In FDIC We TrustPosted: March 7, 2009
I continue to read current economic thought on the state of the economy and the state of the Obama administration’s response. I don’t’ know if you’ve ever made a trip to Project Syndicate, but it’s an interesting site where you can read contributions by brilliant people to newspapers around the world. It’s another one of those places that I’ve found since I’ve completely given up on the US MSM’s ability to provide real news, insight, or criticism of the world today.
Joseph Stiglitz is a frequent contributor. He’s a 2001 Nobel Laureate Economist. This is a contribution of his to The Guatemala Times from March 6, 2009. It’s called How to Fail to Recover. I’ve talked a lot about how the stimulus package isn’t big enough, that it contains too many tax cuts and that it is a bandage approach to a systemic problem that started in the financial system with bad lending practices egged on by Washington and greedy megainvestors. I feel vindicated because that is Stiglitz take too.
The stimulus package appears big – more than 2% of GDP per year – but one-third of it goes to tax cuts. And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries), and falling asset prices, they are likely to save much of the tax cut.
Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level. America’s 50 states must maintain balanced budgets. The total shortfalls were estimated at $150 billion a few months ago; now the number must be much larger – indeed, California alone faces a shortfall of $40 billion.Household savings are finally beginning to rise, which is good for the long-run health of household finances, but disastrous for economic growth. Meanwhile, investment and exports are plummeting as well. America’s automatic stabilizers the progressivity of our tax systems, the strength of our welfare system – have been greatly weakened, but they will provide some stimulus, as the expected fiscal deficit soars to 10% of GDP.
In short, the stimulus will strengthen America’s economy, but it is probably not enough to restore robust growth. This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy.
The real failings in the Obama recovery program, however, lie not in the stimulus package but in its efforts to revive financial markets. America’s failures provide important lessons to countries around the world, which are or will be facing increasing problems which are or will be facing increasing problems with their banks.
You can read the entire article which really goes back, again, to the roots of the problem. The financial system is broken. Lenders are holding assets now that they didn’t originate, never intended to hold on to, and can no longer pass on to hedge funds, investment bankers, and speculators. The problem is that lenders are the lifeblood of the main street economy and their problems run deep. The current administration and many congressional banking committee members, however, own their political livelihood to brokerage houses, hedge funds, investment bankers and speculators. This is a problem. Meanwhile, the average person, who seems confused between the difference between well-regulated banks with fiduciary responsibilities and the Wall Street Gone Wild boys continues to miss the difference. I’ve noticed this confusion has run amok on many so-called progressive blogs. Even huge conglomerate financial holding companies have lines of business that are still viable and safe. The problem is their speculative divisions have infected their business and indeed all financial markets. Many small town banks, credit unions, and thrifts that still operate on the buy and hold loans model are healthy and these bankers should not be confused with the giants that gamed loopholes set up for them by congressman and senators of both parties. It’s time to close the damned loopholes. It’s also time to recognize that folks like Biden, Frank, and Dodd are just as much a part of the problem and cannot possibly lead this country to the best solution. Right now, I’d offer up Paul Volker, James Baker, and Sheila Bair as the three most well-equipped folks to deal with solutions. Volker could represent the Democrats and this administration while James Baker would bring some Republican gravitas. Sheila Bair is perhaps the most crucial regulator at the moment as well as some one from the Fed’s BOG. We need something similar to a Sarbanes-Oxley that actually does something significant. We need new banking regulation. Even Ben Bernanke was begging for it this last week in front of the Senate Budget Committee.
As Stiglitz’s first point says:
Delaying bank restructuring is costly, in terms of both the eventual bailout costs and the damage to the overall economy in the interim.
A major look at at the Graham-Leach-Biley Act (GLBA)should be the first step. Now, this doesn’t mean I am calling for reinstatement of the Glass-Steagall Act (GSA) either because a lot of things have changed that make the details of this regulation unnecessarily restrictive, but if the GSA is a chastity belt, then the GLBA is a government-supported whore house. Surely, some one some how can maintain the fiduciary responsibility that comes with handling and holding other people’s money with the need to provide investment vehicles to investors. Fiduciary responsibility doesn’t mix with speculation or side betting just as fast cars, alcohol, and semi-automatic weapons don’t mix either. More from Stiglitz:
– Bankers can be expected to act in their self-interest on the basis of incentives. Perverse incentives fueled excessive risk-taking, and banks that are near collapse but are too big to fail will engage in even more of it. Knowing that the government will pick up the pieces if necessary, they will postpone resolving mortgages and pay out billions in bonuses and dividends.
– Socializing losses while privatizing gains is more worrisome than the consequences of nationalizing banks. American taxpayers are getting an increasingly bad deal. In the first round of cash infusions, they got about $0.67 in assets for every dollar they gave (though the assets were almost surely overvalued, and quickly fell in value). But in the recent cash infusions, it is estimated that Americans are getting $0.25, or less, for every dollar. Bad terms mean a large national debt in the future. One reason we may be getting bad terms is that if we got fair value for our money, we would by now be the dominant shareholder in at least one of the major banks.
– Don’t confuse saving bankers and shareholders with saving banks. America could have saved its banks, but let the shareholders go, for far less than it has spent.
There are just so many good suggestions from Stiglitz that I want him put on the Committee to solve this mess too. Here’s some more.
– Trickle-down economics almost never works. Throwing money at banks hasn’t helped homeowners: foreclosures continue to increase. Letting AIG fail might have hurt some systemically important institutions, but dealing with that would have been better than to gamble upwards of $150 billion and hope that some of it might stick where it is important.
– Lack of transparency got the US financial system into this trouble. Lack of transparency will not get it out. The Obama administration is promising to pick up losses to persuade hedge funds and other private investors to buy out banks’ bad assets. But this will not establish “market prices,” as the administration claims. With the government bearing losses, these are distorted prices. Bank losses have already occurred, and their gains must now come at taxpayers’ expense. Bringing in hedge funds as third parties will simply increase the cost.
If Reaganomics is trickle-down economics, than Obamanomics appears to be poverty-up economics. Adding short-sighted politicians and greed-minded megainvestors to the Obama panel of advisers to solve the problems is not working. It’s destroying real wealth in this country. It is only a matter of time before even the most besotted of Obama Cheerleaders will notice their skinned knees and strained voices.
If any Czar should be appointed, it’s a banking regulation Czar with a blue ribbon panel. They should propose legislation within a few months to correct the systemic problems in the banking system. Biden, Dodd, Frank, and Penny Prizker should be kept off of it! Let’s just see if that happens.