Stiglitz Primer on Bank Nationalization

by Harry Haller at 02:41 PM | Bay at the Moon | Ping Me!

Nobel Prize-winning economist Joseph Stiglitz has written an essay for The Nation that may well be the clearest defense of bank nationalization I have yet read. I strongly urge you to click the link and read the entire piece, as I cannot begin to reduce all the information available to a single quote; still, for me, Stiglitz’ explanation of the difference between a large bank and the local pizza parlor was telling:

Banks differ in only one respect. The failure of a bank results in particular hardship to depositors and can lead to broader problems in the economy. These are among the reasons that the government has provided deposit insurance. But this means that when banks fail, the government comes in to pick up the pieces—and this is different from when the local pizza parlor fails. Worse still, long experience has taught us that when banks are at risk of failure, their managers engage in behaviors that risk losing even more taxpayer money. They may, for instance, undertake big bets: if they win, they keep the proceeds; if they lose, so what?—they would have died anyway. That’s why we have laws that say when a bank’s capital is low, it should be shut down. We don’t wait for the till to be empty. Because the government is on the hook for so much money, it has to take an active role in managing the restructuring; even in the case of airline bankruptcy, courts typically appoint someone to oversee the restructuring to make sure that the claimants’ interests are served.

Those who argue that banks should simply be left to collapse may be short-sighted, but their arguments are at least as sound as those who insist we should open a monetary vein and hemorrhage away our nation’s treasure. As Stiglitz explains, drawing on another economic discipline, such a program rewards bad practice:

There is a basic principle in environmental economics called “the polluter pays”: polluters must pay for the cost of cleaning up their pollution. American banks have polluted the global economy with toxic waste; it is a matter of equity and efficiency that they must be forced, now or later, to pay the price of cleaning it up. As long as the banking sector feels that it will be bailed out of disasters—even ones it created—we will continue to have a moral hazard. Only by making sure that the sector pays the costs of its actions will efficiency be restored.

U.S. taxpayers are, in a sense, already part owners in failed financial corporations. Consider insurer AIG. After warning of “a ‘catastrophic’ collapse that would be worse for markets than the demise of Lehman Brothers” in February, the financial behemoth got assurance of another $30 billion in equity from the federal government. This is in addition to the $150 billion already transfused under the previous (supposedly conservative) administration.

It mystifies me that taxpayers agree to such massive investments without demanding an equity stake in the corporation. In my vision of nationalization, companies would not only be taken over, restructured, and placed on the auction block, but taxpayers would become shareholders in them. Once the federal government took over an institution and cleaned it up, it would issue one share of stock per dollar of federal money invested and distribute 49 percent of the shares to everyone who filed a tax return in 2008. It would then transfer the remaining 51 percent of shares to the company or companies purchasing the pared-down bank. Then we’d all have a stake in the success or failure of the newly organized company.

Those insisting this is “socialism” (as though socialism is an ill right-thinking people should dread) fail to recognize that government has already become financial institutions’ lender of choice — a practice that began not with “liberal” Barack Obama, but with “conservative” George W. Bush in another example of corporate welfare. Calling for an equity stake in bailed-out financial institutions — and for an equity stake that benefits ordinary taxpayers — is not only better use of the treasury, it’s better business.

More Stiglitz Primer on Bank Nationalization after the jump

Irony of the Day: No Nationalization

by Harry Haller at 03:51 PM | Bay at the Moon | Ping Me!

Like a decrepit robber baron on a Viagra mainline, the market sprung up today after Federal Reserve Chairman Ben Bernanke reassured investors that the government would not nationalize banks. Bank of America stock sported an 18 percent erection, and the Dow as a whole was up 2 percent at 2:30 today.

At almost the same time bank analysts and industry insiders predicted the rate of U.S. bank failures would increase more than four-fold this year, with FDIC spokesman Andrew Gray announcing, “The FDIC has clearly stated that we expect an increase in our resolution activity as we work through this economic cycle.”

RBC Capital Markets’ predictions are grimmer: They believe more than 1,000 banks — or one in eight lenders — may fail in the next three to five years, a figure far greater than the more conservative posited by bank analysts.

Reuters notes, “Declaring a bank failure sooner rather than later often minimizes taxpayer costs.”

Hmm. I suppose the rule only applies if your name isn’t Citigroup or Bank of America. In those cases, taxpayers be damned.

I’m a little late to Paul Krugman’s latest op-ed for The New York Times, but it bears reading: “Banking on the Brink.” I have no reason to think he might be, but I’m hoping he is wrong.

More Irony of the Day: No Nationalization after the jump

Is the Nation in Denial?

by Harry Haller at 02:02 PM | 1 Howl | Ping Me!

It came as no surprise when an editorial in The New York Times called for the nationalization of institutions like Citigroup and Bank of America. One might expect the journal erroneously considered a “lefty” newspaper by those on the right to endorse the measure.

But when Republicans like Lindsey Graham and John McCain start slipping the N-word into conversation, it’s time to face uncomfortable facts. As Graham put it, “I would argue that we cannot be ideologically a little bit pregnant. It doesn’t matter what you call it, but we can’t keep on funding these zombie banks. That’s what the Japanese did.”

Now that the so-called “high priest of lassier-faire capitalism,” Alan Greenspan, admits nationalization is in order (“It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring,” Greenspan said. “I understand that once in a hundred years this is what you do.”), one wonders why President Barack Obama’s administration is slow to pick up the tempo.

In his regular op-ed column for The New York Times, Frank Rich suggests a reason: We don’t want to know the truth.

The Obama White House may come up with euphemisms for nationalization (temporary receivership, anyone?). But whatever it’s called, what will it mean? The reason why the White House has been punting on the new installment of the bank rescue is not that the much-maligned Treasury secretary, Timothy Geithner, is incapable of getting his act together. What’s slowing the works are the huge political questions at stake, many of them with consequences potentially as toxic as the banks’ assets.

Will Obama concede aloud that some of our “too big to fail” banks have, in essence, already failed? If so, what will he do about it? What will it cost? And, most important, who will pay? No one knows the sum of the American banks’ losses, but the economist Nouriel Roubini, who has gotten much right about this crash, puts it at $1.8 trillion. That doesn’t count any defaults still to come on what had been considered “good” mortgages and myriad other debt, whether from auto loans or credit cards.

When Obama sought support for his stimulus package, he appealed to Republicans to put away partisan politics and do what was good for the nation: none answered the call. I would suggest it is time for Obama to follow his own advice, forget what is politically expedient, and nationalize toxic banks.

More Is the Nation in Denial? after the jump

Advice to Obama: Bite the Bullet

by Harry Haller at 05:44 PM | Bay at the Moon | Ping Me!

Apparently Wall Street isn’t buying into the Barack Obama, Timothy Geithner hybrid approach to bank rescue. Here is Reuters’ lead:

Bank of America Corp and Citigroup Inc shares plummeted for the sixth straight day on Friday, hammered by fears the U.S. government could nationalize the banks, wiping out shareholders.

The shares came off their lows after the White House said President Barack Obama favored a privately held banking system, but investor concerns persisted.

The New York Times says reassurances from the White House rallied the markets late in the day:

Wall Street’s fears about a government takeover of major banks eased somewhat on Friday afternoon after the White House reaffirmed its belief in a privately owned banking system.

The Dow climbed back from a 200-point loss but still ended 100 points lower after the Obama administration tried to reassure nervous investors that it wanted to avoid nationalizing troubled banks.

‘This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,”” a spokesman for President Obama, Robert Gibbs, said. “That’s been our belief for quite some time, and we continue to have that.”

The Washington Post calls the market’s response “erratic.”

Lurching ups and downs are great for roller coaster enthusiasts, but lousy for investors and the public. The Obama administration should take a stand one way or another and let the resulting storm play out. Uncertainty worries people more than bold action. Personally, I believe it is past time to temporarily nationalize banks, sell off the pieces, and move ahead. Sometimes those who play the market lose their backsides; it’s part of the risk they take to win big.

But regardless of the course of action, the time has come to say “yes, we will” or “no, we won’t” and get on with it. At least then we’ll all know where we stand.

As I used to tell customers when I worked in sales, “Sooner or later you have to decide. You’re either in or out. Stop wasting our time and choose.”

More Advice to Obama: Bite the Bullet after the jump

Stanford Eludes Reporters -- Again

by Harry Haller at 12:11 PM | Bay at the Moon | Ping Me!

Yesterday we noticed when the FBI served Texas financier Allen Stanford papers from the U.S. Securities and Exchange Commission after accusing him of defrauding 50,000 customers around the world in a multibillion-dollar investment scheme.

Today, according to Reuters, he’s missing again. While television crews mounted a vigil at the home of the woman “reputed to be a girlfriend,” Stanford apparently slipped the noose.

What I’d like to know is where one hides out if he is Allan Stanford, with governments up and down the Western Hemisphere and an army of investors at odds with him. One thing is certain: He likely won’t be welcome in Antigua.

(By the way, I agree with Felix Salmon in the link below: Why wasn’t the man arrested yesterday?)

More Stanford Eludes Reporters -- Again after the jump

Grieder Warns of Social Security Scheme

by Harry Haller at 03:29 PM | Bay at the Moon | Ping Me!

William Grieder’s “Looting Social Security” is essential reading for those who have paid into the system for decades and are interested in receiving a return on their investment.

These players are promoting a tricky way to whack Social Security benefits, but to do it behind closed doors so the public cannot see what’s happening or figure out which politicians to blame. The essential transaction would amount to misappropriating the trillions in Social Security taxes that workers have paid to finance their retirement benefits. This swindle is portrayed as “fiscal reform.” In fact, it’s the political equivalent of bait-and-switch fraud.

This is not an argument over entitlement reform; it’s about conducting government in the light of day and making its players accountable to the public.

More than ever I feel, regardless of political alignment, the United States is operated by a monied minority that has no interest in the middle class majority. Though professional politicians and the prestige media would label my thinking “class war,” maybe the time for a little war on the wealthy is in order. When the political class argues we should bail out the financial industry, favor the investor class with enormous tax breaks, and open up Social Security to the same individuals who mishandled their own funds and brought down the financial empire on their ears, I’m beginning to wonder whether we don’t live under a form of democracy known as total plutocracy.

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• Doctor of poor: Wall Street can ‘burn in hell’ (cnn.com)

More Grieder Warns of Social Security Scheme after the jump

Geithner's Dog and Pony Show

by Harry Haller at 03:58 PM | Bay at the Moon | Ping Me!

In three paragraphs Dean Baker makes about as excellent an argument as I’ve read for nationalizing failed banks:

Fortunately, we don’t have to follow the individual trades to know whether the taxpayers are being ripped off. We just need to ask some more basic questions like “How much will this thing cost?” If the answer is anywhere much more than zero — as Geithner suggested it will be — and we still see that bank stocks carry significant value and bank executives continue to hold on to their high-paying jobs, then we will know that we have been had.

The basic point is extremely simple. We have a large number of bankrupt banks. We have a public interest in keeping the banks functioning, but we have zero public interest in giving taxpayer dollars to bank shareholders or to the executives that wrecked the banks they ran.

Geithner can design as complex a dog and pony show as he wants, but if his plan takes up hundreds of billions of taxpayer dollars and does not involve wiping out the shareholders and sending the bank executives packing, then he has ripped us off.

When the Constitution talks about promoting “the general welfare” it doesn’t mean providing obscene payments to the rich.

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• Geithner Reax (andrewsullivan.theatlantic.com)
• A Wacky Idea (andrewsullivan.theatlantic.com)
• Geithner blocks tougher conditions on Wall Street (americablog.com)

More Geithner's Dog and Pony Show after the jump

Obama, Day 21: Timmy's in Trouble, Lassie

by Harry Haller at 10:41 AM | 1 Howl | Ping Me!

On Sunday, when the Obama-Geithner economic plan was but a gleam in the eyes of its formulators and a series of carefully planted leaks on the Beltway, I wrongly suspected Wall Street would welcome it and Main Street would loathe it. Today, with the plan unveiled, the Dow (perhaps we should rename it the Down) nosedived, losing 381.99 points, or 4.6 percent, to close at 7,888.88. So I was wrong, Lassie, it looks like Timmy is in trouble after all.

The reason, according to a number of sources, was a lack of detail. The Times cited Ryan Larson, head equity trader at Voyageur Asset Management, "We're not impressed, and I don't think the market's impressed either. It's clear the administration is still trying to work on something concrete. I think the market sensed that, too."

The Washington Post quoted Randy Bateman, chief investment officer and president of Huntington Asset Advisors, "It seems like the investment public is just fed up with on-again, off-again programs and there has been no manifestation of an impact on any of the problems, so I think there is a wait-and-see attitude."

Mark A. Coffelt, president and chief investment officer of Empiric Funds in Austin, was more adamant: "I wish the government would stop speaking. Why did you even call a press conference?"

More Obama, Day 21: Timmy's in Trouble, Lassie after the jump

"Who Ends Up Losing?"

by Harry Haller at 05:14 PM | Bay at the Moon | Ping Me!

In Joel Achenbach's "A Sense of Resentment Amid the 'For Sale' Signs" for the Washington Post, Ed Merkle, a defense contractor who recently refused a loan "even when his bank encouraged him to dream bigger", has a question I'll bet is common to a lot of ordinary citizens:

"I've been financially responsible with my own money. Why should I now be responsible for the fact that you were not?" he said.

Pure Darwinian Capitalism is about the market rewarding excessive greed, incompetence and questionable business practices with failure. When the government subverts the process, it also subverts the reason corporations cry for deregulation in the first place. Note to Wall Street: You can't have it both ways.

The more I know about this situation, the less I like it. According to Mr. Achenbach, I'm apparently not alone:

And they say they don't like it. They didn't break it, but now they've bought it. Political leaders and financial titans say the bailout is necessary to save the economy, but on the ground, in such places as Manassas Park, people think that the bailout will reward the wrong people. There's a sense that too many folks bought houses they couldn't really afford, banks urged them on, common sense went on vacation, and now the grown-ups have to clean up the mess.

Angry as Me

by Harry Haller at 05:41 AM | Bay at the Moon | Ping Me!

Juan Cole says the current poll numbers identify Americans as "A Nation of Masochists". Whips and chains, anyone?