"The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it." Washpost.
Roubini and Naseem Taleb (the Black Swan man) were on CNBC last week impatiently explaining to the money honeys and intellectually challenged staff pomposities that the financial system is so broken that it will not reconstruct itself and that the reason the financial system is broken is the unfortunate truth that it is largely populated by even greater (and often equally challenged) pomposities as the staffs of the 24/7 business news channels. The news pomposities are those men of wisdom who bleat the numbers of the day and hope for a rise in the markets.
The big beggar banks are driven by people for whom greed and arrogance are the hallmarks of likely success in the "bidness." Roubini says it simply – "Nationalize the big banks now, or nationalize them later under worse conditions."
I will not repeat at length my opinion of the financial traders, those "rational actors," who were indifferent to the likely effect of trading oil futures, mortgage based securities and other such instruments to the sky regardless of the sustainable short term prices of the underlying commodity.
The best that can be said of "this class of people" (Roubini quote) is that some of them had the wit to try to "call" the inevitable crashes in such a way that they had cashed out in time.
Let us hope that many of them failed to do that, pl
While I, too, hope that may of this class of people took a big bath as a result of their machinations in the creation of personal wealth from nothingness, I wish that the U.S. had a tax code that ensured any of the wealth gained in such a manner was returned to the greater good through the offices of the federal, state and local tax authorities.
As it is, too much of the fantastic wealth in this country is hidden and saved from the greater good. Watching the high-earning “beggar bankers” squirm this week in front of the people’s representatives (themselves making incomes in the top 1-2% of national averages) was a true joy. A joy offset perhaps by the no-nothingness tax cutting forced int the stimulus package by the rump of the GOP. But a joy nonetheless.
Also enjoyable was the grilling Congressman Alan Grayson delivered to Citibank’s newest boss (who earns more than $500,000 year). Yes, I too would like a $7B “insurance” policy to cover my losses on $250B of “bad” investments.
Today’s Post also ran an op-ed on those without access to the billions like the bankers are.
But this time around, we appear to have a class of individuals who think that they should not have to suffer with the rest. Circuit City, currently liquidating all its stores and laying off thousands, asked a bankruptcy court judge to let it give bonuses to executives to convince them to stay for the “wind-down process.” The New York Post reported on a disgraced financial executive who transferred property to his wife to protect it from legal action.
It is this type of behavior, rather than economics, that the working poor don’t understand. I earned $3.35 an hour at my first job washing dishes in 1981, and today, 28 years later, the minimum wage has barely doubled. Congress voted not to raise it for nearly 10 years, while members awarded themselves pay raises on a nearly annual basis. And during the years that the minimum wage was stalled, the pay of a CEO swelled to hundreds of times the wage of an average worker, according to the Economic Policy Institute.
But maybe guys like Mark and Robert would have warned you about this economy years ago, when the jobs began moving overseas, and their credit limits went up even as they got pink-slipped. They didn’t know when it was coming, but they knew.
And their warning would have been plaintive: Stop taking so much. Does anyone really need a $20 million salary? If you have that salary, do you need a bonus? If you take that much, won’t somebody else be deprived?
The people I work with have an arcane belief that money comes from somewhere, that value is added when things are made, and that the only real way to acquire money is to work.
Its time to realign the values held by the so-called “Masters of the Universe;” and since such a re-alignment will not voluntarily come from these masters, its time to impose the change upon them.
The tax code is a good place to start.
I am not generally a person of prayer, but all I can say to your analysis is “amen.”
A. Lincoln is one of B.Obama’s role models.
Like Lincoln, Obama has entered his term at the start of a war. A war against economic depression, and unrealistic expectations.
Like lincoln, his first generals are the heroes of the day. Like Lincoln he will find most, like McClellan aren’t up to the challenge.
His test will be to find new generals like Grant to help him in this war.
“This class of people” is what the American people have deservedly earned as the fruit of their political indolence. They avidly tilled fields of poison salted with ignorance at the urging of treasonous charlatans.
When the crop fails, they proudly declare that their inerrant furrows can run no other way, come what may, damn the torpedoes, the evidence and the collateral damage. Oblivious to the long obvious conclusion that to this “class of people”, The People and The State are mere collateral damage, far removed from their universe.
For heaven’s sake, we allow the air we breathe to be polluted, the water we drink to be a sewer of toxic and pharmaceutical effluvia, the energy upon which our circuit-board-thick civilization depends to be the plaything of private capital, the defense of the realm to be the plaything of delusional fundamentalist liars.
And we pay them handsomely for our bondage and penury, asking only that they mouth soothing platitudes whenever we are distracted from our endlessly variegated rattles.
At $2 trillion, that’d be a direct payout of about $7,000 each, which I am certain most of which would be immediately injected into the consumer economy. Enough to finance domestic regime change, if there was a will to it.
Instead, it is being paid directly to the current economic regime.
Plus la change. . . .
One should not use the word “nationalize”. That implies that the nation should take on the debt of those banks.
Put those banks into a preplanned bankruptcy.
The shareholders get zero. The not FDIC insured debt-holders get all the bad assets.
The managers get fired.
New regulation is put into place.
The rest will be capitalized sufficiently by the government and then, a few years from now, IPOed at the stock exchange.
There is nothing “nationalizing” in that. The FDIC does this quite a lot these days and there is nothing problematic about it.
one strees test number is in.
CreditSights ran the numbers, and found that according to its “severe” case situation, all the major banks and brokerages — Citigroup, Bank of America, Wells Fargo, JPMorgan Chase, Goldman Sachs and Morgan Stanley — might require further capital injections from the government.
CreditSights’ projections were driven by its own forecast for future credit losses based on how badly the market could perform over the next two years. Under these assumptions, the losses from mortgage-related products would be significantly higher than the amount the banks have set aside already. It also envisions an unemployment rate of 10 percent.
The future losses for some banks are staggering by CreditSights’ estimates: Wells Fargo, $119 billion; BofA, $99 billion; JPMorgan, $124 billion; Citi, $101 billion; Goldman Sachs: $47 billion; Morgan Stanley, $34 billion.
I watched that CNBC interview courtesy of Zanzibar’s link in an earlier post. It was edifying both for what these two experts had to say, and also for how completely clueless the CNBC talking heads were (one fool kept asking Taleb for investment advice for a college fund!).
As far as nationalizing the banks, I was always under the impression that when you bought something, you owned it. The US taxpayer has had the unfortunate honor of buying these banks (and without even being told the actual purchase price). Thus we should own them.
Well, we should own them until they are in better shape, at which point we should do what any good American entrepreneur would do: flip ’em!
Nationalization is likely the right thing for two simple reasons:
1) Punishment of irresponsible, greedy shareholders for the damage they did – as a lesson for all (that lasts for a generation).
2) Only nationalization allows to keep both risk and chances of government intervention on the side of the government (the people).
Intervention with loans or else but without getting equivalent shares means that the people bear the risks, but the shareholder have the chances.
If we don’t nationalize the banks we will be throwing good money after bad, and the taxpayers will be even further screwed. The powers that screwed us must be removed, so the taxpayers own them theoretically, and perhaps a profit might be gained by selling them off after recovery. The funds to sustain the banks must not be entrusted to those who screwed us. Aux barricades.
This has been another edition of “What Pat Lang said” 🙂
with apologies to Atrios…
Shakespeare had it wrong: first kill all the financiers. Retain the lawyers to find a way to call it justifiable homicide.
Here’s an older youtube clip featuring Peter Schiff versus the odious financial talking heads that – watch them if you can stomach them, like what was done to Ron Paul, laugh Schiff right off the tube. I can only hope they suffered from their own advice:
When folks at the highest levels screw things up, they should be gotten rid of, Bush and company should have resigned gracefully on 9/12/01 (abject failure to protect USA airspace). That they didn’t and our Congress didn’t have the will to get rid of them only fueled the fires of the past 8 years.
Same ‘ol, same ‘ol. I defer to zanzibar and probably concur too.
There are many of us senior citizens, maybe millions, who saved every penny we could over our careers and purchased investment-grade bonds, including from banks, to generate some retirement income to supplement Social Security. We were not greedy speculators. I think many of your commenters urging the summary execution of banks, instead of bankers, have no exposure to the bonds in their portfolios. We should not treat the millions of prudent, middle-class investors as collateral damage in trying to fix what a handful of bankers and federal officials have inflicted on the nation. Knut
Before the big banks can be “resolved” (a better term than nationalization which raises red flags), Tim Geithner either needs to change his views or be replaced by President Obama with someone who understands what has to be done. Geithner currently proposes to keep the system propped up that has rewarded himself and other members of the nation’s financial elite. The system they support, however, is hopelessly dysfunctional, as the current hard times demonstrate. Change will only come when the focus shifts from maintaining a tiny elite to actually restoring the nation’s economy..
Watch the 60 Minutes segment on World Savings. Fraud abounds.
One barrier to nationalization is the fact that banks under federal receivership are probably not allowed to hire lobbyists.
Layoff lobbyists? Are you crazy?
Nothing is more important than creating lucrative employment for former senators and representatives.
Allons enfants de la patrie
le jour de gloire est arrive
Well, not quite –
nothing’s happened yet;
just talking so far.
My best friend owned Albany Ladder Company.
He was the entrepreneur of the year in 1994 in the United States.
He was entitled to a million dollar a year salary.
He took a dollar a year, infused the money into the company, made it the best scaffolding company in the Northeast, and shared his wealth in efforts to improve the quality and sustainability of life.
Barry Sanders, the great Detroit Lion footballer, when awarded a $2 million dollar contract a few years back, wrote a check for $200,000 to his church upon signing.
As Mr. Obama has said, the bankers and traders, brokers and speculators ought to be ashamed.
Why they are not is their business.
If it does not soon change, we will make it our business.
Thanks again for all the great reading tonight.
As the high school kids say,
Nationalizing the banks and other parts of the financial sector is a bad idea. Let them fail along with Freddie Mac and Fannie Mae. Creative destruction.
Does anyone else find it ironic that a post calling for greater government involvement and intervention in the financial sector was preceded by a post about corruption by government officials from the part of the federal government that is generally considered the most trustworthy and responsible?
“Democracy is the theory that the common people know what they want, and deserve to get it good and hard.” – H. L. Mencken
I think Jon makes a valid point. Any approach – including nationalization – will not work until we change our governing class/elites/ruling pomposities. This is not a call for revolution – it is actually one of the conditions the IMF puts on countries to which it gives ‘rescue’ packages, e.g. Argentina. The theory is that if the same corrupt and corrupted individuals remain in their positions, no policy or reform program can ever succeed. We are no different.
How do we do this? Obama could require banks that get federal funds to relocate to depressed cities (breaking up the Wall Street CJ), raise the top tax rate to 70 or 80% like it was in the 1960s, and maybe even – god forbid – hire people who have been proven right these past 5-10 years and fire those who have been proven wrong.
Since Obama seems to have trouble even accomplishing the last point, then if we are indeed facing the next Great Depression, then I’m starting to think we just elected Hoover instead of FDR.
The past is always a good arbiter. Rather than “nationalization,” I prefer the approach taken by FDR in his first days in office. He, in effect, put the banking system through bankruptcy reorganization. He declared the bank holiday, in effect, a time out, while auditors went in and scrubbed the books of all the banks in the country. They determined which banks were solvent and could immediately resume business, which banks were hopelessly bankrupt and should be shut down, and which banks could survive with some help. The help took the form of government assistance, through purchasing of bank stocks, and other means of capitalization, to be paid off over time, presuming a larger plan to jump start real economic activity. Contrary to American Enterprise Institute ideologues, the New Deal did work, and lay the basis for the later war mobilization, which was the greatest economic drive in history. This, seems to me, is the way to go now. In addition to bankruptcy reorganization of the entire Federal Reserve banking system, we need Congress to enact a capital budget that goes way beyond the silly elements in the just-passed “stimulus package.” We need top-down investment, from the Federal government, in big infrastructure projects that will, over time, transform the US economy, and boost productivity. I mean highspeed rail and maglev (46,000 miles of new electrified highspeed rail and maglev over the next 25 years), nuclear power, water management. This will create meaningful longterm jobs, in high-tech sectors, like machine tool design, state of the art steel production (only Mitsubishi is able to produce containment vessels for large nuclear power plants, at a rate of about six per year).
Thank you for opening this site to discussion about this vital issue, which is at the heart of our national security needs.
My first reaction was “amen”, but I see that response is taken.
My second was that someone could do a great public service by doing a documentary expose of these people, similar to the one about Enron. The difficulty would be paring down the material, as one could easily do two hours on Ben Stein alone. Perhaps it should be a long-running TV serial.
Do you agree there is a difference between being corrupt and being bad at your job? Corruption, to me, involves actions that are criminal, such as fraud, and that is why we have a criminal justice system. I do not think being crap at your job in the private sector is, or should be, a crime. The kid who keeps screwing up my order at the Wendy’s down the street isn’t a criminal, he just isn’t good at his job. If CEOs are bad at their job then shareholders should either vote them out or sell their shares and invest in another company with a management team they think is better and therefore a better investment.
I think the government forcing companies to relocate is a bad idea. Companies should operate where they can operate the most efficiently.
I do not think that tax rates should be used in the manner you are describing. I think the only valid purpose for taxes is to fund the actions of the government. I do not agree with taxes being used to punish, or otherwise shape, behavior.
I think that had government not provided bailouts and allowed firms to fail then more of the poor managers would have been thrown out and discredited professionally.
I believe that the analysts and others who saw the writing on the wall are having no problems finding employment. However, I do not believe that because an individual was able to foresee this series of events that it automatically means that individual will make an effective manager. Are there are some individuals who foresaw the crisis and are capable of being good managers? Sure. Is everyone who foresaw crisis capable of being a good manager? I doubt it.
If the government is serious about helping the economy recover, in general is should stop making tax payers generally involuntary shareholders in failing firms. I believe that this housing crisis can, and will be, traced back to the government, through Fannie Mae and Freddie Mac, distorting the housing market with the good intention of bringing affordable housing to all.
“The road to hell is paved with good intentions.”
Simon Johnson interview
I believe that this housing crisis can, and will be, traced back to the government, through Fannie Mae and Freddie Mac, distorting the housing market with the good intention of bringing affordable housing to all.
I don’t, and here’s why…
First, it’s not a housing crisis: it’s an excessive leverage crisis. The debacle in subprime lending was merely the first canary in the coal mine that keeled over from the fiscal fumes produced by Wall Street “risk-management” schemes.
That’s why the painful process currently underway is called “de-leveraging”. It’s not called “de-housing” or “de-Freddie-Mac-ing”. The fundamental problem was that Wall Street mavens used housing as collateral for excessive leverage, without due consideration to what would happen if housing prices ever stagnated, much less fell.
They couldn’t seem to grasp the fact that “subprime” meant “not a great credit risk”. But that’s just the most recent incarnation of this problem of chasing yield (e.g., just like they forgot that “junk bonds” were called that name for a reason!)
And the proximate cause of the subprime debacle was artificially low interest rates set and maintained by the Fed under old “Easy Al Greenspan”. But the Fed isn’t part of the U.S. government, any more than GSE’s like Fannie and Freddie are.
Had Wall Street not become enamored of assets derived from housing, they would have found something else to lose their shirts with. They chose housing first, then oil later on, and they’ll find something else to screw up just as soon as we let them.
As Cylon Leoben says: this has all happened before, and it will all happen again.
To address your points:
Corruption (i.e. ‘being corrupted by something’) does not have to be criminal. The crony capitalism that was at the core of the Asian financial crisis was certainly ‘corruption’ in any but the most legalistic sense of the word, but was largely not criminal (mainly because the corrupt also made the laws – which in many ways is not so different than our situation).
I’m not suggesting the government ‘force companies’ to do anything. I’m just saying that the government place CONDITIONS – one of which is to move their executive components – on federal aid. This particular condition would have the benefit of breaking up the clubby circle jerk that is Wall Street, expose the former masters of the universe to the real world, and help depressed areas.
Taxation is political. Politics reflects one’s values. Therefore taxation necessarily reflects one’s values.
My point is that if we really are in the beginning of an epic man-made crisis, then it is not logical to rely on the same individuals who created the ideas, laws, policies, and institutions that created the crisis to steer us out of it.
I agree completely about the road to hell.
Something is not right in this country. Listening to the bunch of bankers in front of Congress last week. When asked about their solvency, they gushed about some abstract ratio in trying to out-do each other like a bunch of preening peacocks. Then in the Roubini article you get the reality. Thus our banks have not really marked their books to today’s market.
California and many other states are out of money. The property assessor in my town is overworked dropping real estate assessments. Obama’s got his stimulus package plus whatever else he has coming down the road. Stores are boarding up their windows all over town as there is no demand for their goods.
Its obvious Deflation is upon us and coming quickly.
We need decisive action by honest people without ties to the present day financial system as right now all we are getting is the tossing of money at the problem in the hope something will work.
There is another component of the crisis is missing from this conversation: The failure of people to make difficult financial decisions. Here are two examples:
1. The refusal of certain state governments to make difficult budget decisions. A long-time resident of western Nebraska, my neigbors and I have for years paid some of the highest state taxes in the country. Guess where it got us? A balanced state budget and probably a very small slice of “bailout” pie for state governments. If we want the Legion baseball team to have a new infield, we raise the money to pay for it. Property taxes are high, but we pay our bills.
2. Personal financial decisions: As a banker at a small community bank, 2008 was our best year in my 35 year career. 2009 is on track to be better. No ARMs, no derivatives, “no stated income” mortgage applications. Just fixed – rate mortgages to homeowners and loans to ranchers to buy feed and equipment.
Were we as profitable as California – based mortgage originators in the early 2000s? No. Do you think we feel sorry for anyone who (1) bought an enormous house they obviously could not afford (or thought they could afford by spinning the the “my home value will always increase” wheel), (2) in a state that never raises property taxes to pay for government services? Maybe. Do we think they should be bailed out by the federal government. I think you know the answer to that one.
I disagree and I think there is a “housing crisis.” To be clear, when I say “housing crisis” I am speaking of the bursting of the “housing bubble” that refers to the economically unsupportable rise in the supply, demand, and prices of homes. I agree that low interest rates made the cost of home loans lower thereby increasing demand. However, I believe that a more, and the most, significant distortion in the housing market came from the government sponsored entities (GSEs) Fannie Mae and Freddie Mae taking in subprime mortgages at unsupportable levels causing the “subprime debacle.”
I disagree that Wall Street did not understand the high levels of risk involved in subprime mortgages. I believe the opposite, they did understand. However, they determined that there was no long term risk to their firms because the government sponsored entities Fannie Mae and Freddie Mac were willing recipients of the increasingly riskier subprime mortgages. Freddie Mac and Fannie Mae demand for sub-prime mortgages was driven by targets set by the federal government in an attempt to extend “affordable housing” to a larger segment of the population.
The statement that the government exercises no control over Fannie Mae and Freddie Mac is false.
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992: “The Federal Housing Enterprises Financial Safety and Soundness Act (“FHEFSSA”) of 1992 modernized the regulatory oversight of Fannie Mae and Freddie Mac. It created the Office of Federal Housing Enterprise Oversight (“OFHEO”) as a new regulatory office within HUD with the responsibility to “ensure that Fannie Mae and Freddie Mac are adequately capitalized and operating safely.” OFHEO is funded by assessments on Fannie Mae and Freddie Mac and is authorized to act without HUD oversight on a range of regulatory issues enumerated in the statute. FHEFSSA established risk-based and minimum capital standards for Fannie Mae and Freddie Mac. And, it established HUD-imposed housing goals for financing of affordable housing and housing in central cities and other rural and underserved areas.”
The Housing and Economic Recovery Act of 2008: “Strengthened governmental oversight of Fannie Mae and Freddie Mac. It established the Federal Housing Finance Agency (FHFA), which replaced OFHEO and HUD as Fannie Mae’s safety and soundness and mission regulator. Among other things, FHFA has broad authority to require Fannie Mae to hold capital above statutory minimum levels, regulate the size and content of our portfolio, and approve new mortgage products. “
Would there still be economic downturn today due to excessive consumption over the past several years? Yes, I think so. But I think this downturn has been exacerbated by the actions of Fannie Mae and Freddie Mac in relation to subprime mortgages. I believe that the low Federal Reserve interest rates alone have resulted in a financial “blackout,” subprime mess is resulting in a full blown coma.
Cieran, I agree with your ending quote. Within the next decade there will undoubtedly be future bubbles caused by government market distortion. Right now, that government introduced distortion is, and will continue to be, the subsidizing “fiscal stimulus.” The federal government caused this crisis and it is now in the process of sowing the seeds of the next one. Specifically, I believe that the “green technology” sector will see a “bubble” in the next five to ten years.
A few hopefully-relevant comments…
I disagree and I think there is a “housing crisis.”
(1) I didn’t say there was no housing crisis: I said that what we are now experiencing is an excessive leverage crisis, not a housing crisis. There was definitely a huge bubble in housing (I saw that bubble forming almost ten years ago ago), but there have been booms and busts in housing for just about forever. I’ve lived through a couple doozies myself.
What makes this one different is exactly what I stated: that Wall Street used mortgages as collateral for highly-leveraged financial products (what Warren Buffett called “financial weapons of mass destruction”). And then they used those financial WMD’s as collateral for more leverage. Uh-oh!
Had this leverage been prohibited by regulation, or had the reward systems on Wall Street required some due diligence to long-term profits instead of short-term shenanighans (as Buffett does, by the way), or had the outright fraud that resulted been prosecuted, the housing bubble would have more closely resembled other real-estate bubbles of the past, which we’ve all lived safely through.
(2) as far as this:
I disagree that Wall Street did not understand the high levels of risk involved in subprime mortgages. I believe the opposite, they did understand.
Then I have a bridge I’d like to sell you. Seriously.
(3) not to mention this:
The statement that the government exercises no control over Fannie Mae and Freddie Mac is false.
Damn right it’s false! We practically own both GSE’s thanks to the last administration, so we better have some control over them!
But I never said what you’re disagreeing with. So what are you disagreeing with?
Jon, my best guess is that you are simply observing the current financial debacle through the prism of “everything that goes wrong is the government’s fault”. And your choice of how you view the world is exactly that: it’s your choice.
I just prefer to observe the world with fewer filters. And unless you want to suggest that the likes of Angelo “Subprime” Mozillo and David “Liar” Lereah or the ratings agencies that slapped “AAA” ratings on MBS’s are agents of the federal government, I believe that you are barking up the wrong tree, and missing the forest to boot.
Let’s just agree on one fact–The present US banking system is dead and cannot be revived. We need an entirely new banking system. Perhaps loan officers for small mortages (up to the national median)and consumer loans and auto and business loans. The loan officers would be housed in the branch public libraries of the US. They would be federal employees. Nostalgia for the past no–just realizm. Note that the financial system as currently constructed is just a large dependency. Okay so those who made it will go down for the count but at least the rest of the country should not have to do so. And a start in recovery would mean cut the flag ranks by number in one-half by EASTER. We must start altering the militarizm in the US somewhere.