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As the dust settles, there does not seem to be supportive evidence that the threat of systemic risk posed by an AIG failure could be established by vigorous mathematics based on solid data. The AIG's sweet deal raises several issues:
1. There is no evidence except scare-tactic rationalization that letting big financial institutions fail, though no doubt painful to many, would be the end of financial life on Earth.
2. If systemic failure is the cause of the financial crisis, then a collapse of the system is the only effective way towards reform. Spending future wealth to bandage over fatal wounds to preserve a failing system will only obscure the need for true reform. This is what has happened in 2009. The economy is still in danger of dying from financial gangrene.
3. There is no evidence that the panic bailout has saved the system. The amount of pain remains the same, if not greater, with the need to pay for the wasted bailout down the road. The only difference is that, with the bailout, the pain will be stretched out for decades more, with additional pain in the form of interest cost to be paid by future generations and continuing loss of purchasing power of the dollar. In time, the pain will numb expectation to appear normal.
4. Eventually, we may still have to let the insolvent institutions fail, even having thrown good money after bad. This is because these institutions did not fail from lack of money; rather, they failed because cheap money was too readily available.
5. The banking system has not been saved, only the too-big-to-fail banks were saved. Large numbers of smaller community banks have gone under and many more will go under. A healthy banking system cannot be one with only five super banks.
6. The challenge is to save the financial system, not the wayward financial institutions that had destroyed the system. Avoidance of pain is not an effective curative protocol.
On the website of New Deal 2.0, a project of the Roosevelt Institute, Randall Wray, professor of Economics at the University of Missouri-Kansas City, research director with the Center for Full Employment and Price Stability, and senior research scholar at the Levy Economics Institute, praised Obama for finally moving in the right direction, albeit only "in a baby step". However, Wray feels that the nature of this proposal seems to indicate that Obama still does not understand the scope of the problem. Wray lists what he believes to be more than mere quibbles:
1. The financial bail-out was not needed and would do nothing to prevent another great depression. We had a liquidity crisis that could have been resolved in the normal way, through lending by the Fed without limit, to all financial institutions, and without collateral. That is how you end a liquidity crisis. But that has nothing to do with the Henry Paulson/Robert Rubin/Timothy Geithner plans that variously bought bad assets, injected capital, and provided guarantees - in an amount estimated above $20 trillion.
None of that was necessary and none of it prevented collapse of the economic system. Banks are still massively insolvent. If we wanted to leave insolvent institutions open, all we had to do was to use forbearance. And, in truth, that is the only reason they are still open for business.
Elsewhere, Wray and others have pointed out that such intervention measures embolden "moral hazard" to guarantee future recurrence of the same crisis as financial firms will operate with the confidence that government bailout is assured.
2. And of course, none of that had any benefit at all for Main Street. Indeed, we could have closed down the top 20 banks (responsible for almost all of the mess) with no impact on the economy. The only thing that has helped was the fiscal stimulus package. That will soon run out, and although it helped it was far too small. Obama has zero chance of getting more money for Main Street unless he can convince congress and the public that he has changed his ways. The reforms he has announced fall short.
3. The financial system is not healthier today. Indeed, it is much more dangerous. The Bush and Obama administrations reacted to the crisis by encouraging and subsidizing consolidation of the sector in the hands of gargantuan and dangerously insolvent institutions. The sector is essentially run by a handful of rapacious institutions that have made out like bandits because of the crisis: Goldman, JP Morgan, Citi, Chase and Bank of America. All of these are systemically dangerous. All should be closed. Today.
4. Yes, the lobbyists are a problem. What do you expect when you operate a revolving door between Wall Street and the administration? Goldman essentially runs the Treasury. The lobbyists are in Washington to meet with their former colleagues, and to oil that revolving door. There is only one solution: ban all former employees of the financial sector from government employment (including roles as advisors), and prohibit all government employees from ever working for a Wall Street firm.
5. It is not enough to subject banks to the requirements of the Volcker Rule. Any institution that has access to the Fed and to the Federal Deposit Insurance Corporation should be prohibited from making any kinds of trades. They should make loans, and purchase securities, and then hold them. (An exception can be made for government debt.) They should perform underwriting and due diligence to ensure that the assets they hold meet appropriate standards of risk. And then they should bear all the risk through maturity of the assets.
They should not be allowed to offload assets, much less to short assets that they sell, while knowing they are trash (Goldman's favorite strategy). They should not be able to hedge risks through derivatives. They should not be allowed to purchase credit default "insurance" to protect themselves. They should not be allowed to move risk off balance sheet. They should not be involved in equities markets.
Any behemoth that does not like these conditions can hand back its bank charter and become an unprotected financial institution. Those that retain their charters will be treated as public-private partnerships, which is what banks are. They put up $5 of their own money, then gamble with $95 of government (guaranteed) money. The only public purpose they serve is underwriting - and that only works if they hold all the risks.
6. Obama ignores fraud. It is rampant in the financial sector. Indeed, it has no doubt increased since the crisis. Where do you think all of those record profits come from? It is a massive control fraud, based on Ponzi (or Bernie Madoff) schemes. This must be investigated. Fraudulent institutions must be shut down. Management must be prosecuted and jailed. Only if Obama is willing to take on fraud where it is alleged will we know that he really is about hope and change.
http://www.atimes.com/atimes/Global_.../LA29Dj03.html
1. There is no evidence except scare-tactic rationalization that letting big financial institutions fail, though no doubt painful to many, would be the end of financial life on Earth.
2. If systemic failure is the cause of the financial crisis, then a collapse of the system is the only effective way towards reform. Spending future wealth to bandage over fatal wounds to preserve a failing system will only obscure the need for true reform. This is what has happened in 2009. The economy is still in danger of dying from financial gangrene.
3. There is no evidence that the panic bailout has saved the system. The amount of pain remains the same, if not greater, with the need to pay for the wasted bailout down the road. The only difference is that, with the bailout, the pain will be stretched out for decades more, with additional pain in the form of interest cost to be paid by future generations and continuing loss of purchasing power of the dollar. In time, the pain will numb expectation to appear normal.
4. Eventually, we may still have to let the insolvent institutions fail, even having thrown good money after bad. This is because these institutions did not fail from lack of money; rather, they failed because cheap money was too readily available.
5. The banking system has not been saved, only the too-big-to-fail banks were saved. Large numbers of smaller community banks have gone under and many more will go under. A healthy banking system cannot be one with only five super banks.
6. The challenge is to save the financial system, not the wayward financial institutions that had destroyed the system. Avoidance of pain is not an effective curative protocol.
On the website of New Deal 2.0, a project of the Roosevelt Institute, Randall Wray, professor of Economics at the University of Missouri-Kansas City, research director with the Center for Full Employment and Price Stability, and senior research scholar at the Levy Economics Institute, praised Obama for finally moving in the right direction, albeit only "in a baby step". However, Wray feels that the nature of this proposal seems to indicate that Obama still does not understand the scope of the problem. Wray lists what he believes to be more than mere quibbles:
1. The financial bail-out was not needed and would do nothing to prevent another great depression. We had a liquidity crisis that could have been resolved in the normal way, through lending by the Fed without limit, to all financial institutions, and without collateral. That is how you end a liquidity crisis. But that has nothing to do with the Henry Paulson/Robert Rubin/Timothy Geithner plans that variously bought bad assets, injected capital, and provided guarantees - in an amount estimated above $20 trillion.
None of that was necessary and none of it prevented collapse of the economic system. Banks are still massively insolvent. If we wanted to leave insolvent institutions open, all we had to do was to use forbearance. And, in truth, that is the only reason they are still open for business.
Elsewhere, Wray and others have pointed out that such intervention measures embolden "moral hazard" to guarantee future recurrence of the same crisis as financial firms will operate with the confidence that government bailout is assured.
2. And of course, none of that had any benefit at all for Main Street. Indeed, we could have closed down the top 20 banks (responsible for almost all of the mess) with no impact on the economy. The only thing that has helped was the fiscal stimulus package. That will soon run out, and although it helped it was far too small. Obama has zero chance of getting more money for Main Street unless he can convince congress and the public that he has changed his ways. The reforms he has announced fall short.
3. The financial system is not healthier today. Indeed, it is much more dangerous. The Bush and Obama administrations reacted to the crisis by encouraging and subsidizing consolidation of the sector in the hands of gargantuan and dangerously insolvent institutions. The sector is essentially run by a handful of rapacious institutions that have made out like bandits because of the crisis: Goldman, JP Morgan, Citi, Chase and Bank of America. All of these are systemically dangerous. All should be closed. Today.
4. Yes, the lobbyists are a problem. What do you expect when you operate a revolving door between Wall Street and the administration? Goldman essentially runs the Treasury. The lobbyists are in Washington to meet with their former colleagues, and to oil that revolving door. There is only one solution: ban all former employees of the financial sector from government employment (including roles as advisors), and prohibit all government employees from ever working for a Wall Street firm.
5. It is not enough to subject banks to the requirements of the Volcker Rule. Any institution that has access to the Fed and to the Federal Deposit Insurance Corporation should be prohibited from making any kinds of trades. They should make loans, and purchase securities, and then hold them. (An exception can be made for government debt.) They should perform underwriting and due diligence to ensure that the assets they hold meet appropriate standards of risk. And then they should bear all the risk through maturity of the assets.
They should not be allowed to offload assets, much less to short assets that they sell, while knowing they are trash (Goldman's favorite strategy). They should not be able to hedge risks through derivatives. They should not be allowed to purchase credit default "insurance" to protect themselves. They should not be allowed to move risk off balance sheet. They should not be involved in equities markets.
Any behemoth that does not like these conditions can hand back its bank charter and become an unprotected financial institution. Those that retain their charters will be treated as public-private partnerships, which is what banks are. They put up $5 of their own money, then gamble with $95 of government (guaranteed) money. The only public purpose they serve is underwriting - and that only works if they hold all the risks.
6. Obama ignores fraud. It is rampant in the financial sector. Indeed, it has no doubt increased since the crisis. Where do you think all of those record profits come from? It is a massive control fraud, based on Ponzi (or Bernie Madoff) schemes. This must be investigated. Fraudulent institutions must be shut down. Management must be prosecuted and jailed. Only if Obama is willing to take on fraud where it is alleged will we know that he really is about hope and change.
http://www.atimes.com/atimes/Global_.../LA29Dj03.html
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