Joseph Stiglitz: Break the Banks, for the Good of the People

[marmar]

via CommonDreams:



Published on Tuesday, June 9, 2009 by The Age (Australia)

Break the Banks, for the Good of the People
Bailing out the big US banks has done nothing to improve them

by Joseph E. Stiglitz


With all the talk of "green shoots" of economic recovery, America's banks are resisting efforts to regulate them. While politicians talk about their commitment to regulatory reform to prevent a recurrence of the crisis, this is one area where the devil really is in the details - and the banks will muster what muscle they have left to ensure that they have ample room to continue as they have in the past.

The old system worked well for the banks so why should they embrace change? Indeed, the efforts to rescue them devoted such little thought to the kind of post-crisis financial system we want, that we will end up with a banking system that is less competitive, with the large banks that were "too big to fail" even larger.

It has long been recognised that the US banks that are too big to fail are also too big to be managed. That is one reason the performance of several has been so dismal. When they fail, the Government engineers a financial restructuring and provides deposit insurance, gaining a stake in their future. Officials know that if they wait too long, zombie or near-zombie banks - which have little or no net worth, but are treated as if they were viable institutions - are likely to "gamble on resurrection". If they take big bets and win, they walk away with the proceeds, if they fail, the Government picks up the tab.

This is not just theory; it is a lesson learned, at great expense, during the savings and loan crisis of the 1980s. In a financial restructuring, shareholders typically get wiped out, and bondholders become the new shareholders. Sometimes, the government must provide additional funds, or a new investor must be willing to take over the failed bank. ...........(more)

The complete piece is at: http://www.commondreams.org/view/2009/06/09-8

[KansDem]

1. I heard on NPR this morning that some banks are eager to repay their TARP loans

...in order to escape the strings attached.

I'm flummoxed! I thought these banks needed this quick infusion of cash in order to survive. Now many of the are just fine? What happened? Did the economy improve so dramatically that quickly? Did I miss something?

[MarjorieG]

2. They're not fine, just don't like strings. Making regulations ever more important.

[Karenina]

3. What has occurred between Bear Stern's blowout and today

is the most massive transfer of wealth upwards EVER.

[HamdenRice]

4. Here's what happened

As Paul Krugman explained several times, there was both a solvency crisis (bad mortgage debt leading to banks being insolvent) and a liquidity crisis (banks scared shitless, hence unwilling to lend to each other or even settle checks).

The first caused the second. But the second can feedback and cause the first. Imagine any business that depends on constant revolving credit to make payroll or whatever. It could be profitable, but if cut them off instantaneously, they go bankrupt.

Back in September there was huge financial panic. Companies that were not actually bankrupt were forced out of business, and it looked like a number more would go under in a vicious downward spiral.

Some of the banks that took TARP money needed it to ride out the panic.

The panic is over. Some of them are now solvent again and no longer need the money. With the end of the panic, there are large institutional investors who want to invest in the banks and replace the Treasury. The banks are successfully raising tens of billions in private money to replace TARP money.

Note, btw, that the banks are saying that they want to "pay it back." Note then that the bailout was a loan (actually preferred share purchase) that had to be paid back. It was not a money gift to the banks. The Treasury did not "give" money to the banks. It lent money to the banks.

The fact that they want to pay it back hopefully will educate some people to the fact that the Treasury did not give "trillions" to the banks "with no strings attached." The strings are severe enough that they want to pay it back as soon as possible and cut the strings.

[MarjorieG]

5. As O said, people won't like propping up banks, but necessary. Somehow wish we could have reined

banks in more, maybe dismantled, while they were down, though, because as avarice as ever.

[truedelphi]

6. Most people are unaware that the Bigger Banks have

Gotten Bailouts, in some cases, three times!

They received funds from TARP; they received funds from AIG (Which acted like a Pass through, especially for Goldman Sachs) and then they got money DIRECTLY.

So they want to pay back the TARP funds so that they can escape the government decrees as to how big salaries and bonuses can be.

And the media doesn't tell us much - Citibank probably has control over CBS and NBC. For over two decades, Citibank has been able to squash any stories that are not in its best interests (Like the Chippas' uprising in Mexico in January 1994)