Pundits & Prejudice

written by Glen Aaron on July 14, 2011

It is difficult to listen to or read from pundits who seek attention by way of attack.  The use of simplistic platitudes is most often the vehicle used.  I can think of many by name who are popular and have dedicated followings.  Every person wants a clear, simplistic explanation of the truth.  It is this human desire that the pundit takes advantage of.  Unfortunately, issues are seldom, if ever, just black or white.  We all wish it were so.  A simplistic platitude is an interesting technique, and indeed, it works well the world over in convincing the masses or simply influencing a group for special interest.

Today, as I write this, the U.S. as well as the world is experiencing a market crash.  We have not seen anything of this magnitude since the Depression of 1929.  The platitudes that fill the internet as well as the media are remarkable.  It is also remarkable the number of otherwise educated people that snap to the either/or logic failure in search of simplistic truths.  Look at the following, just to get a taste.

Some pundits are whipping up venom and hate of the government saying that the government is nationalizing the banks.  This is an attack on free enterprise and is a clear step to socialism.  It should go without saying that the word “socialism” is a naughty word, otherwise known as a loaded word.  It is like “liberal” or “conservative”.  These words really don’t mean much anymore.  They are simply words of negative connotation used to set the groundwork for prejudicial arguments.  True, the word “socialism” once had a classical definition as used in early 20th century history.  It is not used in that context in pundit use, however.  The word “nationalism” is another word used stereotypically but with very little real meaning.  The argument here in order to drum up distrust is that the federal government is “nationalizing” the U.S. banks by loaning them money so as to prevent a banking collapse.

What do these pundits or their followers think a “national” bank is.  Perhaps they think that that word in their title, like First National Bank, means that it is a bank that operates nationally.  Surely not.  The word in the title means that it is nationalized, as it has always been.  It is a “national” bank because it is founded by and governed by the national government.

Without a solid banking system, i.e. liquid and regulated, our entire economy fails and the ability of every person to be able to make a living wage along with it.  The pundit argument being radically verbalized is that private enterprise, the very foundation of America, will be destroyed.  This is typical of both the historical perversion and the fallacy of quantum lean from a false premise to a false speculation often made by those who urge it.

Historically, the economy of this nation has learned, since shortly after its founding, on numerous occasions including the current one that totally unregulated private enterprise leads to regression, not growth, to greed and manipulation and not an even playing field for the mass.  Thus, in America there has been a partnership between regulation (nationalization) and private enterprise.  As long as there is a balance between the two, more people have an opportunity to prosper.  The balance is not and cannot be static. Clearly, things change.  When they do, there has to be a readjustment between government and private enterprise.  To remain successful, there has to be an ebb and flow throughout the course of history.  Neither total government nor totally unregulated enterprise works.

But back to the example of bank nationalization.  Today, our banks are failing, en masse.  We have just completed twenty-five years of massive, aggressive deregulation based on the theory and political philosophy that pure, unregulated private enterprise is more productive.  It was an attempt to readjust the partnership between government and private enterprise.  Unfortunately, the adjustment over adjusted.  But for history’s sake let’s work backwards on this misconception of bank nationalization.

In 1984, under President Reagan, federal regulators decided that Continental Illinois, then the nation’s seventh largest bank, was too big to allow it to fail.  The government put the Federal Deposit Insurance Corporation in charge of it, subsidized it and saved it.

In 1933, after the bank failures of the great depression, Congress decreed that small depositors should be protected from bank failures and by governmental decree made all national banks pay for the insurance.

In 1913, Congress created the Federal Reserve System to stem the tide of banking panics and to regulate the money supply available to banks.

1864 was the advent of the national banking system requiring banks to be subject to audit and maintain a minimum capital base.  Congress placed this administrative duty upon the Federal Comptroller of Currency.  Even as early as 1791, the party government-owned Bank of the United States was established.  The point is that the current rant about bank nationalization is more than a little historically obtuse.  But then pundits stirring the waters of prejudice are usually factually obtuse.

But what confronts the nation at the moment is not so much a philosophical debate over nationalization as a practical discussion about how best to put the banking system back on its feet.  The banking system is failing and at great speed.  To do nothing guarantees complete failure.  No thoughtful economist knows exactly what to do.  On the other hand, even if economists know, can we borrow enough money from our foreign creditors, who now have their own problems, to get it done.

It may come down to which banks actually stand a chance of returning to health.  The government will probably have to pick and choose.  It seems impossible to save all the banks that are failing.  Judged by liquidation value – what they could get for selling their assets on the open market today – most banks in the U.S. are probably insolvent.  Remember, most banks bought and sold the now defunct mortgaged backed bonds, collateralized debt obligations (CDOs), etc., to meet their liquidity requirements.  Those financial instruments are now worthless.  In a banking crash, markets for certain assets simply stop functioning, and relying on the market to determine the health of banks means succumbing to panic.

So, here we are.  Nationalize?  Don’t nationalize?  The real question is do we loan the banks the money to get back on t heir feet or not?  Then comes the harder question:  Can we, as a nation, even borrow enough money from our foreign creditors to get our banking system back on its feet?

It is a little more difficult than black or white, as most things are when you really look at them.  Much of the problem was created by the Wall-Street-Washington corridor that evolved over the last 25 years.  Wall Street lobbying and campaign contributions, much like our military industrial complex debacle now being overshadowed—is the sour seed that grew into the thorned bush.  The American financial industry gained political powers by amassing a kind of cultural capital, that the market was wise, unmanipulated and that the entire American financial system was healthiest when untethered.  During this period of sanctified freedom, the banking-and-securities industry has become one of the top contributors to political campaigns.  Neo-con Washington insiders believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One only has to look at the channel of influence, the flow of individuals between Wall Street and Washington.  Robert Rubin, once the co-chairman of Goldman Sachs, served as Treasury secretary under Clinton, and later became a chairman of Citigroup’s executive committee.  Henry Paulson, CEO of Goldman Sachs, became Treasury secretary under George W. Bush.  John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm with Dan Quayle among its executives.

You can multiply the Congress-Wall Street connections many times over from high-level to low level rank and file Congressmen over the past three administrations, strengthening the ties between Washington and Wall Street.  There is now a whole generation of Congressmen and government policy makers mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true, and of all things, they should not be interfered with.  Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known, but the very man who took his place, Ben Bernanke, is on the record as saying this:

“The management of market risk and credit risk has become increasingly sophisticated . . . Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Really.  So, who was asleep at the wheel?  Regulators, appointed with administration policies to “keep hands off” the banking and securities industries, legislators and popular academics assumed that the managers of these banks knew what they were doing.  Today, the new administration, again using the Wall Street Washington corridor, relies on the same fallacy, but shores up the thinking by shoveling trillions to keep the industry afloat.

The hubris of Wall Street and Washington is invincible.  We are a society that celebrates the idea of making money.  Even Wall Street’s criminals like Michael Milken and Ivan Boesky, the junk bond and merger kings, become larger than life.  We came to believe that the interests of the financial sector knew better what was good for America than did the career civil servants in Washington.  Faith in free financial markets grew into conventional wisdom and greed became the moral code by other names for most Americans.

What ultimately developed over this 25 year period was an oligarchy, an elite confluence of campaign finance, personal connections, and ideology that flowed a river of deregulatory policies.  Even to this day, in the midst of a financial system breakdown, many commonplace, average hardworking Americans somehow believe that they were and still are a part of a workable Wall Street banking oligarchy that should not be interfered with and will correct itself.  They simply cannot bring themselves to see that they have been had, and they listen to and watch only the pundits that reinforce that belief by hammering simplistic economic platitudes.

Let’s look at what it’s going to take to fix the financial system.  It’s not like we and many other countries throughout history haven’t been here before.  Remember J P Morgan?  Remember the banking crash of 1913?

The Obama administration should b commended for not sitting on its hands in the midst of financial breakdown in an attempt to stem the downward vortex.  However, the pick-and-choose approach does not treat the systemic ailment.  What I mean by this is that the current approach charges in when a major financial institution gets into trouble.  The Treasury Department and the Federal Reserve engineer a bailout over the weekend and announces on Monday that everything is fine.  In March 2008, Bear Sterns was sold to J P Morgan Chase in what looked to many like a gift to J P Morgan.  One might note that Jamie Dimon, J P Morgan’s CEO, sits on the Board of Directors of the Federal Reserve Bank of New York, which along with the Treasury Department, brokered the deal.  In September, Merrill Lynch was sold to bank of America, and we saw the first bailout of AIG and the takeover and immediate sale of Washington Mutual to J P Morgan – all of which were brokered by the government.  In October, nine large banks were recapitalized on the same day behind closed doors in Washington.  This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

What was occurring is that throughout the crises the government was taking extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us into this mess in the first place.  The Wall Street/Washington corridor continues on and instead of taking the crises and correcting and developing our financial system anew, we have simply enhanced a larger Wall Street oligarchy.  In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions.  The purpose was simply to overpay for those assets and take them off the banks’ hands.  That was bad enough but what happened instead was the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves.

Now we have moved into a new phase of the bailout stigmata.  Through the new Financial Stability Plan and other less noticeable actions, we will provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices.  This governmental tactic has been heavily influenced by the financial sector.

What is the problem with this velvet glove approach by the government to the financial sector of the economy?  Aside from being terribly unfair to the taxpayer, it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms.  It literally doesn’t matter how much money Hank Paulson gives the banks.  They are not going to lend one dime until the economy turns.  The rub is that the economy can’t recover until the banks are healthy and lend.

We have a desperately ill banking sector.  It will choke off and recovery that the fiscal stimulus might generate, but instead of revamping the banking system to heal its inherent problems at a crisis time that would allow us to do so we have enhanced the political power of the financial sector.  Again, we have allowed the financial elite to control the country to the detriment of middle class America.

The root of the banks’ problems are the large losses they have taken on their securities and loan portfolios.  On main street America, consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs.  The banks don’t want to recognize the full extent of their losses, because that would expose them as insolvent.  So they talk down the problem while conservative pundits join in to fool the public at large into believing the financial sector is healthier that it is.  The banks continue to ask for handouts that aren’t enough to make them healthy, and they aren’t about to reveal what amount would make them healthy (again, this would just disclose how insolvent they really are).  The bailouts just keep them upright a little longer.

Can we not see that this behavior is corrosive?  Unhealthy banks either don’t lend and because they must hoard money to shore up reserves, or they make desperate gambles on high-risk magna loans and investments that could pay off big – or, lose big.  Main street America be damned.

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