A Bailout Monstrosity

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The Dodd-Frank Wall Street Reform and Consumer Protection Act, billed as a fix for the financial industry, was also debated without knowing the scope of the Fed’s involvement. Ironically, it creates a Financial Stability Oversight Council that has the power to shut down failing institutions in an “orderly way.” The irony? The council is headed by Secretary Geithner.

Former Senator Bob Dorgan (D-ND) believes greater knowledge might have also led to the re-instatement of the Glass-Steagall Act. The Depression-era legislation separated deposit and investment banks. Its repeal during the Clinton administration–a move the former president now regrets–led to the creation of the mega-banks at the heart of the crisis. Newt Gingrich, who also supported the repeal, has recanted as well.

On the other hand, the mega-bailout has its defenders. “Ladies and Gentlemen, this is what a lender of last resort looks like,” writes Reuters columnist Felix Salmon referring to the Bloomberg piece. “The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job,” he adds. “Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”

One suspects many Americans would dispute that assessment. While bigger banks have eased some of their credit restrictions, 80 percent of lenders have tighter credit since 2008. Furthermore, the “most prevalent tightening occurs in CRE (commercial real estate) loans, leasing, and small business loans. The most prevalent easing is in international, large corporate, asset-based lending, and leveraged loans.” In other words, Main Street borrowers are still taking it on the chin while Wall Street is back to business as usual.

Maybe better than usual. Even though it’s a relatively small number, banks earned an estimated $13 billion of income by taking advantage of the Fed’s below-market rates during the crisis. Total assets held by the Big Six have increased 39 percent, from $6.8 trillion on September 30, 2006 to $9.5 trillion as of September 30, 2011. The Big Six have also paid out $146.3 billion in compensation in 2010, which comes to $126,342 per worker. “The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out,” says Anil Kashyap, a former Fed economist who’s now a professor of economics at the University of Chicago Booth School of Business. “They shouldn’t be surprised that a lot of people find some of the stuff that happened totally outrageous.”

Much of the outrage is eminently justified. The overwhelming amount of it stems from the fact that while ordinary Americans were being hammered by a recession (and still are), the crony-capitalist nexus of big government and big finance was engineering a cushy landing for some of the most irresponsible people on the planet. People who not only remain unaccountable for their behavior, but have prospered from it.

Perhaps it was a necessary evil in the sense that a systemic failure might have hurt innocent Americans even worse than what has occurred. But it is truly disturbing that not one CEO or any other board member of the institutions who benefitted from the Fed bailout or TARP–which Bloomberg revealed was essentially collateral for the far bigger loans–was forced to resign as a condition for receiving the funds. And the “brain drain” rationale used to justify that fact is a howler. These are the same “brains” who brought the nation to its knees. No one but their equally-compromised colleagues would miss them.

Moreover, the revelations of the Fed bailout may have other repercussions. Already, Reuter’s Felix Simon is contending that the European Central Bank (EBC) should emulate the Fed and bail out the European Union. On Monday the White House also pledged its support to the EU, in order to “reinvigorate economic growth, create jobs and ensure financial stability.” And lest anyone forget, American taxpayers fund the International Money Fund (IMF) that has provided billions for the Greek bailout.

Furthermore, the Occupy Wall Street movement, despite its tenuous grasp of economics and its anti-capitalist underpinnings, is sure to get a boost. The boost will come from those Americans whose grasp of both concepts is equally suspect, and those who don’t understand that the word “crony” in front of the word “capitalism” completely changes the parameters of the debate, as sure as the word “illegal” in front of immigrant does.

As for the idea that the financial industry has been saved and that something like this couldn’t happen again, Exhibits A and B offer a different perspective. Exhibit A is the EU, which has the capacity to drag any number of American financial institutions back into trouble. Which ones? No one knows for sure, as “transparency,” despite all contentions to the contrary, remains steadfastly elusive. Exhibit B is the move by Fitch ratings agency, affirming the AAA status of U.S. debt–but changing its outlook going forward from “stable” to “negative.” Chances of another downgrade? Better than 50 percent over the next two years.

So was the Fed bailout a success? The “lender of last resort” claims almost all of the loans have been repaid, and that there have been no losses. But there is something equally big at stake here. Nobel Prize-winning economist Oliver E. Williamson explains. “The banks that were too big got even bigger, and the problems that we had to begin with are magnified in the process,” he notes. “The big banks have incentives to take risks they wouldn’t take if they didn’t have government support. It’s a serious burden on the rest of the economy.”

Burden? More moral hazard on steroids.

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  • http://BanksOwnAmerica.com Mad

    So we should all be rioting or what?

    • WTF

      YES! bofa STOLE this money from the AMERICAN public BUT yet REFUSES to modify home loans, foreclosing on the SAME people they STOLE the money from! YES we should be RIOTING!!!

  • alex n


  • StephenD

    Being a VERY simple person, I find it extraordinary to think that someone ~ Anyone, could be “bailed out” if their business is failing. I always thought that the risk is true and accepted by businesses because the rewards of success are great. Some business ventures fail. That is part of the system…and it is a good thing. It is what sparks innovation and competition and the striving for excellence we in America have come to take for granted. I recall seeing pictures of cars and appliances from the Soviet Union; they looked like relics even then! Why? Because there was no incentive to do any better. They COULD NOT FAIL. It was laughable to me then. Now with America heading in the same direction…it’s not so funny.

    • Steve

      Yes, these financial institutions were too big to be allowed to fail….but when "bailed out" the top 10% of the executives should have been fired with no severence and the last three years of bonuses clawed back.

  • http://www.tartanmarine.blogspot.com Robert A. Hall

    I’m currently reading “Reckless Endangerment” which suggests that everyone the right or left blame–Republicans, Democrats, the Fed, Fannie Mae, S&P, the banks, Wall Street, the big lends like Countrywide—all were guilty of making tens of millions of dollars while shifting the risk to the rest of us. I will link to this from my Old Jarhead blog.  

    Robert A. Hall
    Author: The Coming Collapse of the American Republic
    (All royalties go to a charity to help wounded veterans)
    For a free PDF of my book, write tartanmarine(at)gmail.com 

    • Jim_C

      Robert–that's where the real outrage is. I compare it to the Penn State abuse scandal. Sandusky is a sick, deranged man, but like many of his ilk, probably had been abused himself at some point to become that perverse. People inclined to actually act out their perversions, to a certain extent, can't help it. Sandusky is like the American people looking to get rich quick in the housing market and looking to buy stuff they can't afford.

      But Sandusky's bosses at Penn knew what happened, did nothing about it, and tried to cover it up. And that's what true evil is–cold, dispassionate, removed. They allowed it to continue. These are the bankers, economists, and government officials who stood by KNOWING what was happening, doing nothing, and sometimes even encouraging it.

      There's a special circle in h(-ll for these folks.

  • LindaRivera

    An inferior health care plan that no one wants and CANNOT afford to pay. The threat to jail and/or fine those who don't purchase the government enforced plan.

    Massive spending as if there is no tomorrow. Fighting wars we have no money for. Massive borrowing.

    The Massive giving away of Billions of dollars every year to other countries, including the oil-wealthy Middle East, Hamas-controlled Gaza and the Palestinian Authority organization who fill their war chests, build mansions and laugh all the way to the bank with FREE infidel money. Whilst in America, homeless shelters are filled to capacity; tent cities have sprung up all over the U.S. filled with desperate, jobless, homeless, neglected Americans.

    Massive debt. The massive printing of paper money out of thin air to DELIBERATELY create out-of-control inflation. There is no question that the total DESTRUCTION of America's economy is planned. The results will be horrifying. In the once wealthy and great nation of America, millions of Americans will become destitute, hungry and homeless with no money or resources to help them.

  • LindaRivera

    Organic, non-GMO avocado, fruit and nut trees and berries must be planted in all of our nation’s cities’ and towns’ parks to help the many millions of Americans who will soon be in a desperate struggle to survive because of the frightening, highly destructive economic policies of our government.

    Watch it. And weep for our great nation and people:

    FALL Of The Republic – The Presidency Of Barack H Obama – The Full Movie HQ http://www.youtube.com/watch?v=F8LPNRI_6T8&fe

  • Ellman

    One of the primary functions of the Creature from Jekyll Island (Fed Res) has been "the lender of last resort". In practice this meant bailing out banks and other financial institutions, domestic and international, since its inception, such bailouts increasing with each passing decade. One of the first books I read about the Fed documented dozens of cases where the Creature rescued institutions from their own incompetence. The Fed has various ways of accomplishing the rescues and Congress has often been complicit in facilitating its mission – always at the risk and expense of the tax payer, ultimately. Anyone even slightly familiar with the operations of this corrupt institution probably supports Ron Paul's continual calls to audit the Fed. Whether one examines the actions of the Fed, the Treasury, the Congress or the President and his cabinet, there is one conclusion which is unavoidable: the taxpayer receives the least regard or consideration in their deliberations and decisions and always pays the bill unless the Fed decided to print money instead.

  • Steve

    The problem is not bailing out too big to fail financial institutions but not firing the top ten percent of the executives of these firms at the time of the bailout with no severance pay and the past three years bonuses clawed back.
    Please check out the ideas of the economist Martin Hutchinson (“Alchemists of Loss”) for the SEC regulations necessary for a transparent stable financial market that will not crater again due to Wall Street banksters. (Bring back Glass Steagall, outlaw derivatives no one understands while setting up an exchange for the others, outlaw "naked shorting" of equities, require buyers of credit default swaps have a direct insurance need as the counterparty, treat CDS’s like insurance and require reserves to be set aside like every other insurance firm, require banks to continue to have a financial interest in any MBS or CDO products they sell).

    • Jim_C

      It really is a remarkable level of chicanery that has been perpetrated against the American people. Goldman Sachs and other big houses betting against positions they actively pushed to their customers. Academic economists from Harvard and U of C, who served in this and the last bunch of administrations, corrupted by consulting fees, pushing pure hokum and acting put out when called on it. And as long as the money pours in, Washington has enabled this for thirty years. And it brought us to the monstrosity of socialized risk, privatized gain.

      Of course, we are also to blame, to an extent. Excessive borrowing is a big factor. The CRA accounts for about 10% of bad mortgages, but most of the housing bubble was privately induced–people buying homes twice as expensive as what they should have been buying or lured into ARMs and whatnot. The easy access to money should never have been encouraged. Yeah it'd be nice if every human being acted responsibly and ethically but that's not human nature, that's what regulations are for. Hopefully we've learned a lesson about deregulation.

      • Jim

        If the housing prices were inflating to impossible then a potential home owner would almost be forced to buy sooner rather than later. If he waited to long he would be completely priced out of a home.
        The potential buyer would have little knowledge of the intensity of the fraud behind the rising prices.
        The buyer probably thought he was acting responsibly . As usual the public is very trusting of what they are told by so called professionals. The public will probably always be so.

  • alexander

    FULL U.S. employment! Stopping terrorism by defunding it! Simple solutions:
    drill wherever possible.Oh, it "does not look nice"?
    Unemployment lines and dead Americans look better?

  • Jim

    Truer words were never written Sounds more and more like the Occupiers, think God.

    (No not the would be co opters)