Quoting from PK's editorial:
There's more at stake here than fairness, although that matters too.
Saving the economy is going to be very expensive: that $800 billion
stimulus plan is probably just a down payment, and rescuing the
financial system, even if it's done right, is going to cost hundreds
of billions more. We can't afford to squander money giving huge
windfalls to banks and their executives, merely to preserve the
illusion of private ownership [italics added].
I am enjoying PK's last line, "the illusion of private ownership."
It's nice for PK to back nationalization (even if
temporary)............re: our earlier debate on pen-l.
Thanks for circulating, Jim.
Ann
At 09:20 AM 2/2/2009, you wrote:
[He's right that these bankers are greedy bunglers, but there's a more
general point: private, profit-seeking, banking which is subject to
insufficient serious regulation regularly produces bubbles and crises
of the sort we've seen. The incentives are there to take too much risk
while leveraging as much as possible. Of course, it was the bungling
bankers and their cousins who were the ones who lobbied hard and
bought a bunch of politicians to bring in the kind of deregulation (or
rather, pro-banker regulation) that allowed the bankers to follow
those incentives. Profit-seeking is the root of this evil.
[BTW, I'm glad that PK (implicitly) backed Clinton during the endless
primary season. That gives him independence vis-a-vis Obama.]
The New York Times / February 2, 2009 / Op-Ed Columnist
Bailouts for Bunglers
By PAUL KRUGMAN
Question: what happens if you lose vast amounts of other people's
money? Answer: you get a big gift from the federal government but
the president says some very harsh things about you before forking
over the cash.
Am I being unfair? I hope so. But right now that's what seems to be happening.
Just to be clear, I'm not talking about the Obama administration's
plan to support jobs and output with a large, temporary rise in
federal spending, which is very much the right thing to do. I'm
talking, instead, about the administration's plans for a banking
system rescue plans that are shaping up as a classic exercise in
"lemon socialism": taxpayers bear the cost if things go wrong, but
stockholders and executives get the benefits if things go right.
When I read recent remarks on financial policy by top Obama
administration officials, I feel as if I've entered a time warp as
if it's still 2005, Alan Greenspan is still the Maestro, and bankers
are still heroes of capitalism.
"We have a financial system that is run by private shareholders,
managed by private institutions, and we'd like to do our best to
preserve that system," says Timothy Geithner, the Treasury secretary
as he prepares to put taxpayers on the hook for that system's immense
losses.
Meanwhile, a Washington Post report based on administration sources
says that Mr. Geithner and Lawrence Summers, President Obama's top
economic adviser, "think governments make poor bank managers" as
opposed, presumably, to the private-sector geniuses who managed to
lose more than a trillion dollars in the space of a few years.
And this prejudice in favor of private control, even when the
government is putting up all the money, seems to be warping the
administration's response to the financial crisis.
Now, something must be done to shore up the financial system. The
chaos after Lehman Brothers failed showed that letting major financial
institutions collapse can be very bad for the economy's health. And a
number of major institutions are dangerously close to the edge.
So banks need more capital. In normal times, banks raise capital by
selling stock to private investors, who receive a share in the bank's
ownership in return. You might think, then, that if banks currently
can't or won't raise enough capital from private investors, the
government should do what a private investor would: provide capital in
return for partial ownership.
But bank stocks are worth so little these days Citigroup and Bank of
America have a combined market value of only $52 billion that the
ownership wouldn't be partial: pumping in enough taxpayer money to
make the banks sound would, in effect, turn them into publicly owned
enterprises.
My response to this prospect is: so? If taxpayers are footing the bill
for rescuing the banks, why shouldn't they get ownership, at least
until private buyers can be found? But the Obama administration
appears to be tying itself in knots to avoid this outcome.
If news reports are right, the bank rescue plan will contain two main
elements: government purchases of some troubled bank assets and
guarantees against losses on other assets. The guarantees would
represent a big gift to bank stockholders; the purchases might not, if
the price was fair but prices would, The Financial Times reports,
probably be based on "valuation models" rather than market prices,
suggesting that the government would be making a big gift here, too.
And in return for what is likely to be a huge subsidy to stockholders,
taxpayers will get, well, nothing.
Will there at least be limits on executive compensation, to prevent
more of the rip-offs that have enraged the public? President Obama
denounced Wall Street bonuses in his latest weekly address but
according to The Washington Post, "the administration is likely to
refrain from imposing tougher restrictions on executive compensation
at most firms receiving government aid" because "harsh limits could
discourage some firms from asking for aid." This suggests that Mr.
Obama's tough talk is just for show.
Meanwhile, Wall Street's culture of excess seems to have been barely
dented by the crisis. "Say I'm a banker and I created $30 million. I
should get a part of that," one banker told The New York Times. And if
you're a banker and you destroyed $30 billion? Uncle Sam to the
rescue!
There's more at stake here than fairness, although that matters too.
Saving the economy is going to be very expensive: that $800 billion
stimulus plan is probably just a down payment, and rescuing the
financial system, even if it's done right, is going to cost hundreds
of billions more. We can't afford to squander money giving huge
windfalls to banks and their executives, merely to preserve the
illusion of private ownership.
Copyright 2009 The New York Times Company
--
Jim Devine / "Disbelief in magic can force a poor soul into believing
in government and business." -- Tom Robbins
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