The Big Problem

Let’s allow the optimists some fun for a while: all the cable TV channels and now the Wall Street Journal are agog with predictions of an end to this recession as early as this Fall. As I have said before I don’t believe that yet – the upbeat data is just too fragile and limited – but let’s hope the optimists are right.

Meanwhile we need to deal with the problems within the economy that led us to this downturn. Highest, and most prominent on that list is the banking system.

By now there have been vast screeds of opinions written about the ills of our finance system, and we have been subjected to what feels like an endless bombardment of bailouts, fixes, and kluges none of which seem to have done away with those problematic assets.

So let me add my voice to the growing list of people who fear that the opportunity to correct the system are beginning to fade: taxpayers are suffering from ‘bailout’ fatigue, and the administration seems strangely incapable of strong direct action. The government found it fairly easy to ditch Rick Wagoner from GM, but freezes up in helpless fear at the prospect of doing likewise with Ken Lewis at Bank of America [as one obviously inept example], even though the amount of shareholder value destroyed on his watch has been just as horrendous.

There is something fishy about the administration’s lack of reforming zeal with regard to the banks. Let’s not forget that this recession is largely the creation of the enormous greed and ineptitude of the big banks. If GM has to undergo massive and painful surgery, why not Citibank or B. of A.?

The growing consensus is that the banks are simply too powerful. They have tremendous political clout, and constantly wheel out the old ‘you daren’t let me fail’ argument which scares Washington into timid sterility.

Well, if a bank is too big to fail it surely must be too big to exist also.

This maxim is the rallying cry for those of us who fear that an unreformed and significantly weaker banking system will inevitably lead us into a repeat of the current crisis sooner rather than later.

As Paul Krugman says, we should make banking boring again: Op-Ed Columnist – Making Banking Boring

The past thirty years were a boom time for bankers, not only did they pay themselves huge bonuses, but the share of total corporate profits that were generated in finance skyrocketed. The contrast with the dull post war years of the 1950’s through 1980 could not have been more stark.

One result of this boom was that some of the banks became so enormous that they could effectively blackmail taxpayers into saving them even though they had manifestly behaved stupidly and undertaken ridiculous risks. More to the point: the managers who led the banks into the mire have been able to survive by whipping up the ‘too-big-to-fail’ scare.

As Simon Johnson at the Baseline Scenario has dubbed them: they are the new oligarchs. You can get a flavor of his opinions in this entry on his site: What Next For Banks?

Johnson goes much further. He argues that America has many of the characteristics of an emerging economy: there is a powerful economic elite who can pressure the government into making preferential deals that funnel wealth to the elite even in times of crisis. And during the crisis the ‘oligarchs’ can ensure that their interests are protected.

Johnson has specific personal experience to back up this claim: he spent several years at the IMF advising emerging countries who had fallen into economic difficulties. His experience shows that countries with excessively powerful elites become perennially crisis prone because the governments are unable or unwilling to introduce comprehensive reforms sufficient to establish a balanced economic growth path. He agrees with Krugman that the American banks are now powerful enough to behave as such a nefarious elite.

So dealing with this elite is our ‘Big Problem’. Without aggressive action to limit the power of banks it is entirely likely that we will suffer more of these downturns in the next few years and that the concentration of wealth we have experienced during the Reagan years will continue.

Which brings me back to that awful Geithner plan.

The whole thing reeks of hidden and very large handouts to already wealthy individuals and institutions. The roll call of potential partners for the government in the plan is a veritable list of well connected and well heeled ‘friends’ of America: the Carlyle Group; PIMCO; Goldman Sachs and Morgan Stanley are at the top of the list. The prosepct of handing over billions of taxpayer money as the result of what appears to be a thoroughly rigged plan makes my skin crawl.

What makes me even more suspicious is the administration’s obsessive pandering to Wall Street. Those ‘stress tests’ included some less than scary economic scenarios in them and the results are being kept secret. Presumably this secrecy is ‘necessary’ to prevent a run on a bank that failed the tests. Or at least I assume that’s what Geithner has been told by his ex Wall Street advisors.

So we live in perpetual fear of a financial melt down.

As Krugman points out, one of the main consequences of the Great Depression was the radical re-making of the financial sector. Gone were the huge and flashy, larger than life, personalities. In their place were the staid and dull bankers who dominated the industry right through until the Reagan deregulatory and anti-government zeal paved the way for the resurgence of Johnson’s ‘oligarchs’.

The interconnectedness of Wall Street and government, with its easy career opportunities to go from one to the other, has reduced the objectivity of our regulators: who will criticize a potential future employer? Couple that with the flood of money that flows through our political system – everywhere else in the world we would use the word ‘corruption’ to describe the way money is thrown at our elected representatives – and the effectiveness of our elected officials to defend the taxpayers against the elite is eroded virtually to nothing.

I was criticized yesterday when I argued that the average American does not comprehend the size of the problem we face. I was assured that is not the case, and Obama’s election was offered as the prime buttress to the argument.

But I stand my ground: we have a deeply rooted crisis, far beyond an economic downturn. I am concerned about the roots of the downturn and the consequences of ignoring them once a recovery is under way.

Which brings me back to the beginning.

Let’s hope the optimists are correct and that the economy is starting the slow climb out of the hole the banks threw us into. But let us also hope that the energy the crisis created does not dissipate before we have cured ourselves of the causes of that crisis. That’s my biggest current fear.

That’s our Big Problem.