers still insists that the administration did the right thing: more government provision of capital, he says, would not “have been an availing strategy for solving problems.” Whatever. In any case, as a political matter the moment for radical action on banks has clearly passed.

The main thing for the time being is probably to do as much as possible to support job growth. With luck, this will produce a virtuous circle in which an improving economy strengthens the banks, which then become more willing to lend.

Beyond that, we desperately need to pass effective financial reform. For if we don’t, bankers will soon be taking even bigger risks than they did in the run-up to this crisis. After all, the lesson from the last few months has been very clear: When bankers gamble with other people’s money, it’s heads they win, tails the rest of us lose.


Copyright 2009 The New York Times Company

President Obama’s Ersatz Capitalism & the Politics of Wall Street

http://www.nytimes.com/2009/04/01/opinion/01stiglitz.html?em=&adxnnl=1&adxnnlx=1238623203-VJY/ki7NOXKjfeA4eeW4/w

"What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess."--Dr. Joseph Stigliz

All,

As the famed 2001 Nobel prize winner in Economics Dr. Joseph Stiglitz clearly points out, the current economic plan by the Obama administration's Treasury department for dealing with the banks and general Wall Street chicanery is deeply flawed and is politically attempting to avoid the dire need for nationalization of the entire U.S. financial sector. As Dr. Stiglitz makes clear in the article below (and as his fellow 2008 Nobel Prize laureate in economics Paul Krugman also consistently points out) trying to ideologically sidestep the hard and necessary governmental decision of making the banks fully accountable for their own massive theft, mismanagement, and fraudulent behavior is ultimately only going to make the present crisis far worse for the general taxpaying public in both the near and long term future.

Kofi


April 1, 2009

OP-ED CONTRIBUTOR

Obama’s Ersatz Capitalism

By JOSEPH E. STIGLITZ
New York Times

THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.

Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.

Let’s take a moment to remember what caused this mess in the first place. Banks got themselves, and our economy, into trouble by overleveraging — that is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations.

The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was “off balance sheet” financing.

In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.

The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.

Dr. Joseph E. Stiglitz, a professor of economics at Columbia who was chairman of the Council of Economic Advisers from 1995 to 1997, was awarded the Nobel prize in economics in 2001.


Copyright 2009 The New York Times Company

The Struggle for Nationalization and Regulation of the U.S. Banking System

http://www.salon.com/news/feature/2009/03/10/banks/

All,

Let us all fervently hope for our collective sake that the banks are eventually fully nationalized and regulated by the government. It's not only desperately needed but it would come not a minute too soon given the sheer depth and breadth of the current massive economic crisis which under any circumstances can only get much worse before it gets better--which is all the more reason why the Obama administration must have (or find) the ideological independence and political courage to make a serious and widespread governmental intervention in the banking system and general financial markets. In the meantime however it continues to be a major mistake for Obama to have defensively saddled himself with the tepid/"moderate" economic team of Timothy Geithner and Laurence Summers just because Barack fears the inevitable Republican righwing backlash rhetoric that he is a "socialist." After all, while it is blatantly obvious to anyone who knows anything at all about what socialism actually is or means that Obama isn't one, the real issue--as the following article makes clear--is whether the government is now seriously going to protect, advocate, and defend the general economic and political interests of the masses of poor, working class, and middle class citizens instead of the banks, corporations, and Wall Street...The ball is entirely in the President's court at this point because we all know exactly where the Republican right stands--and it ain't even remotely with the masses of the American people...

Kofi


Here Comes Socialism
Salon News

Some kind of bank nationalization is probably inevitable. The Democrats don't want to admit it yet. The Republicans just want you to be scared.

March 10, 2009 | WASHINGTON -- Until the U.S. economy fell to pieces last fall, the phrase "nationalize the banks" usually conjured up, in the popular imagination, scenes of the early days of a revolution in some far-off land (if it conjured up anything at all). Government takeovers of entire financial systems were something newspapers buried deep inside the foreign news section for the truly diligent readers, complete with sad little photos of mobs gathering outside banks to get their last withdrawals.

Which is why you may feel a little disoriented if you've turned on a TV or flipped through conservative opinion columns lately. All of a sudden, nationalization seems to have come home. These days, a federal takeover of the banking system is practically the only thing Republicans want to talk about. If South Carolina Sen. Jim DeMint isn't declaring that even temporary nationalization of banks is "the same idea as socialization," then his colleague from the same state, John McCain sidekick Lindsey Graham, is telling NBC's "Meet the Press" that Obama needs to consider the idea. Even Alan Greenspan is part of the conversation. The Ayn Rand disciple whose every public utterance for most of his life has been devoted to extolling the virtues of the free market is suddenly pushing nationalization.


Of course, even though the federal government now owns 36 percent of Citigroup, and Citigroup and other massive banks are teetering on the edge of insolvency, the Obama administration swears there's no plan for a government takeover. "This is a very complex set of problems, and bad decisions can result in huge taxpayer expenditures and poor results," President Obama told the New York Times on Friday, bringing up -- and then shooting down -- the idea that bank nationalization would save the financial sector. Treasury Secretary Tim Geithner told PBS's Jim Lehrer last week that nationalization is "the wrong strategy."

Yes, some liberal commentators, like Paul Krugman, are pushing the administration to take more control of big banks as a way of clearing bad home loans and related financial detritus out of the system. But much of the conservative chatter seems aimed at freaking people out about creeping socialism, rather than solving the banking crisis. As one Democratic aide on Capitol Hill put it, "The only people talking about nationalization are Republicans -- this is crazy to me, that they have traded their entire ideology within six weeks." Another aide likened the GOP buzz about bank nationalization to the "Joe the Plumber" phase of McCain's campaign -- talking about a federal takeover of banks is like screaming that Obama wanted to "spread the wealth" around. And, as if on cue, conservative firebrand Michelle Malkin called Obama a socialist on Monday, referring back to the McCain campaign's old language about "Barack the Redistributor."

Chances are, of course, that some of the country's biggest banks will fail the "stress tests" the Treasury Department plans to administer soon -- and will effectively prove insolvent, forcing the issue. (Geithner was set to meet with House Democrats Monday night to explain the tests.) The problem with the GOP talking points is that the scenario DeMint sketched out -- government bureaucrats running banks, deciding who gets loans and who doesn't -- isn't what anyone is contemplating. Instead, any nationalization is likely to be brief, narrow and aimed at saving any assets worth saving from banks that would otherwise go under. (Which isn't that different from what the U.S. already does with failed banks.) But to Republicans, the details seem beside the point. "Nationalization" is just another way to make voters fear Obama's stewardship of the economy.


Whether that scare strategy works politically is hard to gauge. But what Republicans apparently believe will work economically would probably frighten even more people. Instead of nationalizing banks, they want to let them fail. "I think that [the Obama administration has] got to close some big banks. They don't want to do it," Sen. Richard Shelby, R-Ala., the highest-ranking Republican on the Senate Banking Committee, told ABC's "This Week With George Stephanopoulos" on Sunday. "I don't want to nationalize them. I think we need to close them." If the debate comes down to simply watching banks go under or letting the government sell off any valuable assets they've still got on the books, nationalization may not seem like such a bad idea.
For now, pollsters say the public isn't paying enough attention to the debate over the financial system to have strong feelings about any one proposal or another. "People are more concerned about losing their jobs, losing their house, the change of living standards that they're facing," said Democratic pollster Harrison Hickman. "From a consumer point of view, I don't think it matters, and they're way too caught up in their own situation to be fixated on those sort of mega-questions." As for calling Obama a socialist, that may not be working, either. " If you did a poll and asked people, 'Here are terms, and see if you think they are an accurate description of Barack Obama,' I bet there are 10 times as many people who say 'Muslim' as say 'socialist,'" Hickman said. "It's sort of like calling somebody a carpetbagger, a scalawag -- it's sort of a word that is devoid of meaning for most people, especially anybody who actually voted for Obama."

What people are most irritated about is the money the banks have already gotten from the government, not what might happen to them under government control. A Newsweek poll last week found 56 percent of voters would rather have the government take over failing banks than just hand over more tax dollars, and 62 percent think the government has already done too much to help banks. The hostility most voters have to helping the banks could make it hard to do anything more no matter how it's spun. Democrats and Republicans alike say there's no way Congress will give the White House more cash to bail out banks without some sign that the $700 billion already authorized has done some good. And as anyone tracking the stock market knows, finding some good news in the financial system these days might be even harder to do than leading a government takeover of all the nation's banks.