Thursday, April 23, 2009

Thought for the day on Shakespeare’s birthday (Google is spacing out…)

OF SYRACUSE: Upon my life, by some device or other
The villain is o'er-raught of all my money.
They say this town is full of cozenage,
As, nimble jugglers that deceive the eye,
Dark-working sorcerers that change the mind,
Soul-killing witches that deform the body,
Disguised cheaters, prating mountebanks,
And many such-like liberties of sin:
If it prove so, I will be gone the sooner.
I'll to the Centaur, to go seek this slave:
I greatly fear my money is not safe.

“The Comedy of Errors,” William Shakespeare, Act I, scene ii.

When you hear a politician or representative of a large financial institution say that it is necessary for the health of the economy that some big financial institution requires their losses to be subsidized by the United State government, it is a false statement.  Here’s why:

  • Subsidizing the losses is like throwing money away or burning it, and making the taxpayer work to replace it.  Subsidizing the loss doesn’t make it go away, it just prevents the financial institution from recognizing it properly.

  • Subsidizing losses will not stimulate bank lending.  Lending is slow because the economy is in a depression.  Banks are understandably cautious.  Lending slowed down after the last two recessions. 

  • Letting the public burn its money through a “public-private partnership” is just another way of subsidizing the losses, throwing good money after bad.  This program will be manipulated to the benefit of a small group of big financial firms, those in trouble and some others, but the end result is the same:  your government will take some of your future earnings and burn it, and tell you to work to replace it.  The financial institutions involved will feel no pain.

  • What about the capital hole that may result in some financial institutions?  Let them absorb their own losses and go out of business if they deserve to.  That’s the way capitalism works.  There are enough healthy banks around to pick up the slack.  If people are hurt in the process, help them directly.

  • What about stimulating the economy?  Won’t helping the financial institutions get over their losses help the economy grow?  No, just the opposite, it will retard the economy, because subsidizing losses is wasting money.  If you want to stimulate the economy, help out the unemployed with public sector jobs or a poverty level dole and health coverage while they look for a private sector job.  Those dollars will be spent.  We’re beyond arguments about socialism vs. capitalism, so get over that.  Either we take care of each other or we don’t.  What we’ve had the past 30 years is socialistic welfare for the rich, bare knuckles capitalism for working people.

  • But what can I do?  I’m only a citizen in a country with a government that doesn’t listen to me!

    • Call you Congress people at the number on the left.  The operator will connect you.  Scream your head off.  They can’t put us all on the no-fly list.

Here is Simon Johnson:

The Baseline Scenario

What happened to the global economy and what we can do about it

The Missing Witness

with 51 comments

Yesterday’s JEC Hearing on Too Big To Fail did not include any financial industry representatives.  This surprised me - surely they want to go public with their views on the future structure of the financial system?  Obviously, they have great behind-the-doors access on Capitol Hill, but surely it is not in their interest to have right, left, and center piling on with regard to breaking up Big Finance?  Yesterday, Thomas Hoenig, Joseph Stiglitz, and I were in complete agreement on this point, and my idea of using antitrust measures against major banks seemed to gain traction during and after the hearing.

Apparently, the committee invited a number of leading people from the industry (i.e., individuals who generally articulate the case for big banks) and they were all too busy to attend (Update: this statement is incorrect; the potential witnesses who were unable to attend are academics).  This is a curious coincidence, because someone else - in an unrelated initiative - has been trying to set up a discussion involving me and people from the Financial Services Roundtable and/or the American Bankers Association, to be held at the National Press Club, but their calendars are completely full (i.e., there is literally no day that works for them, ever).

There has been some counterargument - e.g., against our Atlantic article on American oligarchs - from people who wish to defend the way that big finance currently works, but so far this has been quite limited in the public domain.  The most pushback so far probably came from Carlos Gutierrez (Commerce Secretary, 2005-09), who argued Monday on CNBC that our argument is “somewhat sensationalist” and that it would lead to a wholesale and unproductive assault by government on the finance industry (i.e., an application of the Economics of Vilification).

But of course our argument, both in the Atlantic and more broadly, is not against finance per se.  In fact, we’ve received some strong expressions of support from within the financial sector - just not particularly from firms that are Too Big To Fail - as well as from many in the risk-taking entrepreneurial sector.  And here Thomas Hoenig - President of the Kansas City Fed, with long experience regulating, winding down, and generally overseeing banks; and very far from being a sensationalist - absolutely nailed it towards the end of yesterday’s hearing.  My recollection of his exact wording is: whenever you have banks that are too big to fail, you will get oligarchs (yes, he said oligarchs).

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