Friday, September 19, 2008

The Wrong Type of Government Intervention

Being the socialist-leaning guy that I am, you might think that Id be happy with the U.S. government’s recent “bold plan” of intervention in the financial crisis on Wall Street. Not so.

Why? Because it’s the wrong type of “intervention.” What the U.S. government is doing is a “quick fix” intervention on behalf of private (and reckless) business interests. It’s not a carefully thought through action for the long term common good of the public – the sphere that government is supposed to serve.

Authentic socialist values nourish community life and, as author and lecturer Ronald Aronson notes, “conceive a society that provides for the needs of every individual, including adequate means to live a decent life and develop each person’s capacities.” I don’t see Wall Street and so-called “free market” capitalism conceiving such a society or nourishing such community life. And since the U.S. government is more of a plutocracy than a democracy (i.e., the rule of money generally trumps the rule of the people), perhaps it’s not surprising that the government is engaging in this type of corporate pandering at tax payers’ expense.

As Bill Van Auken perceptively observes: “If the cataclysmic events in the financial markets over the past week have revealed anything, it is the complete subservience of every branch of the U.S. government and both major political parties to the banks and the biggest capitalist interests. Behind the façade of American democracy lies a dictatorship of finance capital that, under conditions of crisis, exerts its power directly and nakedly.”

Of course, the type of government “intervention” that’s needed and that would nourish community and protect the public interest, is a level of regulation of the private business sphere that would prevent such financial crises from occurring in the first place.

As a recent Wild Reed post has documented, this “melt-down” on Wall Street came about as the result of banks and investors taking risks on bad debts; as the result of irresponsible behavior of many within the corporate and banking worlds. In particular, we’ve seen insurance companies like AIG acting as a speculative investment banks/hedge funds. If we had regulations with real teeth, such behavior would not be tolerated but viewed as criminal and dealt with accordingly. Instead, we have a government not just stepping in and bailing out these crooks but, as Nomi Prins points out, “taking on the risk of items it cannot even begin to understand, because if it had understood them, this would never have gotten to the point to which it has gotten.”

Prins (pictured at right) is one woman who knows what she’s talking about, being as she is a former investment banker turned journalist. In fact, she used to run the European analytics group at Bear Stearns. She’s also the author of two books: Other People’s Money: The Corporate Mugging of America and Jacked: How Conservatives Are Picking Your Pocket.

Earlier this week, Prins was interviewed by Amy Goodman on Pacifica Radio’s Democracy Now! program. Here’s a little of what she had to say about the current crisis for U.S. and global capitalism. (I especially appreciated Goodman’s injection of a little humor into the interview when she asks Prins: “Could this [nationalizing of insurance] lead to single-payer healthcare?”).


Amy Goodman: How did it get to this point? How did it go beyond insurance?

Nomi Prins: In AIG and in Lehman and with Merrill and every other company on Wall Street that has faltered or is faltering, it’s about taking on too much leverage and borrowing to take on the risk and borrowing again and borrowing again, twenty-five to thirty times the amount of capital, the amount of money that they had to basically back the borrowing that they were doing. Human regular borrowers cannot do this. This is something that is an item only of the banking industry.

And not only was all that borrowing happening, but there was no transparency to the Fed, to the SEC, to the Treasury, to anyone who would have even bothered to look as to how much of a catastrophe was being created, so that when anything fell, whether it was the subprime mortgage or whether it was a credit complex security, it was all below a pile of immense interlocked, incestuous borrowing, and that’s what is bringing down the entire banking system.

Amy Goodman: How has Wall Street changed? And how does this meet everyday people? Lehman, bankrupt; you’ve got AIG nationalized, same with Freddie and Fannie; you’ve got the takeover of Merrill Lynch, now part of Bank of America — happened over a weekend.

Nomi Prins: It’s insane, actually. It’s bad math, and it’s a bad precedent, because they’re not simply bailing it out with putting taxpayers’ money through the Fed into taking on the risks of these companies; they’re taking on risks. They’re not bailing out and selling debt; they are taking on the risk. They’re becoming — the Fed is continuing to become a larger and larger hedge fund. And it’s doing it with taxpayer money, and it’s doing it with the future debt of the United States.

So, for the one thing, they’re not attaching any rules to these bailouts. You know, you bail out Bear Stearns, effectively you’re putting up $30 billion to take Bear Stearns’s junk and say, “Alright, we’ll back the junk. JPMorgan Chase, you take Bear Stearns. We’ll back whatever junk is there.” But there’s no decision to say, “But, you know, you’ve got to tell us what’s there. And JPMorgan, by the way, as you’re taking on this bank, you have to explain to us what you really have. And Bank of America, you have to explain to us what your risks are.”

I know that at Bank of America they were struggling with their own risks and trying to figure out what was going on in their own company, and now they have assumed Merrill Lynch. That creates a tremendous institution, where the Fed is now obligated, when that starts to have more and more trouble, which it will.

Amy Goodman: What started all this?

Nomi Prins: What started all of this was a complete lack of transparency and regulation in the banking system. If we go back to a history where we had a similar situation on Wall Street, which was 1929, when we had a stock market crash followed by a Great Depression, in 1932, when FDR was elected and Herbert Hoover was ousted, right after that, we put together — he put together —

Amy Goodman: But interestingly, FDR didn’t come in on a plank of changing everything the way he did. It happened — didn’t it? — after he became president with —

Nomi Prins: He had to take a look at the banking system, which was undermining the general economy, which had undermined the general economy, and say, “You know what? We do not understand what’s going on here. We have two types of banks. We have speculating investment banks, and we have commercial banks that deal with the public, take deposits, take savings, make mortgage loans, understand what’s going on. We’ll back those. The government will back those commercial institutions that deal with the public. It will not back speculative investment banks. And, by the way, those two things have to split. You pick a side. You want to be an investment bank? You be an investment bank. You want to be a commercial bank? We’ll back you. The Fed will back you. We will be there. We’ll create an insurance company, the FDIC, to back deposits for the public. We’ll have your back.” There was no — there was no agreement to have the back of the speculative investment banks.

Over the years, these things have merged and merged and merged. And in late 1999, [the] Glass-Steagall [Act]* was repealed, killed, died in Congress. And now you have a situation where everything that went wrong up until the creation of that act is happening now with a lot more capital and a lot more international interplay and a lot more money on the federal government to have to bail out when things go wrong. So, we have gone backwards in banking history, and having Merrill be a part of Bank of America is a tremendously big accident waiting to happen. Bear Stearns’s assets part of JPMorgan — they’re all part of recombining speculation and commercial.

Amy Goodman: Nomi Prins, you worked at a number of these places, like Bear Stearns. You worked at Lehman Brothers, too, now bankrupt. Let’s talk about the money that Obama and McCain get. According to the Center for Responsive Politics, Obama, it’s nearly $10 million from the securities investment industry; McCain, it’s nearly $7 million. So Obama actually gets more. Employees of Merrill Lynch, the investment bank that’s been taken over by Bank of America, have given the largest corporate money to Senator McCain’s campaign, Merrill employees giving some—close to $300,000 to McCain, close to $200,000 to Obama. Lehman Brothers, which filed for bankruptcy, given—has been the eighth-largest corporate giver to Senator Obama’s campaign. Democrats have become increasingly reliant on Wall Street money. The industry ranks as the third-biggest giver to Senator Obama’s presidential campaign. How does this influence the debate, and what are the proposals of the two men?

Nomi Prins: Well, the proposals of McCain have to do with—well, they’re very nondescript. Basically, he says there is a greed situation, and we need to contain it. And we need —

Amy Goodman: And he says we have to set up a commission.

Nomi Prins: We need to set up a commission to understand what’s going on. Well, we have seven different regulatory bodies in Washington, and they’re supposed to be watching various aspects of the financial community. And we have state ones that are supposed to be watching over insurance companies. So we actually have regulatory agencies. And Obama has basically said the same thing. He wants to strengthen the ones that do exist.

The problem is being connected to Wall Street, in terms of your funding. And Washington, in general — Wall Street, in general, was the biggest contributor to all of the politicians in Washington over the last decade. It’s where the most money comes from. So you have a situation where that money doesn’t want oversight, even when it so badly mismanages and over-leverages and over-bets and gets into such a tremendous problem that we haven’t seen. They don’t want the regulation.

What you should do, what the candidates should do, is step back and say, OK, well, you know what? Instead of having them dictate the terms and us coming in to bail them out with no strings attached — we’ll bail you out, and we won’t even ask you to explain to us what the heck has been going on with your balance sheets; we’re taking stuff on we don’t even understand — actually have to make it transparent and actually have to dissect the businesses back into a form where speculative businesses and commercial businesses are once again separated, at least until our government can understand what’s going on and understand the hook onto which they’re taking American public money to bail them out.

Amy Goodman: Maybe injecting a little humor here, could this lead to single-payer healthcare? I mean, we’re talking about nationalizing of insurance.

Nomi Prins: You might as well nationalize insurance.

Amy Goodman: And why does that have to be humorous?

Nomi Prins: Well, no, exactly right. If you’re effectively nationalizing a portion of the banking—you’re nationalizing the worst portion of the banking system is what you’re effectively nationalizing. But you’re not even doing that, because you’re not running as a public entity. You’re taking on risk you won’t be able to understand, and you’re not even trying to. So it’s even more dangerous.

With health insurance, which actually those companies have not sort of been involved in this, because they haven’t had the same derivatives, type of financial services, speculative activity that AIG has under its umbrella, which is the real reason it is imploding, you could actually put some money into something that preempts a problem happening and helps people get healthcare.

Amy Goodman: [Imagine] you’re being called in by Senator McCain and Senator Obama to make your recommendation to them. They would maybe give you fifteen seconds, if they give you that. Nomi Prins, what are you going to tell them?

Nomi Prins: It’s very simple. You don’t understand the system, so you know what? You take some guts, and you create a situation where you dissect the system. You don’t merge it; you dissect it. And you make accountable what is going on within each segment of the speculative and commercial banks, so that you know what’s going on, as was had to do in 1933, because that will create an actual stable system that the government can actually understand and quantify.

* According to Michael Hudson: “Glass-Steagall was designed to prevent what has happened. It was designed to keep investment banking apart from commercial banking. Now you have the banking system taking—merging with the most crooked companies in the country, like Countrywide Financial that’s under indictment by attorney generals all over the country. You’re having the banking system commit its deposits and its space to recycle the savings not into industrial investment, but into exploitive loans.”

Recommended Off-site Links:
Why Fed Reform Won’t Work - Nomi Prins (Slate, March 31, 2008).
Obama’s Response to Financial Meltdown: Deception and Subservience to Wall Street - Bill Van Auken (World Socialist Web Site, September 19, 2008).

See also the previous Wild Reed posts:
A System That’s Not Going to Survive
R.I.P. Neoclassical Economics
Capitalism on Trial
John le Carré’s Dark Suspicions
A Lose/Lose Situation
John Pilger on Resisting Empire

Opening Image: Treasury Secretary Henry Paulson talks with reporters after meeting with Congressional leaders on the current economic crisis Thursday, September 18, 2008 on Capitol Hill in Washington. At right is Federal Reserve Board Chairman Ben Bernanke, 2nd right is Speaker Nancy Pelosi, D-Calif., and second left is Securities and Exchange Commission Chairman Chris Cox. Paulson says the government is crafting a plan to rescue banks from bad debts that are at the heart of Wall Street’s worst financial crisis in decades. (AP Photo/Lauren Victoria Burke)

1 comment:

Frank Partisan said...

Really good post.

Even the real estate market is up, it is not the same type of capital, as productive forces as new technologies. There is so much speculation involved, even on a good day. Money goes to speculation/rent.

Amy Goodman has been exceptional in her coverage of this issue, and the RNC.

I heard the charges against her were dropped.