Neoliberal free trade zombies got it wrong.
One Treasury official after another is doing somersaults on a wire to distract us from the obvious: We need to nationalize many of the banks, not save them as private entities.
The banks got us into this financial mess in the first place by making unwise home loans and by speculating in unregulated credit-default swaps tied to those loans. They have taken the entire world economy down with them. They don’t deserve to be bailed out.
If our government really believed in free enterprise, these banks would be out of business right now.
Instead, first the Bush Administration and now the Obama Administration have decided to act like an iron lung for the banks, pumping hundreds of billions of dollars into them to keep them alive.
There is no reason to do that.
And it would have been cheaper to buy them outright.
“The day we gave Citigroup their second infusion we could have bought them for the same $20 billion,” says economist Dean Baker. “On top of that, we guaranteed $300 billion of assets. We could have bought Citigroup several times over.”
Still, the banks aren’t solvent. Baker estimates that the losses on most of their balance sheets outweigh their capital. This is a recipe for indefinite bailouts.
Nobel Prize-winner in economics Joseph Stiglitz also sees the irrationality of leaving the banks in private hands.
“In effect, the American taxpayers are the major provider of finance to the banks,” he wrote on CNN’s website. “In some cases, the value of our equity injection, guarantees, and other forms of assistance dwarfs the value of the ‘private’ sector’s equity contribution. Yet we have no voice in how the banks are run.”
We don’t have a voice because the Bush Administration tied no strings to the $350 billion. But if we’re the major shareholders, as we now are with Citigroup (taxpayers hold a 7.8 percent stake) and Bank of America (6 percent), we ought to have a major say. And if we’re going to throw more money at them, why not just purchase the banks themselves?
The banks have not done what the government told us they were supposed to do when it lavished the first $350 billion on them. They didn’t start lending more.
“The last thing in their mind was to restart lending,” wrote Stiglitz. And even today, they have a strong incentive to sit on their cash.
“There is still no assurance of a resumption of lending,” Stiglitz explains. “Having been burned once, many bankers are staying away from the fire. . . . Many a bank may decide that the better strategy is a conservative one: Hoard one’s cash, wait until things settle down, hope that you are among the few surviving banks, and then start lending. Of course, if all the banks reason so, the recession will be longer and deeper than it otherwise would be.”
So, since lending is vital to the economy, and since the private banks won’t lend, let’s buy up some insolvent banks so we can get the lending going ourselves. The private sector has proven that it can’t or won’t do the job. The public sector must step in. Put a different way, if we want companies to receive loans, why not get rid of the middleman, and have the government lend directly to businesses and to homeowners?
“For the moment, there’s no choice,” says Robert Pollin, professor of economics at the University of Massachusetts-Amherst. “Relative to a year ago, lending in the U.S. economy is down an astonishing 90 percent. The government needs to take over the banks now, and force them to start lending.” (Pollin wants the government to sell the banks back into private hands, later on, with stringent regulations.)
Truly nationalized banks, run by the government for the people, would help out the economy as a whole. As Stiglitz put it, under private ownership, there’s a “huge gap between private rewards and social returns.” Under public ownership, “the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.”
We could reap other social returns from nationalization, as well. “If the banks were nationalized, the government could declare a moratorium on foreclosures for the properties it controls, and move to restructure mortgages—perhaps at subsidized rates—for homeowners,” writes Joshua Holland of AlterNet.
As it is right now, we’re getting some of the vices of nationalization without all the virtues. We’re shelling out gobs of public money for these companies—in many cases, more money than the companies are actually worth—but we’re not running these companies in the public interest. We’re allowing the companies to remain in private hands, for private purposes.
“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,” said Treasury Secretary Timothy Geithner.
Why is that the job of the Obama Administration?
I thought its job was to make the economy work for the American public. And keeping the banks in private hands isn’t getting the job done. Throwing hundreds of billions of dollars, over and over, to keep these banks on life support makes no sense.
Unless you want to ensure that the shareholders get artificially inflated returns and the executives get to keep their jobs.
Or unless you are too snug in your ideological straitjacket to even consider the most rational way to proceed.
And that’s the problem today. The word “nationalization” shuts off the debate. Never mind that Britain, facing the same crisis we are, just nationalized the Bank of Scotland. Never mind that Ronald Reagan himself considered such an option during a global banking crisis in the early 1980s.
“When a bank is insolvent, the regulators put it into receivership,” says James Galbraith, professor of government at the LBJ School of Public Affairs of the University of Texas at Austin. “The Reagan Administration had a plan to do it with all the big banks in 1982 and 1983, if a single large Latin American country had defaulted. Let me repeat that: the Reagan Administration.”
But the Obama Administration is not considering receivership, much less genuine nationalization in the interests of the majority of Americans. Cluttered with worshippers of the private sector, skittish about being tagged “leftist,” and beset by obdurate Republicans, the Obama Administration has blocked off the path to true nationalization. Instead, it is opting for gimmicky proposals to take some bad debts off the books—all in service of those “private shareholders” that Geithner so adores.
Granted, nationalization over the long haul is a risky business, too, which is why Pollin resists it.
“We would have every reason to expect a wide range of failures and misjudgments, including ‘crony capitalism’—privileged back-room dealings with selected non-financial firms,” Pollin writes in Boston Review.
Pollin is also worried about the political fallout. “The failures of the nationalized system could be the very thing—perhaps the only thing—that could shift the target of public outrage over the collapse of the financial system off Wall Street and onto the U.S. government,” he wrote.
While these are certainly legitimate concerns, we’ve seen what the private sector does—not only when left to its own devices but also when bailed out by hundreds of billions of our funds.
Yes, if it took over some of the banks, the government would have to carefully design a system to prevent corruption. And yes, there would be bumps along the road.
But we’ve had enough bumps on the road marked “private.”
If we’re going to be shelling out the money, we might as well run the store.