[by Andrew Pollack]
On Feb. 10, Treasury Secretary Timothy Geithner broadly outlined the Obama administration’s rescue package for U.S. banks. He said that the new program would require collecting as much as $2 trillion from the Treasury, the Federal Reserve, and private investors.
Geithner acknowledged that people in the United States have “lost faith” in financial institutions and the federal government. He pointed to the Bush administration’s bailout efforts, in which $350 billion was given away to the major banks, with virtually no strings attached. Geithner said, “The spectacle of huge amounts of taxpayer money being provided to the same institutions that caused the crisis, with limited transparency and oversight, added to the public distrust.”
Despite this admission, the Obama bailout plan includes a combination of new favors to capital. As requested repeatedly by Wall Street, it would include an agency to buy troubled assets; federal guarantees against losses to banks from these assets; and more government purchase of stakes in failing or failed banks.
Of the last option, the Washington Post warned that “the prices of bank shares are so low that the government risks owning these firms outright if it makes a major investment of taxpayer money.” This, said the paper, runs counter to the ideological preferences of Obama and advisers, although they leave open the option of such “nationalizations” for banks “too big to fail.”
Goldman Sachs estimated that a new “bad assets bank” would have to take $4 trillion in debt off the private banks’ hands. That would equal nearly 1/3 of U.S. GDP.
This new bailout comes in the face of a study released in late January showing that lending at many of the nation’s largest banks fell in recent months despite the money received in the first bailout. Said Campbell Harvey of Duke University’s business school: “We dropped a huge amount of money and we have nothing to show for what we actually wanted to happen.”
Despite White House pledges to use part of the new bailout to help homeowners and small businesses, the Post said other senior government officials and economists expect the bulk of the funds to continue going to banks.
The banking crisis is so deep that even some mainstream economists believe government ownership of a minority of stock will very soon prove inadequate: “The case for full nationalization is far stronger now than it was a few months ago,” said Adam Posen, deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire management, wipe out shareholders, to declare that you are just going to take the losses and start over.
“I would guess that sometime in the next few weeks, Obama and Geithner will have to come out and say, ‘It’s much worse than we thought,’ and bite the bullet.”
But The New York Times reports that Obama is wary of such “nationalizations,” not only for ideological reasons but also for fear that “if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies.” This from the man who is being accused by Republicans of using the crisis to socialize the economy bit by bit!
Even fear of partial “nationalizations” has prompted predictions of investor flight or further bank cutbacks, as bankers fear that when Washington takes over one bank, the access of others to capital, or the value of their assets, will be correspondingly diminished, leading to the need for further bailouts.
Although they make this argument out of self-interest, not just banker greed, but more importantly, the laws of competition in an anarchic market lend such arguments a perverse truth. For socialists, this means that the only real alternative is 100% nationalization of all the banks, and their amalgamation into one public institution under workers’ control.