by Paul Krugman
Question: what happens if you lose vast amounts of other people’s money? Answer: you get a big gift from the federal government — but the president says some very harsh things about you before forking over the cash.
Am I being unfair? I hope so. But right now that’s what seems to be happening.
Just to be clear, I’m not talking about the Obama administration’s plan to support jobs and output with a large, temporary rise in federal spending, which is very much the right thing to do. I’m talking, instead, about the administration’s plans for a banking system rescue — plans that are shaping up as a classic exercise in “lemon socialism”: taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right.
When I read recent remarks on financial policy by top Obama administration officials, I feel as if I’ve entered a time warp — as if it’s still 2005, Alan Greenspan is still the Maestro, and bankers are still heroes of capitalism.
“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” says Timothy Geithner, the Treasury secretary — as he prepares to put taxpayers on the hook for that system’s immense losses.
Meanwhile, a Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers, President Obama’s top economic adviser, “think governments make poor bank managers” — as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.
And this prejudice in favor of private control, even when the government is putting up all the money, seems to be warping the administration’s response to the financial crisis.
Now, something must be done to shore up the financial system. The chaos after Lehman Brothers failed showed that letting major financial institutions collapse can be very bad for the economy’s health. And a number of major institutions are dangerously close to the edge.
So banks need more capital. In normal times, banks raise capital by selling stock to private investors, who receive a share in the bank’s ownership in return. You might think, then, that if banks currently can’t or won’t raise enough capital from private investors, the government should do what a private investor would: provide capital in return for partial ownership.
But bank stocks are worth so little these days — Citigroup and Bank of America have a combined market value of only $52 billion — that the ownership wouldn’t be partial: pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.
My response to this prospect is: so? If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome.
If news reports are right, the bank rescue plan will contain two main elements: government purchases of some troubled bank assets and guarantees against losses on other assets. The guarantees would represent a big gift to bank stockholders; the purchases might not, if the price was fair — but prices would, The Financial Times reports, probably be based on “valuation models” rather than market prices, suggesting that the government would be making a big gift here, too.
And in return for what is likely to be a huge subsidy to stockholders, taxpayers will get, well, nothing.
Will there at least be limits on executive compensation, to prevent more of the rip-offs that have enraged the public? President Obama denounced Wall Street bonuses in his latest weekly address — but according to The Washington Post, “the administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid” because “harsh limits could discourage some firms from asking for aid.” This suggests that Mr. Obama’s tough talk is just for show.
Meanwhile, Wall Street’s culture of excess seems to have been barely dented by the crisis. “Say I’m a banker and I created $30 million. I should get a part of that,” one banker told The New York Times. And if you’re a banker and you destroyed $30 billion? Uncle Sam to the rescue!
There’s more at stake here than fairness, although that matters too. Saving the economy is going to be very expensive: that $800 billion stimulus plan is probably just a down payment, and rescuing the financial system, even if it’s done right, is going to cost hundreds of billions more. We can’t afford to squander money giving huge windfalls to banks and their executives, merely to preserve the illusion of private ownership.
3 comments:
I do love Krugman. And I am very skeptical of the bailout. There are three problems at work and they are inter-related, which makes it really hard to come up with a solution that will please enough people to succeed. 1) Housing has collapsed, and until it picks up again banks have a lot of once over priced and now cheap property on their hands. 2) Unemployment is skyrocketing, and so people can't put money into the system, they fall behind on their mortgages, their homes are repossessed and problem 1 becomes all the worse. 3)Banks are really hesitant to loan money because of 1 and 2 plus a lot of related factors like overall investor confidence being low. So....what to do. I would love to see some hard core nationalization (at least in the immediate term) and let the government do the lending if banks are too hesitant to. I would also prefer a lot more New Deal type federal pay for social works projects. But Republicans and conservative Democrats hate those types of proposals (especially the first), so they want to incentive lending and buying. Basically, the proposals seem to be about lowering taxes more and more and providing rebates for home buyers. In one proposal there would be a 10,000 dollar rebate for a home purchase. That is great, but it does little good for a guy who just lost is job or worries about. And it does nothing to put people back to work.
Much of the bailout is truly flawed but at least it contains a lot of counter-cyclical provisions like increased medicare/medicaid, unemployment benefits, etc. I would push for a shit ton more of those, but again, I butt heads with the right, that want the market to do it. Sadly, though, letting banks fail is pretty risky. I am all for it if the government is going to be there to pick up the slack, but again, resistance from the right....hmm..still not sure of the best course of action or my opinion on the bailout...except that I hate bankers a lot more. When the revolution comes...
I do agree with you for the most part.
Why do we feel like we should reward the failure of individuals who were motivated by greed with more money? I hope the "new" bailout is executed much better than the handing over of billions into the greedy pockets of the already super-rich that was the last bailout. I know you and I do not see eye-to-eye on that issue, so I will leave it be... for now. ;-) I think that this financial catastrophe that is the world economy right now shows without a doubt that the "free market" system at worst doesn't work and at the very best needs heavy regulation. The invisible hand is obviously guided by an invisible blind man with an IQ well below 70.
Bankers... grrrr...
... when the revolution comes...
In listening to the commentary of most free marketeers, a funny thing has emerged. Most that I know have begun to begrudgingly accept that the practice of the free market doesn't meet the ideal of it. Who wouldn't want to live in a world where government got the Hell out of the way and people could govern themselves? Well, guess the fuck what. Welcome to the world of "THEORY DON"T MATCH REALITY"....Also called "When greedy soulless Douchebags ruin a good idea." See, modern day communists (for the most part) figured that out a ways back. Communism was a great theory that all people could be 100% equal an everyone would be happier if no one had private property to fight and be envious over. A cool idea that didn't match well with the innate greed and douchebaggery of the people in power. Anarchism would have probably had a similar experience but when you oppose bureaucracy and organization it is a little hard to implement an ideology. But keep trying guys. So here is the free market, libertarian ideology, stuck realizing that people suck an when left to their own devices tend to try to fuck everyone else to make another few bizzillion dollars.
Anyway, I have heard some interesting revisionist free market commentary lately. The most notable was an economist and Smith scholar that was keen t point out that it wasn't the market per se that failed, but the intentions, and the ugly outgrowth of the market known as over consumption. In his view, and apparently, as he quoted, Smith's, was that the market is good and people should have the freedom to make money. But when money making becomes the sole objective, and when an economy is no longer used to support a people, to benefit a country, or to enrich people's lives, it becomes corrupt and soulless and this is when the bad stuff happens. What he seemed to be suggesting was that where we as country have gotten off on the wrong path is not the free market but that we have built an economic system on consumption. And this, he argues, is certainly bound to fail. We produce nothing. And worse, money is made just to spend to make more money. There is no inherent point and it is negatively cyclical.
I certainly have more problems with the market than that, but I thought it interesting that someone might point out the dangers of just making money for the sake of doing it. This is why I see no reason with income caps or progressive taxation. When you make 800 million a year the government should get to take 7/8th of it. You can't even begin to spend it, so keeping it is just greed. Is it unfair? That is wholly subjective. Tell it to the guy who works just as hard for 35,000/yr. The point being, money should do things other than make more money. And when it doesn't, in my mind you can't really defend having it. And the fairness and justice thing, the notion that the government should have no inherent right to tell people what to do with their money let alone take--it's a paper tiger built rhetorical arguments and bad analogies that does noting but attempt to allow greedy people to cling to their cash. The argument that progressive taxation and caps disincentives people, that they work less hard when they pay more taxes is partially correct. It only holds when people actually need or can even enjoy the money they have. It holds no logic once they are retardly wealthy.
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