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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