Joseph Stiglitz addresses an important issue in the latest issue of The Economists' Voice. See America's Socialism for the Rich, Economists' Voice (June 2009).
Big Banks are "pushing back on efforts to regulate them" and "will muster what muscle they have left to ensure that they have ample room to continue as they have in the past." The problem, he notes, is that we haven't thought about what kind of financial system we need after the crisis passes--and since we haven't, "we will end up with a banking system that is less competitive, with the large banks that were too big to fail even larger."
This problem--of being in a financial crisis caused by deregulation of banks and the growth of banks beyond a manageable scale, resulting in risky speculation and inattention to the ways that bank behavior posed systemic risks for the system as long as there was individual profit for the bankers--is a real one that has grown in the crisis as government regulators (starting with Bush and regretably continued with Obama) have pushed the bigger and more likely genuinely solvent financial institutions to absorb the assets and some of the liabilities of the failing institutions like Merrill Lynch. The Treasury even aided the consolidation of banks with its illegal notice permitting use of losses in direct violation of the tax code. Banks that are too big simply WILL engage in too much risk--there is too much money, any one bank is too big to fail without causing systemic problems, and knowing that, the banks engage in even riskier behavior (and investors fund it for the same reason) because they EXPECT a bailout. See the companion article by John Boyd and Ravi Jagannathan, Avoiding the Next Crisis, Economists' Voice (June 2009).
Stiglitz notes that the problem of being too big to fail puts the government at grave risk. "[i]f [government officials] wait too long [to restructure the banks], zombie or near zombie banks--with little or no net worth, but treated as if they were viable institutions--are likely to 'gamble on resurrection.' If they take big bets and win, they walk away with the proceeds; if they fail, the government picks up the tab." And "[t]he Obama Administration has, however, introduced a new concept: too big to be financially restructured....All hell would break loose...Markets would panic...So, not only can't we touch the bondholders, we can't even touch the shareholders--even if most of the shares' existing value merely reflects a bet on a government bailout." But Stiglitz notes, this is misguided, "the administration has confused bailing out the bankers and their shareholders [something that there is no reason whatsoever to do] with bailing out the banks [something that is important to salvabe the financial system].
Stiglitz has captured the essence of the current situation. Without restructuring, the government picks up the tab. And the current approach considers restructuring off the table because Wall Street has convinced it that "all hell would break loose"--in other words, the wealthy icons of Wall Street wouldn't like it. And if that applies, the foregone conclusion is that shareholders and bankers will make money from the government picking up the tab. That's not what the bank bailout is intended to do--it's not about saving the shareholders' asses, but saving the depositors' asses. And the ultimate result won't please anyone but the wealthy.
"Rewriting the rules of the market economy--in a way that has benefited those that have caused so much pain to the entire global economy--is worse than financially costly. MOst Americans view it as grossly unjust, espeically after they saw the banks divert the billions intended to enable them to revive lending to payments of outsized bonuses and dividends. ...But this new form of ersatz capitalism, in which losses are socialized and profits privatized, is doomed to failure. Incentives are distorted. There is no market discipline. ...This is not socialism, but an extension of long standing corporate welfarism. The rich and powerful turn to the government to help them whenever they can, while needy individuals get little social protection. ... This raises another problem with America's too-big-to-fail, too-big-to be-restrcutured banks: they are too politically powerfull.
This is wise talk, and sound advice for the Obama administration. There needs to be someone who understands that banks are too powerful on the inside, with ability to help push Congress to dethrone the Big Banks once and for all. Obama should have made Stiglitz either Treasury Secretary or head of his Council of Economic Advisers. He can still do it by asking Stiglitz to come on board and replace Summers, who is simply too cozy with the banking folks in power to ever do the job that has to be done.
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