The stress tests are finished and the verdicts are in: The Bankers Have Won.
James Kwak and Simon Johnson of Baseline Scenario have a not-to-be-missed post that lay it all out:
In short, relationships between the government and the large banks have never been closer, with large amounts of money flowing in one direction, and complete co-dependency going in both directions. Those relationships are not entirely friendly, which is not surprising. In any crisis when public resources are called on to bail out the private sector, not all of the oligarchs will survive; Bear Stearns and Lehman have already vanished. But the winners – which should include Jamie Dimon of JPMorgan Chase and Lloyd Blankfein of Goldman – will emerge even more powerful and influential than before.
In rejecting “nationalization” (regulatory takeover and conservatorship), the government has not ensured a private, properly functioning banking system. Instead, it has muddled into a broken-down, undercapitalized system that is nominally in private hands, but is able to tap the state for apparently limitless support. And to date, that support has flowed on one-sided terms, with the taxpayer accepting downside risk but limited upside potential. No wonder bank shareholders are comfortable with this outcome.
As a result, the banks have largely preserved their existing management teams and bonus plans: on Wall Street, first-quarter accruals for bonuses returned to the levels of the glory years of 2006 and 2007. Creditors and counterparties have been kept whole, most notably through the AIG bailout. And shareholders have seen their share prices supported by the promise of sustained government support. The incentives we have ended up with are more similar to those of a nationalized system than those of a free market. Instead of state-owned coal mines run for the benefit of miners (the U.K. in the 1970s) or state-owned oil and gas companies run for the benefit of bureaucrats (the Soviet Union in the 1980s), we have state-backed banks in the U.S. run for the benefit of bankers and their creditors.
The smart economists in the Obama administration must know what is going on. But having insisted that large bank takeovers are tantamount to nationalization and therefore off the table, the administration is betting that the financial system will repair itself – or “earn their way out,” as StatsGuy put it.
This is possible. With the competition in both investment banking (Bear Stearns, Lehman) and mortgage lending (most of the specialist mortgage lenders) gone, the survivors all enjoy larger market shares and higher prices, contributing to their somewhat healthy profits in the first quarter. Even the large banks that receive the lowest grades in the stress tests will be given relatively cheap capital by the government; Treasury will use its resulting stakes to apply behind-the-scenes pressure to the banks (more government influence), but without taking decisive steps to clean up bank balance sheets. Instead, it will hope that the PPIP will do the trick, using cheap government financing.
According to Paul Krugman, H. Rodgin Cohen, once nominated by the Obama administration for Deputy Secretary of the Treasury, is to have made the following statement recently. “I am far from convinced there was something inherently wrong with the system.”
In short, the Change! that we all Hoped for last year is that the Democratic party is now firmly in the hands of the Republicans. Well, that’s what it looks like to me. I imagine that the smart, techy, creative class Republicans and Wall Street types didn’t much like living in the 14th century with the fundamentalist Goddies of their own party. They weren’t into war either. And they could see that the Republican party had sort of dug itself into a hole with Bush, DeLay and all the creepy GOP politicians who had issues with diapers and tapdancing in men’s bathrooms. (not that there’s anything wrong with tapdancing in men’s bathrooms but if you’re going to do it, for gawdsakes, get a room) The Republican party became so declasse. How does one keep mainlining money when you’re no longer on the A list? Hey! Why not take over the other guy’s party?
We should have seen this coming. Actually, I think *we* did see this coming. The traditional media is owned and operated by big corporations that love neo-feudalism and cut-throat competition where winner takes all. So, when they started praising Barack Obama like he was the second coming of Jesus, our antenna started to twitch. This was a media that was so in the tank for everything Bush for eight straight years and was opposed to everything Democratic, in their words “liberal” for eight years before, that their support of anyone would have to have been seen as self-serving.
But there were warning signs before the 2008 election. There was Joe Lieberman, for example. Ned Lamont won the Democratic primary in CT in 2006 but it was Lieberman who got the support of the party in the general. It was almost like the primary never happened. The party did what it damned well pleased. It was followed up with last year’s presidential primary where once again, the party chose the victor and bent over backwards in the most obvious way to finagle the numbers so that Obama’s disastrous experiment of forgoing the Michigan primary was not held against him. But there’s more! Now, we have Arlen Specter, newly minted Democrat who is having problems adjusting, given a guarantee by the party that he won’t face a primary challenger for the Democratic nomination for Senator next year. Yes, the governor of PA has just decided that voters need not apply, their choices have been made for them.
Maybe these party officials think they are doing us a favor by removing what must be an agonizing and difficult responsibility from us. Maybe they think we are too immature and untrustworthy to handle these decisions ourselves. I thank them for my part but I don’t need the kind of guidance they are providing. But maybe they think they can now get away with it.
I was watching Frost/Nixon the other night and one of the characters, a research assistant, tries to explain to Frost why it was so important to nail Nixon publicly. It was because he committed constitutional crimes and letting him get away with it with a pardon would come back to haunt us in the future. And it did. We don’t hold anyone responsible anymore for anything. Nixon got away with Watergate, Reagan and Bush with Iran/Contra, Bush II with torture. We let the Savings and Loan crisis happen and didn’t learn a thing from it. We watched the debacle at Enron and Tyco and clicked our tongues in sympathy for the employees that lost everything. But the finance industry at large has adopted Enron’s Wild West risktaking and accounting practices. And now, no one will be held accountable but the taxpayers for the trillions of dollars lost.
It didn’t have to be like this. We could have gotten off the emotional roller coaster last year when there was time. We could have asked the party what we were going to get in exchange for nominating this neophyte with the pockets overflowing with cash. We could have set conditions for his nomination, raised a ruckus when our votes were callously thrown away. We could have held the party accountable for the decisions it was intending to make. We tried. We were called racists.
This is what happens when you don’t ask for anything in return for your vote. Why buy the cow when you can get the milk for free?
And there is no such thing as being a little bit pregnant. We are all now well and truly fucked.