The Other I

September 16, 2011

Badder than I thought

When Lehman Brothers collapsed in 2008, instigating the collapse of huge banks in the U.S. and all over Europe, the very survival of our functioning economy was at grave risk.  I had to swallow hard like almost everybody else, but I thought then, and still think, that governments were right to rescue them with taxpayers’ money.

What I didn’t realize then was that this kind of rescue has been going on for years, and that banks had begun to behave as if they were insured by their governments.  They took risks they never would have taken had they not been assured that they were too important to be allowed to fail.

In his recently published book Age of Greed:  The Triumph of Finance and the Decline of America, 1970 to the Present, Jeff Madrick lists the bank busts that show that the credit crunch of 2008 is just the latest of increasingly bigger busts for the last forty years.

After the Great Depression, Congress passed the Glass Steagall act forbidding banks to use customers’ deposits to fund what is given the respectable name of “investment banking.”   This kept banking rather staid and stable, a service institution that greatly facilitated the processes in an economy requiring the exchange of money.

But then economic theory began to develop the idea that Greed is Good.  Greed itself might be selfish, the argument went, but the multiplication of money driven by greed, helped create a dynamic and expanding economy from which everyone, rich and poor alike, could benefit.   Alan Greenspan, hailed at the time as one of the most successful directors of the Federal Reserve in US history, bought into this doctrine.

The greedy, so the theory went, might be selfish, but they were not stupid.  And so they would not destroy the very systems, the goose, that was laying so many golden eggs.

And so it seemed.  More and more sophisticated computer-based and mathematically complex methods were instituted around the world to make billions of dollars.  Traders were given annual bonuses of millions of dollars.  They went out to $40,000 lunches.  They bought houses and cars and stocks in an ever-expanding stock market.  Economies around the world boomed, and the standard of living for millions of people rose.

Basically, banks were using customers’ deposits to engage in informed gambling with huge sums.  Were they aware of the risks?  Some undoubtedly were.

But they knew there was a safety net, one for which they weren’t even paying:  if all else failed, the governments would bail them out.

The rot began to set in about 1970.  Milton Friedman and Ronald Reagan between them convinced the public that big government is the cause of our ills.  People began to trust themselves and private institutions – including banks – more than they trusted Big Government.  Many of the Far Right in America are still adamant that Big Government is our biggest problem, which is why they don’t want universal health care, why they want social security to be privatized, why they are against raising taxes, and most government regulation.

By 1970’s, banks were pushing for the repeal of Glass Steagall that kept them on the straight and narrow.  They won and deregulation of the financial world set them free to do whatever they wished with depositors’ money.

But although banks were against the federal bailouts of companies like Chrysler in 1978,  Citi Bank needed help – and took it – when loans to Latin American governments failed in the 1980s.  Then there was the savings and loan banks, which were bailed out by Washington.  And then there was the big bust in 2008, and at this very moment, EU governments are meeting to find a way out of the euro-crisis.

Effectively this is not to save Greece or Italy or Ireland from defaulting on their debts.  It is to save the banks which are holding Greek and Italian and Irish and other threatened euro-country bonds.  Billions of dollars have already been poured into this enterprise, and conservatively, another 17 billion (yes, 17 billion) dollars is required just to stabilize a situation that might develop into a global disaster.

Banks took and will continue to take huge government subsidies to stay afloat.  And yet they continue to argue that they know best.  That government interference and nannying is the real problem that needs to be reigned in.  They are resisting with every conceivable strategy and all the funds they can find governments’ suggestion that investment banking should once again be separated from commercial banking.

Big government isn’t the problem.  Even people who took out sub-prime mortgages and credit card debts they could not sustain are not the problem.  Banks were giving out mortgages to people without ever even checking their employment status, convincing them that they too would be on the band-wagon of big money.

Actually, many banks are at it again already, leveraging customers’ deposits to gamble with.

And could they go bust again?

What do you think?

 

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