The Big Bad Banks: The Beatings Will Continue Until Morale Improves

First, we see our government low-balling the expected returns for the Tarp investments in banks so that an additional tax on banks can be justified—including banks that never receive the investments and excluding nonbanks that did. Now proprietary trading is verboten even though there is no evidence that it had anything to do with the crisis. The same goes for hedge fund and private equity. Have we totally forgotten about the making and securitization of subprime mortgage loans? I would say the war on banks is getting curiouser and curiouser, but I’ve already used that line to describe this new wonderland.

Every politician wants to be perceived as a populist these days. They want to be perceived as anti-establishment, and I guess nothing is more identified with the establishment than the Federal Reserve. So, throwing Ben Bernanke—the guy who, along with Henry Paulson and Tim Geithner, saved the country from a second great depression—under the bus will be perceived to be good politics. I guess Geithner will be next. Taking irresponsible actions to atone for responsible actions is apparently the new norm for our leaders. Have they no shame?

Once upon a time, mainstream leaders tolerated populists nipping at their heals and pretty much ignored their irrational policy prescriptions. Of course, there was a time when populists had a policy prescription, such as a silver standard rather than a gold standard. I don’t see one now, other than to be against everything the government and the Fed try to do to stop the panic and restore health to the economy. “Just say no” makes a better slogan for teenage temptations than for economic policy. Thinking people would examine the issues and make distinctions between remedies that are reasonable and those that make no sense. Of course, thinking is suspect these days, a sign of softness.

Maybe bank bashing is the best way to encourage bank lending to support economic growth. Maybe tax increases are the best way to stimulate the economy. Maybe punishing Gentle Ben Bernanke for his good work will produce some good that I can’t conceive of. Maybe having government accountants second guessing monetary policy will improve policy. Maybe politicians following the mob will be taken for leadership. Maybe.

Comments (12)

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  1. Jon says:

    Respectfully, I think you are so embedded with the mind set that the Fed is infallible that you cannot see what is obvious.

    Bernanke did not see the crisis coming and takes zero responsibility for the crisis. How do we know he “saved” the economy? If the economy was so bad as you say it was, then you support the removal of Bernanke because his leadership allowed the economy to approach the cliff. How can you support the man that is most responsible for the crisis? “Saving” the economy is irrelevant.

    You may know the man personally, and I am sure he is a descent man and is well intentioned. But he failed in his leadership role; therefore, he should be removed.

    Here is your policy prescription: End the Fed and reinstate a government backed monetary system. Its not what backs the currency, but it is who controls the quantity. The Fed has manipulated our currency long enough, and look at where we are. You claim under this monetary system we almost had a second Great Depression. By your own emission, the Federal Reserve failed, and we must begin searching for an alternative monetary systems. The monetary system is broken, and the American people know it.

  2. Nemo says:

    Want to respond to the “populists”?

    Explain how the mega-banks are earning record billions in profits, and handing over record billions in compensation to their executives and employees, at the same time the economy is suffering a near-depression.

    Aren’t the banks supposed to be mere facilitators of real economic activity? If so, then how are they breaking records when everyone with a real job — those who still have one, that is — live in fear of losing it?

    Where are those obscene banking profits coming from, exactly? It couldn’t possibly have anything to do with trillions in freshly-created dollars from a certain central bank, could it?

    Some of us would rather risk a depression than watch a bunch of parasites walk off with the nation’s wealth. If you want to persuade us of anything, you will need to start by understanding this.

  3. W.C. Varones says:

    Bob,

    I’d be interested to hear your proposals for dealing with the TBTF banks.

    It’s clear that there is a huge moral hazard problem with these banks knowing they will always be bailed out at taxpayer expense. The banks also get Fed-subsidized borrowing, effectively a transfer of wealth from taxpayers to bank shareholders and employees.

    Obama’s latest solution (whether for the right reasons or political opportunism) is to reduce the leverage and split off the speculative investment banks from the taxpayer-guaranteed, Fed-subsidized commercial banks.

    That seems like a pretty good, common-sense solution to me.

    What do you think?

  4. EHROSEN says:

    Well, honest men can disagree and I disagree with the tone, if not the content of this entry. First time for everything I guess.
    Bernanke and Paulson are well intentioned patriots who did what they thought was right. I agree with that and that Ben does not deserve to be blamed for the complex multidetermined breakdown where he was more hero than villain.
    But, was he right? Was the AIG bail out good for our country the way it was executed? Is it fair to say no one can know what is on the Fed’s balance sheet? Should the Fed, a non elected body, have the power to allocate public funds to the degree that they have?
    I worry that the tone of your piece might intimidate equally patriotic well intentioned Americans to fear raising such issues and risk being labeled “populists”.
    Mitch McConnel struck just the right open minded tone in supporting Bernanke today on Meet The Press. America’s enemies want to divide us, let’s extend a hand towards uniting.

  5. John B says:

    JP Morgan Chase bought Sempra Energy’s trading company last week and put Blythe Masters in charge of commodity trading. I can see how it might help Texas oil men and Wall Street banks. I can also see how it might squeeze the “mob.”

  6. john says:

    I don’t like the bank bashing, but they have also brought a lot of this one themselves through irresponsible behavior and poor customer service.

  7. Bob McTeer says:

    To EHROSEN

    Thanks for your civil tone. Regarding fear of being labeled populist, the opposite is going on with our politicians. They are falling all over themselves trying to jump on the populist bandwagon. Regarding what’s on the Fed’s balance sheet, conspiracy theorists would never be satisfied. However, the Fed actually publishes its balance sheet weekly. It is audited by a private audit firm, and frequently by the GAO. The issue over Ron Paul’s audit bill is that it specifically includes the audit of monetary policy. Regarding total immediate revelations of all the Fed’s activities, it has been trying to calm financial markets and stop the rot from spreading. It would defeat its purpose in that regard to immediately point the spotlight over all borrowers.

  8. Bob McTeer says:

    To WC:

    I don’t have a good solution to TBTF. Most solutions that would work would also make our banks less competitive in the world economy.

    One minor point regarding the transfer of wealth from taxpayers to bank employees and stockholders. The Fed’s activities to hold down rates generally involves increasing its purchases of assets, which increase its earnings, which increase its transfers to the Treasury’s general fund (taxpayers). It’s hard to help banks without helping them.

  9. Bob McTeer says:

    Jon:

    Regarding the Fed mindset, that might be true. When I was there, however, I dissented three times. Those were times I thought the majority was wrong.

    It would actually be in my personal interest if I thought it was wrong now. Then I could rail against it and be invited to appear on TV more often and to make more speeches. Being pro-Fed is bad for my personal income but I try not to let that determine my views.

  10. gail lightfoot says:

    Hi Bob,
    We met at the ISIL COnference in France in 2001. I looked back at the brochure to find your name which I insist on confusing with Bob Bidnotto [sorry].
    I am very interested in what you are saying about Bernanke and the Fed since to my limited understanding of economics curent Fed policy is an echo of the 1930s and I have been led to believe that the Great Depression ended either 1. with WWII spending or 2. individual turst in banking institutions and the increased saving accounts in bank instead of under the mattress. Am I to simple minded? Or being misled?
    I have always felt that ‘pushing paper’ from desk to desk was not a positive productive way to build a strong economy. I could never see a real tangible service or product in such paper pushing? In my mind the layer upon layer of fee takers only increases the cost of investing in stocks while reducing the actual capital needed to build a business.
    Our govt has been first in line to operate on credit and the banks have been happy to continously increased our credit card limits and accept minimum payments from us while we accepted it as out due.
    Why have the economists let us continue without warning us of the danger?
    Do you truly believe bailing out banks and increasing the many subsidies is a wise long term solution?
    Do you truly believe that govt control and Five Year Plans will bring stability and econominc growth?

  11. W.C. Varones says:

    Bob,

    When I speak of the transfer of wealth from the taxpayer to the banks, I’m not talking about the accounting profits the Fed returns to the Treasury.

    Those “profits” ignore the collapse in purchasing power of the dollars held by individuals (97%+ loss since the Fed began debasing), and they ignore the loss of earnings on savings. Grandma is getting 0% on her savings now and having trouble heating her home and eating so that Goldman can pay out record bonuses.

    Yes, the Fed can always print trillions to buy Treasury debt and then report the interest on that debt as “profits” that it is generously giving back to Treasury, but that is farcical.

    And even with the Fed’s “profits” from printing, we still have to run trillion-plus dollar deficits to try to keep this Keynesian Ponzi scheme afloat.

  12. Fernadinho says:

    Some of your economic coepncts are off I’ll give you a clue on one NEWS FLASH:Hyperinflation is not caused by paper money. Peter: Yes it is. It is not caused by too much money. It is caused by unpayable interest rates.
 Nonesense, it’s a side-effect, it’s not the cause. High interest rates where caused by a lack of confidence in the economy, nobody was willing to lend money any more to the government, and the government was so desperate to get their hands on cash, investors were only willing to lend them money at 800% interest. Now, in order for government to pay this money back, because they never had it in the first place, they started printing money. This led to inflation in the economy and people started demanding higher interest rates because of the higher inflation it was a vicious circle. The bond market, will also set interest rates in the market, despite what a reserve bank sets interest rates at the bank lending window at.Sounds like you’re still in Zimbabwe what’s the point? Get out, leave.Fact: Interest Rates in Zimbabwe were 800% in 2007
Fact: The Overnight Rate Charged By Zimbabwe’s Reserve Bank is 10,000%
Fact: The 91 Day T-Bill is at an interest rate of 66.33%
Fact: Their Government has to hike taxes to pay the T-Bill rate at its maturity. Taxes up to 79%!
Fact: Unemployment in Zimbabwe is at 85% and HERE