Before It's Too Late, Is the Entire Debt Strategy Flawed?
On second thought, never mind about that bailout
| Nothing’s fixed until it’s fixed right, noted Abe Lincoln. For economies, that means ending land's role as an object of speculation, a goal that geonomics accomplishes by recovering for public benefit the socially-generated value of locations. Meanwhile, most thinking stays in the box. We trim, blend, and append three 2009 articles from: (1) the AP, Jan 29, on local banks by Matt ATT Apuzzo; (2) CNN, Jan 26, on nationalization by Joseph Stiglitz (Nobel laureate and professor at Columbia U); and (3) DownsizeDC, Jan 15, on the Fed by Perry Willis, Communications Director. |
by Apuzzo, by Stiglitz, and by Willis
- On second thought, never mind about that bailout
About 20 community banks so far that applied for or had been approved to receive about $1 billion combined in taxpayer money have reversed course in the past month and declined the money. That's just a fraction of the hundreds of billions of dollars the government already has spent, but it shows that taxpayers aren't the only ones who’re anxious.
These banks worry the government's going to own a good portion of them. For one local bank, taking the money would mean the government would own about 25 percent of the company's outstanding stock. Then Congress and the White House could start calling the shots.
After Congress approved the $700 billion bailout in October, the government gave banks only a few weeks to decide whether they wanted to take part. Many applied to get a foot in the door, in case predictions of an economic collapse came true.
In a weak economy with high unemployment, there are only so many good loans to make. Explaining that to investors is easy. To politicians, it looks like you're hoarding taxpayer money.
The government could force banks to cut dividends to shareholders, making a bank's stock less attractive to investors. Obama has said he wants to prohibit banks from buying other banks. And at any time, Congress can change the terms.
JJS: What bankers worry about, a Nobel laureate proposes.
- As did Sweden, let’s take over the banks for a while
The value of tax dollar injection, guarantees, and other forms of public assistance for some banks dwarf the value of the "private" sector's equity contribution; yet we have no voice in how the banks are run.
As we poured money into banks, some poured it out: bonuses to executives, dividends to shareholders, and mergers with other banks. Many banks hoard cash, waiting until things settle down, hoping to be among the survivors, and then start lending. If all the banks reason so, they’ll prolong the recession.
Some say that by moving the assets around, putting the bad assets in a bank run by the government, things will improve. So, government is better at disposing of garbage, while the private sector is better at making loans?
As bank managers took home huge paychecks, over the past five years the net profits of many of the banks shrank. And the social returns have even been less. The financial sector allocated capital and managed risk disastrously.
It is standard practice to shut down failing banks. We have been too gentle in enforcing the law.
Yes, shareholders and bondholders will lose out, but their gains under the current regime come at the expense of taxpayers. In the good years, they were rewarded for their risk taking. Ownership cannot be a one-sided bet.
Eventually, America's economy will recover. Our financial sector will be profitable. When things turn around, any failed bank we nationalize we can then privatize, and use the returns to pay down the national debt.
Conversely, putting $20 billion in a bank with $2 trillion of assets gets wiped out with just a 1 percent fall in asset prices. What's the point?
Throwing hundreds of billions of dollars at the banks has failed to resuscitate lending. Perhaps the entire strategy is flawed. What is needed is a fundamental rethinking.
JJS: Others say, rather than nationalize banks, we could de-charter our national bank.
- End the Fed
Credit expansion by the Federal Reserve increases the demand for producer assets and investment instruments. This causes bubbles in things like stocks and housing. When the Fed then contracts credit to avoid systemic price inflation the asset bubbles burst.
This is the history of the Federal Reserve -- booms and busts, mixed with episodes of economic stagnation and high inflation like the 1970s. The Federal Reserve, with its monopoly control over the supply of money and credit, causes investment errors to cluster. We need to end centralized top-down control of the money supply and interest rates.
We need a true free market in money and banking. We must abolish the Federal Reserve. Congressman Ron Paul has introduced the "Federal Reserve Board Abolition Act," and a national coalition called "End the Fed" is working to bring attention to this bill.
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Jeffery J. Smith runs the Forum on Geonomics.
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Also see: Bankers' bonuses equal one-tenth the bailout
Public dollars are already lining speculator pockets on Wall Street
A quick fix for the broken-down economy? |
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