The banking crisis. ‘How sweet it is.
By: George Warren; Columnist
Capitalism is an economic order where the accumulation of wealth and its benefits are left entirely to the private sector, rather than state owned or controlled. We were taught in grammar school that “Laissez-faire capitalism” meant minimizing or eliminating any government interference in the process. In truth, the United States has never enjoyed true Laissez-faire capitalism, and since the 1930’s we have seen ever increasing Federal regulationism (my word).
Yet, it is my contention that this host of regulators failed miserably in their duty when they allowed the creation of 11 banking institutions which are now deemed “too large to fail.” I don’t argue that we are not there. The failure of Lehmann Brothers investment bank made the point explicitly. I argue that we should never have been allowed to get there. The terms ‘capitalism’ and ‘too large to fail’ are contradictory terms. The very root of capitalism has to include “you pay your money and you take your chance.”
Republican President Teddy Roosevelt (the good one) became known as the “trust buster” when he used a report generated by his predecessor, Republican President William McKinley, to bust 44 Trusts, which had assumed monopoly powers in certain areas. His successor, another Republican president, William Howard Taft, busted another 90 trusts. Yet somewhere along the way, Democrat FDR, amidst all his new depression bureaucracies, managed to tag the GOP as anti-populist and pro-business. The tag has stuck since, and apparently George W Bush decided to live by it. I have earlier discussed my disdain for his “Laissez-faire” approach to regulating the investment banking industry.
Now, we have a new Democrat President who has said he wants to change things in Washington, so I issue him this challenge. Mr. President, it is time for a populist Democrat to bust some trusts. Break up the 11 banks which are considered too big to fail. Free market capitalism does not need any single banking enterprise whose failure can bring down our banking system. Nor does it need any single insurance conglomerate whose failure can bring down our banking system. I find it somewhat disconcerting that, according to Reuters, even my nemesis, Allen Greenspan, agrees with me. And why should a capitalist be able to buy insurance to cover the bad debts on his books, bad loans that he made in a free market?
Before 1950, the FDIC had two options for a failing bank, close and liquidate, paying off insured depositors; or purchase and assume obligations, with a later sale back to private interests. The FDIC Act of 1950 allowed a third option, which was Federal lending, and/or Federal purchase of bad assets. In the 1980’s Continental Illinois Bank & Trust Company, then 7th largest US bank, was first loaned $8 billion of taxpayer money; subsequently the government was forced to buy $5 billion of non-performing assets, and to acquire a controlling interest in the bank, simply because it was deemed too large to fail. We should have learned a lesson that would have prevented today’s debacle.
The FDIC Improvement Act of 1991 was passed with the implicit goal of eliminating the widespread belief that in the future all large banks could count on government rescue, but it included an escape clause; allowing that a favorable two-thirds vote of FDIC Directors, Federal Reserve Governors, and the Treasury Secretary would allow the rescue of any bank. What it should have done was to begin an orderly process of breaking each of these banks into enterprises whose failure could not be large enough to endanger the entire banking system. The banking crisis of 2008 could never have developed. The President could act now in a way to prevent the banking crisis of 2030.
Instead, the Geithner rescue plan to remove all the toxic assets from the books of our banks is designed to once again reward the same people who designed and carried out the preposterous collateralized mortgage securities scheme. Under his plan, the ailing banks will decide what securities or direct loans they wish to sell, and notify the FDIC. The FDIC will loan (with absolutely no recourse) 84 percent of the price for which they sell. Private investors (Goldman Sachs, Merrill Lynch, hedge funds, etc.) will be expected to put up eight percent cash, and will have sole management authority of the assets. The Treasury (the US taxpayers) will put up the remaining eight percent cash required. We (the US taxpayer) will have a total of 92 percent at risk, with no recourse against the private investors if they can’t repay the loans. If there is any profit made on the deal, we (the US taxpayer) will share it 50-50 with the blackguards who created the problem. While the FDIC’s income is from fees charged to banks, not tax money; it is clear tax money will have to back them up when they run out of funds. How sweet it is!
Published in the April 2, 2009 Edition