Breaking Their Backs
Simon Johnson has a really interesting aricle at TPM Café that puts the next massive economic decision to be made by the Obama Administration - what to do with insolvent banks - into an international perspective.
There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that - they say - will deliver you back to growth. The person has political support, a strong track record, and every incentive to enter the history books. But one nagging question remains.
Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble? The form of these vested interests, of course, varies substantially across situations, but they are always still strong, despite the downward spiral which they did so much to bring about. And fully escaping the grip of crisis really means breaking their power.
Not only is this a standard way of thinking about crisis resolution in many developing and post-communist countries, it also turns out to be a good guide to thinking about the US today. We have a powerful banking industry that has mismanaged its way into deep trouble. Yet these banks obtained an initial bailout - the Troubled Asset Relief Program, or TARP - on generous terms, and have consistently failed to use the opportunity provided by this government support to turn their operations around. Not only that, but they have flaunted their power - and their arrogance - through paying themselves large and largely inappropriate bonuses.
We come now, this week, to the podium.
You've doubtless heard some reports about what Treasury Secretary Timothy Geithner plans to say at that podium, and he is sadly more likely to protect elites and offer them welfare than do anything to admit their insolvency and break their power. In fact, he's likely to rely on private money from hedge funds and private equity firms to buy the toxic assets from the banks - no doubt with substantial favors from the government in return (like guaranteeing a floor value for the securities). The inescapable fact is that here, as it is in banana republics and oligarchies throughout the world in similar crises, no progress can possibly be made as long as the same people who caused the problem remain in control.
Mr. Geithner wants to use taxpayer dollars to keep bankrupt banks in business. In effect, he wants to tax teachers, fire fighters, and Joe the Plumber to protect the wealth of the banks' shareholders and to pay high salaries to their top executives. No readers of this piece would understand that this is the process being described.
The Post editorial page carried on with this deception. An editorial on saving the banks dismissed nationalization because it would involve the government in running the banks. Then it discusses the idea of buying bad assets and warns, "but there is a huge risk that the government would badly overpay in the first place."
Actually, this is not a risk, this is the point. If the government paid the market price for these assets the banks would be bankrupt and we would be back to step 1, nationalization. The point of buying the bad assets is to pay too much, so that the banks can get enough money to stay solvent.
Barack Obama plays the populist well on TV on occasion, whether by railing against executive pay bonuses or, today, backing the cram-down provision that would let bankruptcy judges modify mortgage terms for those facing foreclosure. But ultimately, his pretensions to populism, his belief that he has the best interests of the people in mind, will face the pressure from elites to make whole the banking system, the executives and the shareholders, and to use taxpayer funds to do it. The banks played casino night in unregulated markets for decades, racking up huge gains on paper and accruing enormous amounts of financial and political power. They practically bankroll most election campaigns, certainly at the Senate and Presidential level, and they used this leverage to wall themselves off from any assault on their power and influence from inside the Capitol. As Johnson says:
Ending the financial crisis is relatively straightforward - a forced recapitalization and change of ownership/management in the banking system - although this will not immediately lead to an economic recovery (more on that here). But seen in deeper political terms, decisive action to restructure large banks is almost impossible. Such action would require overcoming perhaps the single strongest interest group in the United States today.
How can you do it? The answer must be by splitting this powerful interest group into competing factions, and taking them on one by one. Can this be done? Definitely, yes. In particular, bank recapitalization - if implemented right - can use private equity interests against the powerful large bank insiders. Then you need to force the new private equity owners of banks to break them up so they are no longer too big to fail. And then... there is always more to do to contain the power of a lobby that is boosted by any boom and which, the more it succeeds, the more likely it is to ruin us all.
I see this as an unlikely scenario, but one way to reduce elite power is to give sunlight to arrogance like this in the hopes that popular anger will box in elites and their enablers in Washington so that they are unable to do anything but offer concessions. That's basically how the New Deal came about, although it was fought tooth and nail at every step.
Last month, Theresa Hatt died at 52, after a brief struggle with cancer.
Hatt, who lived in Portland, Maine, and worked for the city of Scarborough, had had several credit cards in her name. So, shortly after her death, Hatt's son, Paul Kelleher, began the sad task of calling his mother's creditors, to inform them of her passing.
The calls were uneventful, if depressing, until Kelleher got to Bank of America. Here is how he says his conversation with a representative of the company's estates unit went:
Paul Kelleher: Yes, I'm calling to inform you that my mom died on the 24th of January.
Bank of America Estates representative: I'm sorry. Oh, it looks like she never even missed a payment. That's too bad. Well, how are you planning to take care of her balance?
PK: I'm not going to. She has no estate to speak of, but you should feel free to just go through the standard probate procedure. I'm certainly not legally obligated to pay for her.
BOA: You mean you're not going to help her out?
PK: I wouldn't be helping her out -- she's dead. I'd be helping you out.
BOA: Oh, that's really not the way to look at it. I know that if it were my mother, I'd pay it. That's why we're in the banking crisis we're in: banks having to write off defaulted loans.
Right now, on the issue of the banks Obama is paying lip service to the populists and siding with the elites. The kind of people who try to con the bereaved and blame their own troubles on the dead. There is mass anger around this kind of buck-passing, anger that can be channeled into action. Another bailout for the wealthy and connected would do that.