I've noted in prior posts on this issue that the bailout as passed falls far short of (1) the requirements for internal accountability that should have been imposed on Hank Paulson, who has far too much discretion and way too little real oversight by anyone other than his administrative (and Goldman Sachs) pals and (2) the requirements for bailee accountability that should have been imposed on the bailed out financial institutions, which should have ceded actual voting power to the US in return for an equity infusion, that should also have been conditioned on a harsh turnaround on managerial pay, dividends to shareholders paid out of taxpayer funds, and similar issues.
Now I'm getting even more worried about the potential long-term impact of the bailout's being handled by the Goldman Sachs crowd. Hank Paulson, taking charge of the vast funds allocated to him for the bailout of the American banking system, has said that he wants banks to consolidate--in fact, that a good bit of the funding will be provided to healthy banks to help them buy weaker banks. See Mark Landler, U.S. is Said to Favor New Mergers, NY Times, Oct. 21, 2008. The article notes that "the government wants not only to stabilize the industry, but also to reshape it." In fact, an anonymous Treasury official is quoted as saying that "Treasury doesn't want to prop up weak banks...One purpose of this plan is to drive consolidation." (emphasis added)
We had to bail out the banks because we deregulated them too much, did away with the Depression-era banking laws that kept various financial components of the system segmentalized and unable to corrupt each other, and then let them speculate away with the risk being offloaded to the taxpayers in a systemic way, under a hazy theory of diversification. Once the bubble starting bursting, we realized that all of these entities were incestuously in bed with each other, tied by cords of credit default swap agreements whose ends and beginnings were terribly hard to trace. One of them goes bust, we reasoned, and we have systemic problems, because they are "too big to fail." We let Lehman go bust nonetheless (not close enough to Goldman?), but quickly saw the domino effects spread throughout the global financial system and realized anything like Lehman was "too big to fail." Hence, the bailout.
Now, Hank Paulson apparently wants to create fewer, larger institutions. The idea, not surprising for a banker of the Goldman creed, is that bigger is better, because they have more resources to survive the ongoing crisis. Does this strike anyone else as poor thinking, at least for the long term? I'd prescribe just the opposite as the long term reshaping of the industry that is needed. We need to force the big conglomerate financial enterprises to break apart through a new anti-trust initiative to create smaller, more localized, more focused financial institutions that are no longer "too big to fail." For anything but nationalized institutions (like Fannie Mae and Freddie Mac, which should retain their federal charters as well as their federal ownership), we should make clear that there is no taxpayer guarantee other than those explicitly enacted. We should re-regulate--restoring viable lending standards, including a federal usury law to prevent the current exploitation by the credit card banks of their ability merely to change the due date and collect a hefty late payment fee.
ASIDE: Note that Paulson has also called for merging the SEC with the CFTC. As one commenter on the Wall Street Journal blog entry discussing this proposal noted, quoting Peter Morici at the University of Maryland: "[T]he basic problem is that it doesn’t fix what’s wrong. This is regulatory reform as seen through the eyes of a banker. It really entails less regulation than more. It provides no constraints on banks or mortgage companies from bundling loans into arcane or complex securities.”
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