Faust Tarp

by Eric Martin

Barry Ritholtz on a recent piece by Joseph Stiglitz:

Over the past few months, I have criticized CEA director Lawrence Summers “Sacred Cows/Save the Banks” approach, rather than a save the financial system approach. And the mad attempts to bailout the bond holders also came in for some harsh words. Joseph Stiglitz agrees:

The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”

Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.”

No matter how you slice it, the Obama approach pushes the onus (and massive bill) on taxpayers, and away from shareholders and bondholders.  The common retort is that shareholders have been effectively wiped out already, so what's the point.  Only, so long as shareholders aree still holding their shares, their "wiped out" position will wipe back in once the stock price rebounds after we funnel hundreds of billions in taxpayer money in to recapitalize the banks.  On the other hand, if we took the banks into receivership, the taxpayers (not the supposedly "wiped out" shareholders) would capture the increase in value of the recapitalized banks when they are eventually resold to the public.

Besides, the bondholders haven't taken their haircut yet.  And they should - at least, ahead of taxpayers who elected to bear none of the risk.

Further, with the same management in place, the same enormous "too big to fail" structures intact, the same divorced-from-performance, ludicrously massive compensation packages, the same outsized influence in Washington, we will merely be teeing up the ball for the next bailout some time in the near future.   

This will not end well. 

Comments

[TJ]

Well for us peasants, you mean. The big banks are doing swell. They told me so. Repeatedly.

I think the bigger problem is that nobody, republican or democrat, can face that the era of the FIRE economy may be over. Manufacturing is passe, the dotcoms vaporized, and now FIRE is going down and nobody has anything else.

[Daro]

Stiglitz predicted a global depression for '09 back in Sep '06. On Alex Jones' radio show - the only place he could get airplay...

[mattH]

So, which regular is going to be the first to come in and tell us that this either all according to plan, or that it's a feature not a bug?

[Paula]

"faust tarp"?

Dork. :)

[Eric Martin]

Dork.

guilty as charged ;)

[brendan]

No, it won't. I've admired the pragmatic, moderate approach and tone of this blog for a long time. But it must be time now to begin thinking about a future beyond Democrats and Republicans, beyond the currently-ruling financial and political elite. I'm not saying I have any answers! But the Obama administration has shown its true colors, I'm sorry to believe. And we need to begin imagining and articulating how the administration should fundamentally change.

[bedtimeforbonzo]

Brendan: I think Eric was getting at that.

I found it especially troubling that Stiglitz views the Obama administration’s bank-rescue efforts as being "designed to help Wall Street rather than create a viable financial system."

Wall Street is healing, already. Joining Wells Fargo in the profit orgy amid the Great Recession is Citicorp.

Hence, Eric's conclusion that this is all a vicious circle bound to repeat itself.

The rich get richer. The rest of us struggle mightily to get back to even.

[GoodOleBoy]

Now we are getting somewhere. Finally, we are talking about those who continue to torture their fellow Americans. Here's what I know. The corporatists who identify with the republicans and the corporatists who identify with the democrats all seem to have the same objectives and tactics. What's more curious to me is how they can fit this into, other than their mutual corporate devotion, quite distinct political outlooks. Someone here can surely explain how this can be.

[J. Michael Neal]

Eric, you are still ignoring all of the problems with nationalization, starting with the fact that the administration doesn't have the authority to do it. Unless you think that Congress is going to appropriate another $1 trillion and give the government the authority to take over institutions that aren't depository banks and not screw such a bill up, this isn't an option. One of my big problems with Stiglitz and Krugman is that I don't think that they have any appreciation for the political constraints that Obama is working under.

Here, Stiglitz is talking as if the lack of sufficient resources is something that the administration could easily fix if it just went back to Congress. I don't think that that's even a close approximation to reality. At this point, the administration has to work with the resources it already has.

There are other problems with nationalization, but this is the most fundamental one.

[Spartacvs]

Political restraints

I think it's pretty clear that whatever might be got out of the House, now has to survive the seemingly universal 60 vote threshold in the Senate. Large scale nationalization doesn't stand a chance there and it would be a complete waste of Obama's political capital to even try it.

[brendan]

If nationalization "doesn't stand a chance," then the banks should be allowed to fail. The fact that nationalization (which implies monetary loss along with immediate and enduring performance accountability for the financial elite) doesn't stand a chance, while a massive transfer of wealth from taxpayers to banks does stand a chance, and is even cheered on in the media, just shows how ugly a situation prevails in these USA.

[Eric Martin]

Large scale nationalization doesn't stand a chance there and it would be a complete waste of Obama's political capital to even try it.

I disagree.

This should be a teaching moment for Obama. There is a lot of anger at these bailouts, and that could be harnassed to get Congress in line.

At the very least, he could make an attempt and then hang the alternative approach on a recalcitrant Congress/GOP.

Under the current approach, it's his failure of a baby all the way.

[Hogan]

The corporatists who identify with the republicans and the corporatists who identify with the democrats all seem to have the same objectives and tactics. What's more curious to me is how they can fit this into, other than their mutual corporate devotion, quite distinct political outlooks.

Partly it's that the corporatists who most strongly identify with Republicans (e.g., big agriculture, resource extraction) thrive in different policy environments than the corporatists who most strongly identify with Democrats (e.g., telecom, entertainment). Finance, of course, identifies with both parties, as you would expect from the people who invented the hedge bet.

[Eric Martin]

Finance, of course, identifies with both parties, as you would expect from the people who invented the hedge bet.

Heh.

[GoodOleBoy]

Thanks, Hogan. Both sides need to be tortured.

[GoodOleBoy]

There are certainly several more ways to sort corporatists into dems and repubs but essentially they don't really care about policy, only the money. The way forward is to figure out a way to have our market based economy function while avoiding being dominated by those who worship their accumulation of riches. Not much about our recent debacle has been fun to watch but I can confess that nowhere along the way have I felt sympathy for those who brought it on by their recklessness nor for those who gain their riches by knowingly taking advantage of those in less powerful positions as their regular way of doing business. I don't like nationalization and I don't like the bailouts. I would rather see these large institutions fail. I know there are situations where the results would be too harsh and we need to mitigate those, but I'm confident that in the options being discussed the financial brotherhood that got us here will be the first and foremost beneficiary. I would like to see us mitigate those areas that need it and then adopt some methods that allow the market to function without ever again putting the taxpayers in a similar situation. Plenty of our nationally elected politicians are right in the middle of this as well.

[Eric Martin]

Jeez GOB, that's my nomination for your MVC (Most Valuable Comment).

Well said.

[Spartacvs]

This should be a teaching moment for Obama. There is a lot of anger at these bailouts, and that could be harnassed to get Congress in line.

At the very least, he could make an attempt and then hang the alternative approach on a recalcitrant Congress/GOP.

Not when you put a price tag on it, which is what the argument would be all about if a large scale nationalization proposal ever reached Congress.

Under the current approach, it's his failure of a baby all the way.

He's the President, that's the way of the world and he has already publicly stated that if things don't improve then the electorate should vote in someone else come 2012. Rather refreshing in comparison to the last incumbent and the current attitude of the GOP, to have someone in the WH willing to take on responsibility for their actions don't you think.

[Eric Martin]

Not when you put a price tag on it, which is what the argument would be all about if a large scale nationalization proposal ever reached Congress.

But there would be a key difference: it wouldn't be a bailout. The current approach is to shovel hundreds of billions of taxpayer dollars over to shareholders, bondholders and management.

Nationalization would be different: it would ensure that shareholders, bondholders and management take the hit, that the taxpayer reaps the upside and that it actually fixes the banks.

He could certainly try to sell the public on that.

Hell, half the time defenders of the Geithner plan are telling me that Obama's going to eventually go that route anyway, just after this try fails.

At which point, why would that be easier?

[Brett Bellmore]

"But there would be a key difference: it wouldn't be a bailout."

True, but that's scarcely an advantage in selling to the public. It's really going to be hard to make that, "I'm not a socialist, really!" line work, while you're nationalizing industries left and right.

"that the taxpayer reaps the upside"

That the government reaps the upside. It's important, for the sake of clairity, to keep in mind that they're not the same thing.

[Spartacvs]

The current approach is to shovel hundreds of billions of taxpayer dollars over to shareholders, bondholders and management.

Mostly through the Fed, without having to ask Congress for any more money than they have already gotten under TARP authorizations.

Nationalization would be different: it would ensure that shareholders, bondholders and management take the hit, that the taxpayer reaps the upside and that it actually fixes the banks.

I don't believe the bondholders are in any position to take the hit without bringing the whole pack of cards down, with the knock on effect that would have on the economy as a whole being the whole raison detre of the intervention in the 1st place. Shareholders have already taken a hit, though they stand to recover value if the financial sector can be stabilized and there are no legions of competent managers waiting in the wings.

Nationalization would be my preferred solution too if I thought it were politically feasible. Which I fear it isn't, given that it would hamstring the administrations immediate practical response to getting an agreement with Congress on some very large numbers.

[Gary Farber]

"True, but that's scarcely an advantage in selling to the public. It's really going to be hard to make that, 'I'm not a socialist, really!' line work, while you're nationalizing industries left and right."

Nah, IOKIYAR: is George W. Bush a "socialist," after all?

Besides, socialists nationalize the means of production. Socialists also nationalize the distribution of goods.

If you're not doing both those things, or at least one of them, you are not a socialist.

It helps to actually know the simplest things about socialism to be able to sort out what is and isn't socialism, and who is and isn't a socialist.

Social democrats, for instance, aren't socialists. Knowing the difference is having a clue.

[Gary Farber]

"True, but that's scarcely an advantage in selling to the public. It's really going to be hard to make that, 'I'm not a socialist, really!' line work, while you're nationalizing industries left and right."

Nah, IOKIYAR: is George W. Bush a "socialist," after all?

Besides, socialists nationalize the means of production. Socialists also nationalize the distribution of goods.

If you're not doing both those things, or at least one of them, you are not a socialist.

It helps to actually know the simplest things about socialism to be able to sort out what is and isn't socialism, and who is and isn't a socialist.

Social democrats, for instance, aren't socialists. Knowing the difference is having a clue.

[Omega Centauri]

I'd say stockholders have indeed taken a big hit. Any recovery is likely to be to a much lower level than ante. Bondholders may not yet have realized (or should I say locked in) their haircut yet -unless they've sold out for pennies on the dollar, but their options for say raising cash by selling bonds have been severely curtailed. I suspect the exposure of important institutions to the bonds is far larger than nearly anyone here realizes. Few retirement programs would be solvent for one. So the incentive to try to just muddle through, until enough bank operating profits have accumulated to fill in the financial balance sheet holes, is great.

[Eric Martin]

I'd say stockholders have indeed taken a big hit. Any recovery is likely to be to a much lower level than ante.

It should be zero. Before they get dollar one from US taxpayers. They took the risk, they reap the profit, they also suffer the loss.

[Hogan]

There are certainly several more ways to sort corporatists into dems and repubs but essentially they don't really care about policy, only the money.

They care about policy insofar as it affects their ability to make money. Big Ag cares about subsidies and sugar tariffs; Big Oil cares about offshore drilling and public land leases; Big Entertainment cares about intellectual property rules. It's hard to set up a polity of any size where those and/or similar facts are not part of the governmental air you breathe.

The way forward is to figure out a way to have our market based economy function while avoiding being dominated by those who worship their accumulation of riches.

In an essay in the early 1870s Henry Adams wrote about the implications of the fact that there were privately owned business entities in the US that commanded more wealth (and I would add better lawyers) than the federal government, let alone the state governments that chartered and presumably regulated them. Governments with enough domestic power to resist being swayed or outright corrupted by such entities were not anything envisioned at our founding, and our original constitution is deeply inconsistent with such a government. We've developed some cheat codes since the Gilded Age, on the books and off, but we're still vulnerable to that problem, and will be until we either limit the allowable concentration of wealth or endow the federal government with more power than we've so far collectively agreed to give it.

[Cal Gal]

Yep. I knew we were in trouble when he brought in Summers to be Chair of the Council of Economic Advisors.

ONE of them, maybe, but Chair is just too high a position for the man who assured there would be no regulation of the derivatives market.