Wake up Kossacks, Barack's honeymoon is over. The financial establishment is railroading Obama into a mega bank bailout.
If recent press accounts are correct, Obama can pack up our dreams about health care reform, clean energy and virtually everything else we want to do. Instead new federal borrowing will be devoted to propping up our dysfunctional and parasitic banking system.
Find out over the fold just how big the latest bank bailout numbers are and how to avoid a high cost bailout.
Remember back when the $700 billion for TARP was a huge bailout. No longer.
People as central to the negotiations as Sen. Charles Schumer (D-Wall Street) are now floating figures of $3-4 trillion (that's right trillion) to finance a "Aggregator Bad Bank" to purchase the toxic assets paralyzing the banking system.
Take a deep breath here. This is an unfuckingbelievable amount of financing.
The exploding size of the bailout financing will squeeze out other important spending priorities and dangerously gamble with our nation's fiscal and economic health.
One big risk is that the government overpays for the bad assets and the taxpayer is screwed when the assets finally get sold.
The establishment view (Geithner, Summers and the Bankers) holds that our banking institutions are so important that the huge bailout costs pale in comparison to the economic costs dysfunctional banks unable to lend.
But even a mega "Aggregator Bad Bank" bailout, provides no assurance money center banks will resume sufficient lending. And a bank bailout that leaves the same managers and institutional incentives in place merely encourages the misguided risk-taking that spawned the crisis.
A fiscally responsible solution to the banking crisis requires the government take ownership of the banks, replace the top management, separate the bad and the good assets, return the good asset banks to private ownership and manage the bad asset banks to minimize taxpayer costs. Temporary government ownership will require little financing and will remove the risk of overpaying for bad assets. Taxpayers will bear heavy costs but only cover shortfalls that result when asset sales proceeds fail to cover bank deposits.
The establishmentarians roll out excuses why the government cannot run the financial system:
- Bureaucrats can't run banks better than the private sector.
Response: How could bureaucrats do worse? Current bank managements have brought our economy to its knees and their banks to insolvency. Temporary government bank ownership would allow restructuring so recapitalized banks could be sold back into private hands. Government regulators typically replace only top executives allowing other experienced managers and employees to continue bank operations.
- Taking over one or more money center banks will lead to runs on remaining banks and force the entire industry into government hands.
Response: In a market system, individuals (investors, creditors and depositors) determine bank solvency. When the government seizes a bank, it is only after the markets have rendered their verdict and bank capital has shrunk below regulatory limits. Bank stocks decline when the prospect of bailouts evaporate, but this loss in private wealth will be more than offset by the social benefits of a functional banking system.
With higher unemployment and numerous corporate bankruptcies anticipated, it is probable all the money center banks are or will become insolvent. The time to get started restructuring the industry is now before all the banks look like Citigroup.
- Government bank managers will be prone to political interference
Response: Banking is always highly politicized. The financial services industry is the largest employer of lobbyists. They have brought us to where we are by: repealing Glass-Steagall, blocking regulation of derivatives trading, relaxing bank leverage limits and passing anti-consumer bankruptcy "reform". What's wrong with giving a progressive administration the opportunity to design a new banking system?
This is gut check time for Obama. Is he going to stand aside while Geithner and Summers allow bankers to pull off a colossal Treasury raid that neuters his presidency?
Call your congress people, organize, blog. Given all the effort to elect Obama, expend some effort to defend his fiscal resources.