Maintaining the Banks
| Sun Mar. 8, 2009 4:07 PM PDT
Atrios sez:
I know I'll make this point a billion times before this is all over, but there's a difference between thinking that well run financial intermediaries (which, in theory, competition will create) are necessary for a modern economy and believing that the semi-oligopolistic system of financial intermediaries which have demonstrated beyond all reasonable doubt that they're at best incompetent and most likely some combination of incompetent and incredibly corrupt should be maintained at a cost of hundreds of billions of dollars (optimistically) in taxpayer money.
I don't really get this. Aside from the nitpicky point that the United States actually has one of the least oligopolistic banking sectors in the developed world, what's being argued here? That we should let the existing banks fail? That we should temporarily nationalize them? Which ones? And if we do, how should we treat all their creditors and counterparties? That's the big question (not whether shareholders should get wiped out — of course they should, but they're mostly wiped out already), and it doesn't go away just because we nationalize TitanoBank instead of shoveling cash down its gaping maw in return for preferred shares. In fact, it makes the question even more salient, since in a post-nationalization world Uncle Sam would be legally on the hook for all those claims.
As for the cost of all this, we might as well suck it up. We're way beyond the point of thinking we'll get out of this mess without spending a trainload of taxpayer dough one way or another. This debacle is going to cost us hundreds of billions of dollars no matter what we do.
And when it's over, guess what? Pretty much all the same people will be in charge. A few senior executives will be out of jobs, but that's about it. And the ones who replace them won't be much different. The fact is that these people did what they did not because they're stupid, but because the system practically begged them to act the way they did. That's what's broken, and fixing it depends mostly on what kind of new financial regulations we put in place going forward. I guess we're still in firefighting mode and don't have time to address that right at the moment, but I'd sure like to start hearing more about it sometime soon. In the long run, figuring out an effective way to regulate leverage, wherever and however it appears, is probably a lot more important than deciding which bureaucratic solution we should use to clean up the corpses currently littering the battlefield.
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Comments
There isn't enough money in the world .....
Submitted by Matt Dallas (not verified) on Sun Mar. 8, 2009 6:12 PM PDT.
Kevin, you are massively underestimating the scope of the problem. Counterparties to CDS tranactions are owed close to $58 Trillion. And that is just one part of the hemorrhage. There is not enough money in the world to pay this off. You are diminishing the problem by saying that taxpayers would be on the hook for hundreds of billions. It is likeley tens of trillions, if not in the hundreds.
The CDS's need to be defaulted on, the big five and AIG has to go under, the world financial system has to crumble, China has to take its licks and in the mean time, US government should create an alternate banking system for the world that could be sold off to private investors on a later day.
This kabuki dance that the US govt. is orchestrating only delays the inevitable. They should sit across the table with China and draw up the plans for World 2.0. The systems as we know it is a dead man walking.
Not so nitpicky?
Submitted by SRW1 (not verified) on Sun Mar. 8, 2009 6:30 PM PDT.
"Aside from the nitpicky point that the United States actually has one of the least oligopolistic banking sectors in the developed world, what's being argued here?"
Could it be that the 'nitpicky point' actually is the main aspect of contention, namely that having 8,300 banks is not proof of having the 'least ologopolistic banking sector' as long as five or six of them can hold the whole financial system hostage?
I presume that Atrios is
Submitted by Anonymous (not verified) on Sun Mar. 8, 2009 6:32 PM PDT.
I presume that Atrios is suggesting that "the system [that] practically begged them to act the way they did" needs to be changed. His comment is no more about the short-term solution than your last paragraph is. And you both seem to agree that structural changes need to be made, and that we should enact these new rules now while we still have the clout to do so. We may not be able to wipe out the creditors and counterparties the way they might deserve, but we can damn well force everyone to sign on to new rules to prevent this from happening again. (And incidentally, if you do agree that some of these oligopolists were corrupt, I think they should be punished; it doesn't matter that "the system practically begged them to act the way they did" or that other folks in their position would have done the same: the fact is, if these specific guys betrayed their creditors, they deserve punishment, regardless of any context that additionally needs to be fixed.)
The system practically begged them to do it?
Submitted by rational (not verified) on Sun Mar. 8, 2009 7:00 PM PDT.
Wow, a novel defense indeed! You should be advising war criminals around the world -- they could all use this "the system begged me to behave this way" defense and walk away. And they get to keep all the spoils of war they were forced to earn by the system, never mind that they were an active part of creating and sustaining the system.
In 1999 the stock market system practically begged everyone to "invest" in dot coms. Many did. When the bust came around, did they get a bail out? No! So why are these bank speculators getting bailed out at tax payer dime? The only difference is the banks that lost money control the Federal Reserve and managed to buy out politicians and people in power. That doesn't mean we should accept their presumed "right for a bailout" as our obligation to bail them out at our expense.
i don't think anyone is suggesting
Submitted by kahner (not verified) on Mon Mar. 9, 2009 6:41 AM PDT.
that there is a right to a bailout. The fact that the "system begged them to behave this way" refers to the fact that the incentive structure and regulatory restrictions made bad behavior very easy, very profitable and pretty much legal (unless you can prove parties were acting in bad faith instead of just making poor judgements which is very hard to do). So the long term goal is to change that system. Its the equivalent of leaving a pile of money on your front lawn. If someone takes it, its still theft and they should not have done so. But it certainly would be smarter to just keep that money inside instead of metaphorically "begging" a thief to take it.
Agree with Mack.
Submitted by BigTom (not verified) on Sun Mar. 8, 2009 7:19 PM PDT.
My agreement is provisional though, I'm not sure if it really is that bad, but signs the chicken entrails seem to be pointing that way. I think it is disingenious to be talking about wiping out the stockholders as if thats the big deal, as the big really sick players have had more than ninety percent of the market value lost already. The real issue, are the various classes of bondholders, many of whom had no idea they were buying leveraged assets.
If I may jump threads, back to AIG and the counterparties. The current setup has the taxpayers bailing out the counterparties at full insured value. Is this really fair. My analogy is the retirement fund I'm part of, it is almost certain to fail -if I read the PBGC rules correctly, I'll see a whopping 25% of my promised benefit. When things get really bad, and they are now really really bad, insurees should not expect to get paid the par value of their contracts, but to participate in the worldwide haircut. If they leveraged the insurance, and hence are completely wiped out by a subpar payout, that is their justly deserved punishment.
Moral Hazard
Submitted by jimBOB on Sun Mar. 8, 2009 7:27 PM PDT.
One reason we saw such irresponsible behavior was not merely that the system "begged them to do it," it was because the various actors couldn't conceive of being held personally responsible for the results of their actions. Really harsh punishments (i.e. losing every dime they own and spending significant portions of their lives imprisoned) might put some fear into these people, and buy us a few more decades more till some Phil Gramm of the future pulls the same crap and puts our grandchildren into a similar fix.
The reason we had a system begging people to behave irresponsibly is because irresponsible people had risen to the top. And the reason they had risen was because there had been no punishment for behaving irresponsibly.
Bondholders took their risk
Submitted by rational (not verified) on Sun Mar. 8, 2009 7:36 PM PDT.
The real issue, are the various classes of bondholders, many of whom had no idea they were buying leveraged assets.
Were the bondholders misled by the banks when they made their purchases? If so, someone is responsible for that. If not, the bondholders assumed the risk with full knowledge. They may have made poor assumptions based on incorrect mathematical models, but that is where risk comes into picture. Why should taxpayers pony up for something that transpired between banks and their bond holders? Many potential bond holders, I am sure, didn't want to make the same assumptions that others did -- so why are the ones who exercised poor judgment being made whole with taxpayer money?
Narrow/Limited Banking
Submitted by Don the libertarian Democrat (not verified) on Sun Mar. 8, 2009 8:00 PM PDT.
Here's Taleb from Arnold Kling:
http://econlog.econlib.org/archives/2009/02/confidence_and.html
"Also, here is a video featuring Daniel Kahneman and Nassim Taleb. Taleb, like me, wants to get rid of risk-taking by banks, and leave non-insured institutions free to take whatever risks they want, as long as they are not creating risks for others. His solution is to nationalize banks. (me: why would this mean that they would not take risks? Suppose that Freddie Mac and Fannie Mae had been fully nationalized as of three years ago. Would they have taken more risk or less risk?)"
I would rather have Narrow/Limited Banking instead of nationalized banks:
"The FFA and “less is more” limited purpose banking won’t prevent asset markets from occasionally going nuts. But the functioning of financial markets will no longer be in question. Nor will con artists, parading as “financial engineers,” ever again be free to wreak havoc on the nation’s finances and its citizenry."
Narrow/Limited Banking
Submitted by Don the libertarian Democrat (not verified) on Sun Mar. 8, 2009 8:02 PM PDT.
Here's the link about Narrow/Limited Banking:
http://blogs.ft.com/economistsforum/2009/01/putting-an-end-to-financial-...
"This debacle is going to
Submitted by MaynardHandley on Sun Mar. 8, 2009 8:04 PM PDT.
"This debacle is going to cost us hundreds of billions of dollars no matter what we do."
Kevin, why do you persist in making these unhelpful statements? There is no reason, exactly, why this debacle should cost "us" this money; that is a political choice, not a fact of nature. There is NO reason (except unhelpful media attitudes like yours) that sector-specific taxes cannot be implemented to help pay for this.
Most targeted would taxes like a tax on financial transactions, and a tax on leverage.
Next up might be new income tax brackets that kick in at higher levels --- how about a 45% bracket starting at a million dollars, and a 60% bracket starting at 10 million dollars? We'll hear the standard crap from the right wing about how this will stifle initiative, how it's not "fair" that Bill Gates has to pay this much --- and you know what, I'm willing to take that chance. Last time I checked, Bill Gates did just fine founding Microsoft before Reagan came along.
Likewise the various scams that privilege cap gains over wages. (I'm OK with cap gains deflated by the CPI, but this could be handled easily enough via a table lookup, rather than the massive give-away that is the lower cap-gains rate, now including dividends.)
Finally, I see no reason why we need to retain this bullshit reduction of the estate tax. Get it back to the way it was before Bush came into office (and, heck, for good measure, get rid of the various trust-based loopholes). And if this means that once a year poor Ethel and Fred have to sell the family farm, well, you know what, tough fscking shit. Most of us don't get to inherit a family farm worth more than $1 million, so why exactly should we care about Ethel and Fred, who will still have, what, of order half million in cash at the end of the day.
mob-mentality speech
Submitted by alan (not verified) on Sun Mar. 8, 2009 8:54 PM PDT.
The fact is that these people did what they did not because they're stupid, but because the system practically begged them to act the way they did.
But it begged them because stupid people were in charge. Stupid people who listen to the kind of conversation that promotes stupid, parasitic, narrow personalities.
For generations they carefully cultivated the kind of environment where that kind of conversation could get one through the evening, and it was irrelevant whether what you went on about loudly for an hour made a dime's worth of sense.
It was only necessary that this kind of personality kept anything else from happening while he blathered. In time the blather could become a self-fulfilling prophecy when, by sheer accident, it coincided with a speculative bubble.
What you would require is a law that limits the kind of speech that creates a mob-mentality.
yes more please
Submitted by Anonymous (not verified) on Sun Mar. 8, 2009 9:14 PM PDT.
The fact is that these people did what they did not because they're stupid, but because the system practically begged them to act the way they did. That's what's broken, and fixing it depends mostly on what kind of new financial regulations we put in place going forward.
yes. please keep making this point now and then. whenever we come out the other end of this mess, if the rules don't change we'll just end up playing the same game.
p.s. whoever comes up with the captcha words has some sense of humor! "betting" and "eated"? that's lol awesome.
Clearly Atrios is talking about nationalization. If Geithner were bolder he could say, "Okay we're going to perform an actual stress test on these four-five institutions, one without overoptimistic worst case scenarios, and if they're insolvent, we're -- that is you, the taxpayers -- are going to absorb the cost of the difference between their assets and their liabilities, and then we're gonna sell them or whatever..." But he isn't doing that. Instead, we're keeping those things on life support in the hopes that their financial condition isn't as bad as it looks. Which might make sense but it's also worrisome in that it's exactly the approach that Japan took during it's crisis, which lasted, like, forever. Atrios is just pointing out that, given all of the above, there has to be a better reason than preserving the financial industry leadership to forgo nationalization.
If I were Obama I'd get Paul Volcker and his peeps to write up some proposals for nationalization of the four biggest banks and sit down in a room with him and Tim Giethner and tell Geithner that I want him to tell me why those plans aren't better than the alternative and that I'll be listening very closely.
A few other notes -- regulation IS important. Many people view the credit modernization act, where we, or Phil Gramm anyway, decided we weren't going to regulate certain kinds of financial mechanisms, as the key regulatory enabler of the the CDO portion of the bubble. When you couple that with it taking a few years for convention to catch up to a new regulatory framework and eight years of lackadaisical enforcement, it's easy to see how the system itself contributed to the bubble, as much Wall Street leadership. If what they were doing had actually been against the rules and the gov was enforcing the rules, they probably wouldn't have done those things.
People weren't stupid?
Submitted by mctee on Sun Mar. 8, 2009 11:22 PM PDT.
Yes they were....and greedy too. I would argue that stupidity and greed are fairly rampant in our society. The derivative stuff was beginning to bubble up through the collective id back in 06, but nobody wanted to listen.
It's important to zero out the shareholders
Submitted by low-tech cyclist on Mon Mar. 9, 2009 1:13 AM PDT.
As long as they have actual shares in the zombie banks, they will be a powerful interest fighting to keep them alive, in the hopes that those shares will once again be worth real money. They will be at the table, via lobbyists and friendly Congresscritters, throwing their weight around on behalf of non-solutions.
Sure, that doesn't solve the entire problem, but like the Prof said in The Moon Is A Harsh Mistress, if you don't know how to solve a problem, first solve the parts you DO know how to solve, then see if the rest of the puzzle looks any clearer.
I apologize, but I am a
Submitted by DWN (not verified) on Mon Mar. 9, 2009 4:04 AM PDT.
I apologize, but I am a little confused by your post Kevin.
Simply put, you seem to be aware that we are on the hook for all these bank claims (we are insuring these banks, something called the Geithner put from what I understand).
However, in the first paragraph you seem to argue against Nationalization, which might be better called Restructuring or Reprivitization, by saying that we would be on the hook for the debt.
Anyway, confused me, but may be I am just misreading it.
DWN
kevin said: in a
Submitted by kahner (not verified) on Mon Mar. 9, 2009 6:46 AM PDT.
kevin said:
in a post-nationalization world Uncle Sam would be legally on the hook for all those claims.
But is that true? I understand that to maintain stability in the financial system and prevent a cascade of institutional failures the government might decide it should honor CDS obligations or other similar contracts. But are they legally bound to do it? Doesn't bankruptcy/nationalization free them from all financial obligations, not just stock/bond holders?
If Geithner were bolder
Submitted by Art Eclectic on Mon Mar. 9, 2009 7:19 AM PDT.
If Geithner were Bolder
The thing is, they can't be bold. They can't just tell us point blank that the banking system is insolvent because it will start a run on the banks as joe and jane sixpack panic. A run on the banks will be the final act that tips us over the edge and into chaos. Geithner and the team are between a rock and a hard place. If they do what must be done - nationalize - they start a bank run and the whole enchilada goes phlooey.
You can't regulate out greed; greed is a basic human trait. Greed drives Capitalism. You will never keep gamblers out of the casino.....However, what you can do is make sure that the bank and economic engines of the country are banned from the casino. This is where we went wrong - we allowed everyone into the casino, gave them free drinks and let them gamble away every last dime they could get their hands on. The division between banking and investment must be resurrected.
The Woman Greenspan, Rubin & Summers Silenced
Submitted by Art Eclectic on Mon Mar. 9, 2009 7:50 AM PDT.
A commenter at Calculated Risk linked to this:
http://www.thenation.com/blogs/edcut/370925/the_woman_greenspan_rubin_su...
"But more than a decade ago, a woman you're likely never to have heard of, Brooksley Born, head of the Commodity Futures Trading Commission-- a federal agency that regulates options and futures trading--was the oracle whose warnings about the dangerous boom in derivatives trading just might have averted the calamitous bust now engulfing the US and global markets. Instead she was met with scorn, condescension and outright anger by former Federal Reserve Chair Alan Greenspan, former Treasury Secretary Robert Rubin and his deputy Lawrence Summers. In fact, Greenspan, the man some affectionately called "The Oracle," spent his political capital cheerleading these disastrous financial instruments."
labor should not contribute to save the wealthy
Submitted by tpx on Mon Mar. 9, 2009 8:51 AM PDT.
The burden of the financial bailouts is falling on the workers least able to bear the cost. Workers whose earnings have not grown along with the economy the past thirty years should not be expected to finance the recovery of a segment of the economy that produces little economic value for them. The finance industry does not add value to most workers lives. On the contrary, the financial industry led the political movement to devalue the earnings of workers, which has directly led to the financial crisis they are being conscripted into saving with their future tax liabilities.
Drum is willing to pay the price, but hourly laborers are not even being asked to reduce their living standards to pay for the bailouts of the richest segment of the economy, they are being commanded to do so by legislators whose allegiance is to wealthiest. The argument out of work laborers and laborers whose earnings are diminishing will suffer even greater loss of living standards if they do not pay even more tribute to the fiance class who have ruined the economy, is a false one. People who have already lost their jobs and homes, and people who will, cannot be saved by saving the corrupt and decrepit finance system. That system never provided those workers with any benefits. That system devalued their labor. Those laborers, who represent a greater portion of actual society, should insist the finance industry come down to their level. They have no reason to contribute to saving the living standards of the wealthy.
If you can't stand the fall then don't jump.
Submitted by MarkH on Mon Mar. 9, 2009 4:25 PM PDT.
If the economy has sunk (and is continuing to sink) as far and as fast as it has because of Lehman and a tight credit market, then how far would it go overnight if you let Citigroup and a couple of other large firms go under?
People have every right to be annoyed about putting up money for the corrupt greedy stupid idiots who just happen to be in large of some of America's largest firms. But, if they should choose not to (to "jump"), then they should at least be told where the "fall" will land them. I don't think they've really gotten the memo about how bad that could be.
There'a lot of Dirty Harry's out there yelling "Jump you dirty thievin' scumbags, jump." But remember, they might land on YOU.
Don't Search Too Hard For Logic
Submitted by Banks (not verified) on Fri Aug. 21, 2009 9:48 PM PDT.
Don't think too hard to find logic in the events that have taken place in banking and Wall Street - you are not likely to find it. The Federal Reserve, U.S. Treasury and many members of Congress are alumni of Goldman Sachs and other mega financial powerhouses. The alumni looks after its own - so you can count on the mega banks staying afloat one way or another - even at taxpayer expense. The smaller banks don't have these ties, so they have to fend for themselves.
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