by Patrice Ayme
Wed May 6th, 2009 at 12:44:33 AM EST
BANKING CLARITY A MUST TO REPAIR THE ECONOMY.
Stiglitz and Krugman had dinner with Obama. Krugman said he could not talk about it, because it was "off the record".
What should be on the record is this: the banks have a primary function, and a secondary function. Absent these two functions, it's as if there are no lungs, and no heart: the corpse of capitalism can't walk.
It is not clear that these two functions that define banking philosophically have been insured as much as they should have during the first four months of the Obama administration, while it was busy pursuing further the financial policies of the Bush administration.
Instead a great deal of attention was given to having the bank holding companies make good the very contracts that put in danger the very ability of the banks to conduct these two basic functions.
The two functions were the deposit of capital (which is primary), and the ability to extend credit (which is secondary). Obama had to insure both. I am not sure about the second, because I have not seen authoritative studies. But for the first it was easy: just do like the French republic. In France Sarkozy decided that all deposits would be insured, in any amount, in any bank. It provided the country with a lot of confidence. Since the currency system is a myriad of contracts in trust, this was crucial, as fundamental a measure to take for the economy as possible. Relative to this, the waste of toxic "assets" was completely irrelevant, just as irrelevant as it should always have been to banking.
Just an example of the sort of difficulty the refusal of insuring all deposits led to: millions of small businesses may only find difficult to maintain balances below $250,000. This is all the more silly, since the Obama administration made clear it viewed the 19 top banks as too big too fail (thus there was no risk insuring all and any deposits; in a huge contradiction, though, depositors did lose their money in smaller banks going in receivership!)
Addendum: REPAIRING BANKS: Stiglitz called Geithner's PPIP a "robbery of the American people". I agree. But a week later, Obama repelled the mark to market rule, and that pretty much made the PPIP unworkable. The ways of Obama are not as mysterious as those of God: one week he makes a blatant gift to the hedge funds, delivered by his human poodle, and the hedge funds are all happy that the plutocrats are solidly in control, and the week after, Obama takes away their food, but they are too stupid to notice.
Stiglitz and Krugman opposed the conversion of preferred to common stock. Indeed the preferred route for cleaning the banking system would have been receivership (the bank fails, and is reorganized by the government, and then sold for a profit). The point being that the USA then takes ownership of the bank for the cost of recapitalization. The drawback is that severe disruptions to the financial system can happen as shareholders lose everything and bond holders can lose a lot.
The Obama administration had first followed the Bush administration policy (reimbursing losses with taxpayer money, which I have long argued was unworkable: I valued the losses at 8 trillion, minimum; now the IMF is at three trillions in the USA alone). Thus I was satisfied by the conversion into common stock (which has the right of vote, that preferred do not have). It is as good as nationalization can get, once receivership has been excluded (for the reasons of the disruption that bothered Obama).
Obama argued that this was how to make the TARP money go a long way, just as I had argued last September (OK, there was no TARP yet, but it was clear that "If you want leverage, nationalize!").