End the bailouts!

One of the biggest problems about all these bailouts is that we are repeatedly throwing money at the very institutions and people who wrecked the economy. We’re rewarding those who got us into this mess, mostly by virtue of the fact that they successfully backed us into a corner in which competition has broken down and they and are now “too big to fail.” We have to find a way to get out of our vicious cycle of rewarding those who deserve to experience the consequences of their actions. We have to find a way to get stimulus right to where it is needed: rebuilding an economy based on competition AND some degree of fairness. 

Make no mistake, a “free market” system that can’t survive a crisis without massive government bailouts has already failed – it is like a boat that floats well enough until you leave the beach. Something else may take its place and provide some continuity, but it is no longer a free market. If we want to see a more-or-less market based system (hopefully much better than the last one) in the future, we had better admit that we don’t have one now.

Jamie Dimon of JP Morgan Chase is not ready for this admission; in fact he recently tried to avoid responsibility in his remarks at a U.S. Chamber of Commerce conference. He says the situation is “complex” and we should end the “vilification” of corporate America. Unfortunately for him, the situation is actually pretty simple: Corporate America collectively blew it, and he personally blew it a lot worse than most. Sure, not everyone is a real villain like Bernie Madoff and some people actually tried to stop what was happening. But ultimately, there was a colossal collective failure based on people doing what capitalist ideology says they should have done.

Dimon came right out and said to the investors who moved to more conservative positions as the collapse began, “When people say ‘what caused the crisis?’ You did. And I’m being completely honest  about it.” The leadership (like Dimon) should have known better and they should have stopped this before it threatened the entire economy. They did know that problems were brewing – he now admits there was “excessive leverage everywhere.” 

Jon Stewart had a moment of clarity last night while skewering Jim Cramer (of CNBC’s “Mad Money”), taking him to task for being a cheerleader to the corruption that has brought down the system. The full interview is worth watching, and along the way Stewart delivers one of the most damning assessments of what went wrong. He observes that there were two markets. One was made up of  long-term investments and used by mostly clueless people who depend on it for their retirement. The other was based on rapid transactions and active speculation, and populated by high-rolling gamblers who play high-stakes games with other people’s money. The former provided the raw material for the latter, which was essentially parasitic.

Stewart asked, “Any time you sell people the idea that ‘sit back and you’ll get 10-20 percent of your money, don’t you always know that’s gonna be a lie? When are we gonna realize in this country that our wealth is work?” To Cramer’s credit, he openly and repeatedly admitted the error of his ways, joining Alan Greenspan at the top of the list of chastened capitalist gurus. And Stewart also pointed out that it is unfair to blame everyone on Wall Street for this mess, since many are hard working people of integrity. Despite the systemic nature of their failure to run a stable economy, I will give them that.

Nevertheless, the capitalist casino has already failed despite their hard work, and it would be utterly foolish for us to trust it with another nickel. We need every cent to invest in a real economy based on sustainable productivity rather than gambling. 

Even more alarming, the entire system of deposit insurance for banks is running dry, largely due to a colossally stupid move by Congress, which stopped collecting insurance premiums from 1996 to 2006 because it thought that the fund was over-capitalized! 

The FDIC, which is now providing up to $250,000 protection per account (recently raised from $100,000, in another colossally stupid move that potentially drains the fund 150% faster than before and rewards rich people in banks that fail quickly at the expense of everyone with deposits in banks that fail later) with the result that the fund is now down to around $17 billion. It was at $18.9 billion Dec. 31 (after losing $33.5 billion in 2008), but there have been 17 bank failures since then. These additional failures have collectively cost the fund close to $2 billion (you can look this up yourself at the FDIC bank failure press room, which buries how much damage each failure has done at the end of a number-laden press release).

There are several ways to look at the state of the FDIC, and none of them reflect well on the system’s overall integrity: First, it is required by law to keep this fund between 1.15 and 1.5% of insured deposits, and way back at the end of 2008 it had already dropped to 0.4% (17 failures and $2 billion ago). Second, the FDIC estimates that it will need about $65 billion to ride out this storm; if Citigroup or Bank of America go down, the fund will be drained in an instant.

Finally (and this is where I actually get a little bit positive), this balance is only about twice the size of the National Credit Union Share Insurance Fund (NCUSIF), which still has more than $7 billion in it despite the credit union sector being only about 1/8 the size of the banking industry – four times better than FDIC. Plus, the NCUSIF fund is stable and there has never been a taxpayer-funded bailout of a credit union.

Considering that credit unions are weathering the financial crisis much better than the average bank, it seems like we should be throwing money at those democratic financial institutions; they distribute profits back to the depositors in the form of lower fees and better interest rates, rather than spending it on “bonuses,” corporate jets, and anti-union conference calls.

Unfortunately, many credit unions face strict legal limits on their business lending.

Fortunately, Senator Charles Schumer (D-NY) seems set to propose that this rule be repealed. This is a great start, but I would go farther. Rather than subjecting bailout recipients to government oversight, the bailout funds might be delivered in ways that convert ownership to account holders, ideally in a democratic way that creates direct accountability to customers rather than indirect accountability through regulations. This is standard for credit unions, and a big part of why they are not failing like many banks are. So we should essentially require that bailed-out banks eventually become some sort of mutual.

We should also admit that the FDIC is dangerously close to collapse, and therefore put a moratorium on coverage on new deposits into FDIC-backed institutions. I suspect that the main argument against this is that the banks would surely collapse. Of course, if we follow that rationale, people should keep investing with Bernie Madoff or “Sir” Allen Stanford to help those poor widows and charities that have lost everything. The need to keep bringing in new money is a clear indication that the system cannot survive in today’s environment. Bailouts only postpone the inevitable and make the damage worse when the crash finally happens.

Some banks are also doing well, so why exclude them from the efforts to get the economy back on its feet? The main problem with this is that they have the same structural DNA of the banks that have failed. Unless we can find a way to keep control local and prevent consolidation of economic power into very few hands, we will go through this same cycle again. The survivors will snap up those who fail, and build new empires. Capitalism rewards greed, and so the greedy will continue to rise to the top.

We have a great opportunity to stimulate the economy by rewarding those who did good, by encouraging the development of models that combine market competition with internally democratic and just structures. Or we can just do this all over again and have another Great Depression now, followed by more in the future until we learn our lesson.

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