"Check It Out" for Friday, March 6th
Paul Krugman at the NYTimes writes about the Obama administration dithering rather than matching deeds to words.
"...there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.
"Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.
"Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.
"Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.
"The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly.
"Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.
"But would it be enough to make the banking system healthy? No.
"So why has this zombie idea — it keeps being killed, but it keeps coming back — taken such a powerful grip? The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.
"But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more."
Joseph Stiglitz writes at The Nation about bank bailouts that work.
"The banks obviously don't want the government to play by the rules. They want to delay the day of reckoning. They want what is called forbearance. They say, Allow us a little slack now, because we are fundamentally sound. Of course they would say that. Of course banks claim that market prices underestimate true values. We learned the hard way in the S&L crisis, however, that delay is very costly. We are on track to learn that lesson again.
"The Obama administration seems to be proposing a way out of this muddle: we will "stress test." We will see how well you fare. If you pass the test, we will help you get out of your temporary difficulties.. Stress testing involves using mathematical models to see what happens under various scenarios. The banks were supposed to have been stress testing themselves on an on-going basis. Their models said everything was fine and dandy.
We know those models failed. What we don't know is whether the models the administration will use will be any better. Will they use the old, failed models? We have been told that it will take time to do the stress test, and while we wait, will we pour more money into failing institutions, with good money chasing bad, ever widening our national debt."Those who say the government cannot be trusted to allocate capital efficiently sound unconvincing these days. After all, it's not as though the private sector did a very good job. No peacetime government has wasted resources on the scale of America's private financial system. Wall Street's incentives structures were designed to encourage shortsighted and excessively risky behavior. The bankers were supposed to understand risk, but they did not understand the most elementary principles of information asymmetry, risk correlation and fat-tailed distributions. Most of them, while they may have been ethically challenged, were really guided in their behavior by the perverse incentives they championed. The result was that they did not even serve their shareholders well; from 2004 to 2008, net profits of many of the major banks were negative.
"There is every reason to believe that a temporarily nationalized bank will behave much better--even if most of the employees are still the same--simply because we will have changed the perverse incentives. Besides, a government-run bank might spend some time and money teaching its employees about risk management, good lending practices, social responsibility and ethics. The experience elsewhere, including in the Scandinavian countries, shows that the whole process can be done well--and when the economy is eventually restored to prosperity, the profitable banks can be returned to the private sector. What is required is not rocket science. Banks simply need to get back to what they were supposed to do: lending money, on a prudent basis, to businesses and households, based not just on collateral but on a good assessment of the use to which borrowers will put the money and their ability to repay it."
DownWithTyranny has a commentary on the root cause of the economic meltdown: the GOP and Blue Dog Dems in thrall to deregulatory bribery aka special interests like the financial sector controlling our electoral system: the piece also includes lists of elected denizens on Capitol Hill who are recipients of this big legalized pay-offs.
"Perhaps if everyone in the country were to read the detailed 231-page report from Essential Information and the Consumer Education Foundation, we would decide, as a society, that the costs of allowing special interests to finance our electoral system was far too great. The report is titled Sold Out: How Wall Street and Washington Betrayed America and today'sWall Street Journal analyses it for us, highlighting that "from 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made $1.725 billion in political contributions and spent another $3.4 billion on lobbyists, a financial juggernaut aimed at undercutting federal regulation.
"This report has one overriding message: financial deregulation led directly to the financial meltdown.
"It also has two other, top-tier messages.
"First, the details matter. The report documents a dozen specific deregulatory steps (including failures to regulate and failures to enforce existing regulations) that enabled Wall Street to crash the financial system. Second, Wall Street didn’t obtain these regulatory abeyances based on the force of its arguments. At every step, critics warned of the dangers of further deregulation. Their evidence-based claims could not offset the political and economic muscle of Wall Street. The financial sector showered campaign contributions on politicians from both parties, invested heavily in a legion of lobbyists, paid academics and think tanks to justify their preferred policy positions, and cultivated a pliant media-- especially a cheerleading business media complex.
"Subverting the regulatory regime that has protected American society since the beginning of the 20th Century was the engine on which the Bush Family fortune was built. It certainly wasn't just the lunkhead who fronted for the criminal family in the last 8 years-- but an enterprise by a family of parasites that stretches back generations. And though the Bush Family's role was overarching and generational in scope, without the active participation of grubby and corrupt politicians-- basically the entire Republic Party plus the corporatist Blue Dogs, DLV and New Democrat Coalition-- the destruction of the American economy could never have succeeded.."
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