Secret billions for bankers
Hackles were raised in October when the Vatican’s Pontifical Council for Justice and Peace issued a document that condemned, among other things, “the idolatry of the market,” and said that the financial crisis “has revealed behaviors like selfishness, collective greed and hoarding of goods on a great scale.”
This struck me as a great understatement after I read a report from Bloomberg News on how the Federal Reserve secretly provided major banks with a gargantuan gift – reaching $1.2 trillion in emergency loans at below-market interest rates on December 5, 2008. No typo: $1.2 trillion. That’s on top of TARP, which the government was gracious enough to tell the public about.
Bloomberg News reporters calculated that by borrowing money without strings at below-market rates – which meant getting it practically for free – the banks were able to make $13 billion. Citibank alone picked up around $1.8 billion, the story said.
The news service had to go to court under the Freedom of Information Act to dislodge the dark secret of which banks received this money because the Fed argued it would undermine public confidence in the banks if the truth were known. Not to mention that it would reveal how the public was totally misled by everyone involved.
Bloomberg News quoted Sen. Sherrod Brown, D-Ohio, as saying, “This is an issue that can unite the tea party and Occupy Wall Street.”
Can it unite conservative and progressive Catholics? Or at least move them beyond a tedious debate over the teaching authority of the Pontifical Council for Justice and Peace so they can face up to the moral issues posed by systemic greed?
Related to this are the 300 economists who stand by OWS. http://front.moveon.org/300-economists-who-stand-with-occupywallstreet/?rc=fb.fan
The 1% cannot get away with its greed without its slaves, prostitutes and pimps who support them for ulterior reasons.
And with the free money bank traders can gamble in stocks. bonds, currency and buy and sell free too. … without paying any tax. Everybody else pays tax to gamble. at casinos, tracks and lottos. Everybody pays a sales tax on almost everything…. except the WS traders. Why not a TRANACTION tax to bring in 350 billion a year. Might eliminate the 490+DOW day too!
The GOP claims that a transaction tax would interfere with the holy,sacred, free market.. and that these free market investments will bring jobs. The investments last micro seconds or at most till the 4:00PM EST closing time. These investments bring jobs and are sacred too. Anyone buying this BS?
The business of America is monkey, funny or crooked business. All else is a supporting activity.
You guys persist in treating big organizations like banks as though they were the personifications of greedy capitalists in top hats living in fortified castles on the Hudson. That’s nonsense – there’s no evil capitalist behind any of them – they’re just impersonal money machines, filled with employees who do what they’re told and who pay taxes. True, some of the employees take home obscenely large amounts of money, but they’re still employees who are likely to be fired tomorrow if they make one or two big mistakes. The few billionaires out there are hardly a class – they’re just workers who struck it rich.
Governments work hand in glove with the very large corporations because they are, in effect, integral pieces of the economy, bringing in huge amounts of tax money and employing many thousands of people. There’s no cabal of evil capitalists lurking in the shadows – government, big companies – they’re all part of the same machinery. There’s no dark conspiracy to make a few people kings and everyone else paupers.
Of course, there are privileged elites, but they don’t run the world. You, as part of the chattering classes, no doubt have the dubious privilege of meeting these people from time to time at parties and in meetings. In the end, they’re all just worker bees like you – like everyone these days. J. P. Morgan and Andrew Carnegie are long dead.
David ==
It may not be a class, but it’s a culture with too much power, regardless of how few there are in the cculture Have you read any of michael Lewis?
I’m one who thinks the Fed did in late 2008 what central banks exist to do during a financial crisis—be the lender of last resort so as to stop bank runs and prevent credit markets from freezing up. And the Fed has been relatively creative and vigorous in using its powers to prevent a second Great Depression and to get the economy going. What it has not done is raise its annual inflation target to, say 4% (what it was in the 1980s), which would help debtors (e.g., homeowners who are “underwater”).
As for David Smith’s observation that “there are privileged elites, but they don’t run the world”, it brings to mind William Grieder’s book “One World Ready or Not”. Grieder’s basic thesis (as I recall, it’s been a few years since I read it) is that global capitalism is, in effect, a giant truck barreling down the road—with nobody at the wheel. CEOs of major corporations do what they can to “run the world”, but they live in constant fear that somewhere, somehow, something is happening that will put them out of business.
As for the US financial institutions that kicked off the global economic crisis in 2008, Nicholas Kristof has an interesting piece of the story in yesterday’s NY Times: http://www.nytimes.com/2011/12/01/opinion/kristof-a-banker-speaks-with-regret.html?_r=2
P.S. Somewhat off-topic, but this is a good example of what is meant by structural, or systemic racism: “One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.
These less savvy borrowers were disproportionately blacks and Latinos, he said, and they ended up paying a higher rate so that they were more likely to lose their homes. Senior executives seemed aware of this racial mismatch, he recalled, and frantically tried to cover it up. “
“… raise its annual inflation target to, say 4% (what it was in the 1980s), which would help debtors”
And hurt savers. Deliberately stimulating inflation reduces the effective value of both debts and savings. It unequivocally sends the message: “Eat, drink and be merry! Savers are chumps!”
Anti-banker fulminations are good, but boycotting is better. Refuse to patronize irresponsible bankers. Refuse to sign a mortgage until you can make a 20% down payment. Refuse to take out a student loan to study the theology of basket-weaving at a fifty-thousand-a-year liberal arts college. Refuse to borrow anything for any vacation, electronic gadget or article of clothing. That’ll show ‘em.
@Felapton (12/01, 8:41 am) Thanks for the response—and for the suggestion about boycotts.
We agree, I think, that excessive inflation is bad for the economy overall. Most economists think (and I assume you agree) that disinflation also is bad for an economy, as is an inflation rate that is too low.
The question then becomes what inflation rate is appropriate. Given the overall performance of the US economy over the past decade—a decade in which inflation has been about 2% annually—it seems to me there’s a reasonable case to be made for a modest increase in the Fed’s inflation target. If not 4% (recall that the 1980s were, on balance, good economic years for most Americans), then perhaps 3%.
My understanding is that the Fed has a significant degree of control over inflation because of its ability to set interest rates (as we saw under Chairman Paul Volcker).
“Can it unite conservative and progressive Catholics?”
Yes! Dump Dodd-Frank (which institutionalizes Too Big To Fail) and adopt Jon Huntsman’s plan!
http://www.theatlantic.com/politics/archive/2011/11/jon-huntsmans-detailed-plan-to-end-too-big-to-fail/249144/
I have held all along that fundamentally the Tea Partiers and the OWS crowd are upset over the same thing; that government is so big and so much on the take that it gave our hard-earned money to big banks and car companies, those fat firms that were “too big to fail”.
Ugh.
If some business is “too big to fail”, it is too big and should be allowed to fail.
To paraphrase Chesterton: ‘The result of too much capitalism is not too many capitalists, but too few’
The difference I see between OWS and Tea Party folks is that one is the working class (middle and lower middle class) and the other is the student and non-working class (lower class). Also, while the Tea Partiers were upset about this situation two years ago, the OWS folks seem to have only recently become upset.
@Ken (12/01, 9:54 am) I don’t sense a lot of anger about the auto bailout from the OWS crowd. Perhaps that’s because the auto bailout worked, and at a relatively low cost. The federal government forced GM and Chrysler into bankruptcy as the price for being bailed out. The government then fired the CEOs, forced Chrysler to find a buyer (Fiat), forced GM to close unprofitable lines of business (e.g., Pontiac), got rid of incompetent board members, forced all stakeholders (shareholders, bond holders, UAW, etc.) to “take a haircut”, and then got out. The bankruptcies lasted a matter of weeks. Three years later, GM, Chrsyler, Ford and their suppliers are all profitable enterprises.
By contrast, virtually no demands were placed on the financial industry when they were bailed out.
The studies I’ve seen of Tea Party activists all conclude that they are older, whiter and more affluent than the general public. (I’m not sure what conclusions, if any, one can draw from that…other than that it’s a stretch to call them “working class”.)
Also worth noting is that the Tea Party arose on the floor of the Chicago stock market when Rick Santelli of CNBC went on a live, televised rant (with a backdrop of cheering traders) against the prospect of governmental aid to underwater homeowners.
Others have observed, and I think there’s merit to their point, that OWS arose when it became clear to a portion of the left that the result of the 2010 elections was a deadlocked federal government.
I see the tedious debate didn’t escape coments here and oversimplifications like David S.
I have almost no confidence that the ideolgical clash in the uS or inside the Church, politically or theologically, is capable of being reached in these plutocratic days.
“I’m one who thinks the Fed did in late 2008 what central banks exist to do during a financial crisis—be the lender of last resort so as to stop bank runs and prevent credit markets from freezing up. And the Fed has been relatively creative and vigorous in using its powers to prevent a second Great Depression and to get the economy going.”
I agree.
I think Paul has highlighted a number of different issues:
* Fed interventions that represent a break or innovation from the role that Americans have traditionally assigned it. There were several instances of this during 2008-09. I see there is a story in the NY Times this morning on our Fed intervening in Europe (again) to help keep Europe’s financial sector afloat. Headline: “Six Central Banks Act to Buy Time in Europe Crisis.” Depending on one’s point of view, this sort of concerted effort is either welcome innovation (which is my view, and, although I wouldn’t presume to speak for him, Luke’s?) or a worrisome escalation of unbridled Fed power (which seems to be the Ron Paul view).
* The secrecy of the information as reported in the Bloomberg article. It raises questions regarding what the American people – and investors worldwide – have a right to know. I don’t know the answer.
* This little phrase from the Bloomberg story raises many questions: “the secret funding helped preserve a broken status quo”. If the status quo is broken, is it better to preserve it, or let it die? To use a medical analogy: is there a point where the patient is too sick to recover, and if so, what are our obligations to sustain its life? The Fed and the US Treasury let Lehman Brothers, which was broken, die, and it touched off a financial panic. So maybe preservation is the answer. But on the other hand, if the euro is unsalvageable, which even Paul Krugman seems to be coming around to thinking, then why poor billions or trillions down what may be a rathole?
“By contrast, virtually no demands were placed on the financial industry when they were bailed out.”
Have you read Dodd-Frank?
Also worth noting re: anger by the left against the auto-bailouts is that a primary winner from those bailouts were unions – a major constituency on the left, of course. And of course some of us on the right wonder about just how much they had to give up. Then there’s the fact that Steve Rattner, the President’s self-styled “car czar” settled a $6.2 million settlement with the SEC for essentially bribing NY officials while he was “saving” the auto industry.
“P.S. Somewhat off-topic, but this is a good example of what is meant by structural, or systemic racism”
Hi, Luke, I’d describe it as structural or systemic exploitation. If whites had been the primary victims (and perhaps they were), the exploitation would still have taken place. It’s an egregious symptom, though, of racial inequality, and there is no doubt in my mind that our historically racist culture bears a large share of the blame for those inequalities.
Ah yes, I almost forgot the dogma; women and minorities hardest hit.
“I don’t sense a lot of anger about the auto bailout from the OWS crowd. Perhaps that’s because the auto bailout worked, and at a relatively low cost.”
The same is true of the bailouts detailed in this Bloomberg piece.
Not that it matters to anyone but me, but I haven’t found a reason yet to care about OWS anger. Bang a trash can lid, smoke a doobie, soil a public park. Profound. World-changing.
“The federal government forced GM and Chrysler into bankruptcy as the price for being bailed out.”
This is not accurate – the bailout *circumvented* normal bankruptcy proceedings. The haircut for the UAW would have been much, much worse had GM and Chrysler been allowed to do what virtually every other company (except for too-big-to-fail companies in the financial sector) is forced to do.
@Jeff Landry (12/01, 11:06 am) Actually, no, I haven’t read Dodd-Frank. My comments were directed more at the actions by the Fed and by the Treasury & Justice Depts. in late 2008 and early 2009. I have no idea what specific actions would have made for the best policy, but if the federal government had done something like the following:
*taken temporary control of key financial institutions (e.g., AIG, Countrywide Mortgage, Citigroup, Bank of America);
*fired top executives as they did with GM and Chrysler (and no golden parachutes!);
*forced a “haircut” for all key stakeholders (stocks, bonds, employees—particularly those making 6 to 8 figures annually, etc.)
*restructured the companies (as was done with GM and Chrysler); and,
*as soon as practicable, return the companies to the private sector;
then I think the US economy would be in better shape today than it is, and (for what it’s worth) the Obama administration would be in a better position politically.
As for the UAW, one price (among several others) they paid for the bailout was a $14/hour entry wage for new employees, sharply lower than pre-bankruptcy.
@Jim Pauwels (12/01, 11:10 am) Jim, I’d accept your description. The legacy of racial inequality, as well as the banker’s description of which potential borrowers were most targeted for subprime mortgages, were the two main reasons I described it as systemic racism.
I think the government should have let both the troubled banks and the auto firms fail.
Admitting failure would have corrected the markets faster.
The way it has worked out, we have this this lingering malaise which we will eventually work through, but it would have been quicker if the government had stayed out of this.
The most the government should have done “to help” was: 1) freeze federal spending at then then-current level 2) cancel all foreign wars 3) close most foreign military bases and 4) temporarily suspend all foreign aid for a period of five years.
Btw, regarding a possible convergence of the Tea Party and OWS: Rick Perry, of all people, seems to have similar thoughts. Check out this rhetoric:
http://dailycaller.com/2011/11/30/in-speech-to-nh-lawmakers-perry-ramps-up-anti-wall-street-rhetoric/
Lede: CONCORD, N.H. — In a speech to New Hampshire legislators Wednesday morning, GOP presidential candidate and Texas Gov. Rick Perry took a hard line on Wall Street, reaping thunderous applause from Republican representatives, near silence from the Democratic minority and a clamorous mixture of boos and cheers from an activist-filled gallery.
Near silence from the Democratic minority? What’s that all about?!
@Ken (12/01, 12:33 pm) Two questions:
1 – What’s wrong the the automobile market today?
2 – If the federal government had frozen spending in early 2009, what would have been the economic impact for the country?
The auto market is fine, as are the banks – thanks to taxpayer money. My point is that we should have let someone in the private sector who actually has extra money to spare bailout the car companies and the banks.
Money does not evaporate; someone has it. With that in mind, let those who have the pile of money spend it to buy things like bankrupt companies and banks.
I do not like the fact that the federal government borrowed money from China to bail out big-time banks huge car companies. Now I – the taxpayer – have to pay interest to China on the notes, and I don’t even own the banks, or the car companies!
In my opinion it would have been better to cut out the middleman (in this case the US federal government); just have the Chinese or whoever wanted to, buy the car companies or the banks, and move on.
I want the government to stop taking money from my wallet to bail out too-big-to-fail firms.
Not to mention some Fannie May fat cat who made 90 million dollars as that outfit sank
¡Aye Carumba!
On second thought, maybe I should go get bombed and camp in a park – a Tea Party Occupier!
“Perhaps that’s because the auto bailout worked, and at a relatively low cost.”
I do not believe November is out yet, is it? What month are you using to calculate your cost analysis? My recollection from the October 105(a) I reviewed (http://www.treasury.gov/initiatives/financial-stability/briefing-room/reports/Pages/Home.aspx), was that the Auto. Ind. Fin. Program had an outstanding balance of $37.18 billion and projected losses were revised upward from September by $9 billion, to $24.31 billion. It is also my recollection that the federal government still owns 27% of GM. Is that not the case?
Ken -
You say “let” somebody with money bail out the car companies and financial sector. But why should they risk their capital when the whole system is collapsing? That is not the way capitalism works. In fact, the monied guys have 7 TRILLION dollars in the bank just waiting for a good investment. But they don’t want to risk their own money. Before ’08, in the de-regulated market, they were risking other people’s money, but that was OK with them.
So at this point the only player big enough inject huge amounts of money into the system is the federal government. And that is why Obama is right — now is the time for the federal government to spend huge amounts on (much needed) infrastructure and improved schools. If the amount spent is big enough that will kick start the economy.
Of course there is a price tag for this. But we let the big guys go unregulated, so it’s our own fault. Never forget, we elected the yo-yo President and Congress.
@MAT (12/01, 2:06 pm) As far as I can tell, you’re correct that the federal government still has a minority stake in GM. And, unless GM’s stock price increases significantly, the US government will either continue as a minority owner, or it will take a loss on its investment in GM.
The initial total cost of the bailout was, I believe, around $80-85 billion. If the projected loss does total, say, $25 billion, then whether that money was spent wisely or not comes down to a judgment call: was it worth $25 billion to save a significant chunk of what remains of the US manufacturing sector, and in particular, the manufacturing sector in the Great Lakes region?
Hey, I needed that iPad!
“Actually, no, I haven’t read Dodd-Frank. My comments were directed more at the actions by the Fed and by the Treasury & Justice Depts. in late 2008 and early 2009.”
- of course the two are not unrelated, although separated by time. Dodd-Frank is the direct outgrowth of the bailouts. Indeed it institutionalizes more “low cost” bailouts (without taxpayer approval, of course).
“As for the UAW, one price (among several others) they paid for the bailout was a $14/hour entry wage for new employees, sharply lower than pre-bankruptcy.”
And how much are they now contributing to their own retirement?
“As for the UAW, one price (among several others) they paid for the bailout was a $14/hour entry wage for new employees, sharply lower than pre-bankruptcy.”
The global labor market price correction, in action. If jobs are created at that entry wage, it’s good for prospective employees in that community. And still a lot better than Walmart wages.
No. I know of him but haven’t read him. Seems such dry stuff :o)
Luke, 12/01 6:07:
Thanks for that. Sounds right – a giant truck barreling down the road without a driver. Well, there are computer programs running it, of course, but they keep being changed to make things run smoother. Perhaps the biggest problem is that it values efficiency above all else, and humans aren’t machines. That’s not malign – just impersonal, mechanical, departmental, spiritless. It depends on human managers moderating that – and if the managers of the moment don’t feel there’s anything more important than efficiency, workers are likely to be pushed to the limit and out the door. That, of course, is one of the major failings built into a purely secular society – no morality beyond expediency.
This can’t be true – it would have happened during the “reign” of our last Republican president?
Has anyone told all of the current Republican candidates for President? Their constant mantra is that Wall Street, left alone, would put American back to work and that government (much less the hated bugaboo, Federal Reserve, which some would do away with) is the problem/issue. Don’t tell them that the government, or at least, the Federal Reserve had to bail out the “free market” – what would EWTN and the Acton Institute say about this?
David Smith ==
You’d probably like Michael Lewis. He focuses on interesting people, but he also has a gift for making the technical comprehensible. For instance, in “The Big Short”, which is about the collapse of the financial market, he talks about fooling the buyers. Here’s a sample (thanks to a Vanity Fair’s article):
“The subprime-mortgage market had a special talent for obscuring what needed to be clarified. A bond backed entirely by subprime mortgages, for example, wasn’t called a subprime-mortgage bond. It was called an “A.B.S.,” or “asset-backed security.” If you asked Deutsche Bank exactly what assets secured an asset-backed security, you’d be handed lists of more acronyms—R.M.B.S., hels, helocs, Alt-A—along with categories of credit you did not know existed (“midprime”). R.M.B.S. stood for “residential-mortgage-backed security.” hel stood for “home-equity loan.” heloc stood for “home-equity line of credit.” Alt-A was just what they called crappy subprime-mortgage loans for which they hadn’t even bothered to acquire the proper documents—to, say, verify the borrower’s income. All of this could more clearly be called “subprime loans,” but the bond market wasn’t clear. “Midprime” was a kind of triumph of language over truth.”
http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004
I read “Liar’s Poker” which is about Wall Street. It’s partly about Lewis himself who as a young broker at a big house] was making a lot of money, but he saw the corruption of the whole system and decided to write about it instead. He’s been writing best-sellers ever since.
I would repeal Gramm-Leach-Bliley (an extreme example of “if it ain’t broke, don’t fix it”). And I would elect Elizabeth Warren President.
I also think the Fed did the right thing lowering the discount rate and making emergency funds available. Bad as things are, we had a narrow escape from a situation much, much worse. I don’t like the lack of transparency, but then again, I think it’s smart to keep Congress out of our monetary policy.
@Jeff Landry (12/01, 9:51 am) You can file this under “better late than never”, but I wanted to wait until I had something useful to offer in response to this proposal of yours:
“Dump Dodd-Frank (which institutionalizes Too Big To Fail) and adopt Jon Huntsman’s plan!”
It might be a bit more complicated than you make it sound.
Here’s Mike Konczal, who blogs at Rortybomb, responding to Huntsman’s plan:
“So we need to eliminate Dodd-Frank in order to pass Dodd-Frank’s resolution authority and derivative regulations – two of the biggest parts of the bill – but call it something else.
You can argue that Dodd-Frank’s derivative rules has too many loopholes with too much of the market exempted from the process and too much power staying with the largest banks. But those are arguments that Dodd-Frank doesn’t go far enough, where Huntsman’s critique of Dodd-Frank is that it goes way too far.
Huntsman should be required to explain the issues here – is he against Dodd-Frank before being for it? Is his Too Big To Fail policy and derivatives policy the same as Dodd-Frank, and if not how do they differ? It isn’t clear from the materials he has provided so far how the policies would be different, and if it is a problem with the regulations in practice how he would get stronger ones through Congress.”
(Konczal goes immediately from there to applaud Huntsman’s proposal (and to criticize Obama’s Justice Department’s inaction) for enforcing the rule of law by indicting and prosecuting “robo-signing” cases, and also praises Huntsman for putting forward the most serious policy proposal in this arena thus far in the primary campaign.)
P.S. Perhaps one area of agreement for liberal and conservative American Catholics is that we could do with more leadership from our bishops (individually and collectively) on these issues?
I see that Mayor Michael Bloomberg of NYC owns 88 per cent of Bloomberg News which pursued this story I wonder if he is behind this news story, and I also wonder if his ambition to be President has been re-ignited. He could finance several campaigns for president all by himself.