Is Obama’s Populist Rage Against Big Banks Valid?
Courtesy of Econophile
From The Daily Capitalist
President Obama used his bully pulpit on Thursday to chastise banks and bankers while announcing a punitive tax on them to assuage an angry populace.
To me it seemed rather "yesterday" when we’re all taking in the magnitude of the earthquake in Haiti. That’s another subject. But I hope you all will donate money to institutions that are helping the rescue efforts. We like Direct Relief International which sends free medical and emergency supplies to aid poor countries and have an excellent disaster response team. They have a long history in aiding Haiti. Please join me in supporting them.
Back to Barack. Is his rage valid? Should we be angry at banks for making lots of money and then paying out big bonuses?
This is not as easy as it sounds. In a perfect world, who cares? They should be able to pay whatever they want to their employees as long as the Board of Directors and the shareholders agree. If the shareholders don’t like it, they can sell their stock. This would be the classic free market approach.
The other side of the argument is that this isn’t a free market, it’s a highly regulated market, these institutions are creatures of the federal government, and the banks which took TARP money open themselves up to criticism and penalty.
This gets down to some basic economic laws: the laws of unintended consequences, moral hazard, creative destruction, market competition, and the fatal flaw of fractional reserve banking. And a few others.
All these economic laws were ignored during the Panic of 2008. I’m not talking about the market crash, I’m talking about when Hank Paulson and Ben Bernanke panicked and bailed out their Wall Street buddies. They believed that they saved the world because their friends were too big to fail.
They were wrong. Yes, it is true that AIG, Citigroup, maybe BofA, Merrill, and others would have failed without government bailouts. That would have been good for the country. These institutions took big risks knowing that they would be bailed out because of who they were. I’m not saying they planned it that way, but it had to be in the back of their minds.
No one is too big to fail.
Bailouts rewards bad behavior and unfairly burden taxpayers. Which means that these institutions will do it again. That is, they will continue to take improperrisks without full appreciation of the consequences. If they had failed, their business methods would go the way of the pterodactyl. Risk evaluation methods would change the entire banking system. Risk evaluation would change in the insurance industry if AIG had been allowed to fail because their actuaries would realize that they were gambling with credit default swaps, not insuring insurable risks. I’m sure AIG had grasped the concept of potential bank bailouts of the banks they guaranteed.
What would have happened if these large institutions had been allowed to fail? Credit would have dried up, many companies seeking credit would have failed, investment funds would have taken huge losses, housing would have collapsed, and these too big to fail institutions would have been put in receivership or Chapter 11 bankruptcy.
But as we all know, these things did happen after the bailout, so what was the point? You say that we avoided another Great Depression? Not at all. Depressions are caused by government interference in the economy by disrupting the healing process that occurs after every crash. The Great Depression was caused by Hoover and FDR.
What would have happened without bailouts is that we would have recovered by now, or at least be well on our way to recovery. I will concede that things would have been temporarily, cosmetically worse without the bailout. But so what: the point is that things are worse with the bailout because essentially failed or bankrupt banks and businesses are kept alive on life support thus substantially delaying any recovery. We won’t recover until the balance sheets of businesses and financial institutions in this country are cleared up and repaired.
Let me say that I am mad at these financial institutions. I am mad at them for being dopes by failing to properly evaluate risk. I am mad at them for taking TARP money. I am mad at them for their false public hubris. I am mad at them for being part of the Washington-Wall Street Economic Complex. I am mad at them for their "stop me before I kill again" political stance. I am mad at them for failing to change their business models.
I am mad at the federal government for setting the stage which created the economic crisis. I am mad at them for bailing out their buddies. I am mad at them for their Keynesian stimulus. I am mad at them for failing to bring true reform. I am mad at them for their hypocrisy and fake outrage. I am mad at them for … well, for most things.
Yes, I am mad at the big banks and the investment banks for the big payday. Without taxpayer support, their profit structure would be much lower. We would see a different Wall Street.
What we need is to stop doing what we keep doing cycle after cycle. No bailouts.
