Stiglitz: U.S. Paying for Not Nationalizing Banks
“We have this very strange situation today in America where we have given banks hundreds of billions of dollars and the president has to beg the banks to lend and they refuse. What we did was the wrong thing. It has weakened the economy and has increased our deficit, making it more difficult for the future.”
-Joseph Stiglitz
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Any time Joseph Stiglitz calls out the government on their bad decision making, its worth reading:
“Nobel Prize-winning economist Joseph Stiglitz said the world’s biggest economy is suffering because of the U.S. government’s failure to nationalize banks during the financial crisis.
“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters at an economic conference in Shanghai Oct 31. “They would be lending and the economy would be stronger.”
Stiglitz has stuck with his view even after the U.S. economy returned to growth in the third quarter and as banks’ share prices climbed this year…
The U.S. government plans to alter the way that a similar rescue would be handled in the future. Draft legislation proposes that banks, hedge funds and other financial firms holding more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system.”
Why are we constantly governed by fools?
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Source:
Stiglitz Says U.S. Is Paying for Failure to Nationalize Banks
Bloomberg, Nov. 2 2009
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGR4KXaGwxd8
November 3rd, 2009 at 1:17 am
“They would be lending and the economy would be stronger.”
And who exactly should they be lending to?
See Mish on Why Banks Aren’t Lending:
With all the debt that Americans have right now, I don’t think more “lending” would solve the problem.
November 3rd, 2009 at 1:38 am
Barry,
“Why are we constantly governed by fools?” Because half of Americans don’t vote, and the vast majority of those that do participate vote Democrat or Republican.
November 3rd, 2009 at 1:46 am
I doubt that “nationalizing” the banks would have solved our problems. Government control would likely have substituted the current set of problems for others. Check out how GM is doing….
November 3rd, 2009 at 2:47 am
Whay are we constantly governed by fools?
Because we vote for them?
November 3rd, 2009 at 3:23 am
banks make more money speculating … why should they lend to a company that makes a profit of 1-5% profit per year, if they can make 5% per day speculating?
they only lend the leftovers. there are too many investment “opportunities” now, so …
those in government are no fools, they knew what they were doing!
November 3rd, 2009 at 4:04 am
They are not fools. It would be more comforting if we could write them off as crazy or out of touch. The truth is far more frightening. They are weak and corrupt, the natural offspring of a system whereby the weakest and most corruptible rise to govern our nation.
Everyone who posts here knows at least one man in their life that they would classify as great. Sadly, these tyes of men are typically driven far, far from Washington. Hopefully, things can get bad enough for us that we are driven to take our nation back from the scum who are runnin the place now.
And as far as the Government nationalizing the banks?
I would say the banks privatized the government. Facism, not socialism.
November 3rd, 2009 at 4:57 am
Yeah, but even if you do vote, it’s like splitting hairs in the crony gene pool. I have to say, great point i.e. “cars, pizza huts, houses”
November 3rd, 2009 at 5:17 am
We are governed by self-serving individuals who do not see any negative recourse .
If one’s mission is to get re-elected, then one will accept campaign contributions and in return lean towards favorable legislation.
If one expects to land a high paying job in the banking sector after “paying your dues” in public service, then one will tend to be more receptive to banking industry concerns when drafting regulations.
Humans have a strong ability to rationalize in order to justify their actions. Thus these individuals truly do not think that their actions are wrong.
There is always some degree of rationale that can be made for any position on legislation and regulations. Government leaders will simply most often side with the rational that serves the bank’s and thus their own best interests. The banksters are clever enough to understand how the human psyche works and how to play it to achieve their objectives.
We will not get good governance until these circumstances are changed or until fear of consequences over takes self-serving interests.
How can circumstances change? Real campaign reform. Ban governmental employees from accepting positions in private sector firms that they governed over.
How can fear of consequences change behavior? Threaten to vote out all incumbents. Vote for candidates who pledge that they will fire corrupt and self-serving government officials. Let your representative in Congress understand how strongly you feel about this.
I voted for Obama because during the campaign he acted like a statesman. In office though, every indication is that he shares these same self-interest obsessions which may be one reason why the young have become less enthused with him. We really need a leader today who will take the nation’s interests to heart first. I hope Obama will come around, but I do not expect it.
It might be that the government-banking co-dependency is much like an individual who suffers from an addiction. That individual has to hit rock bottom in his life before he is willing to change his behavior. In the present instance, it is likely that our economy will have to hit rock bottom before we are willing to demand the changes in Washington and the banking sector that are needed. If so, it will not be pretty.
November 3rd, 2009 at 5:53 am
I just cannot believe that “nationalizing” these TBTF banks would have been the right thing. These banks should have been allowed to go out of business, been restructured and broken apart. Having nationalized banks loaning money to whomever for whatever political or other reason just is wrong. We need to de-leverage our economy and though that will take time, it ultimately is the right thing to do.
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BR: Thats what Stiglitz is referring to: Temporary FDIC control as part of a prepackaged bankruptcy — then spun out again with adequate capital and without bad debt.
November 3rd, 2009 at 5:57 am
banks won’t lend because they know we’re in for a multi decade decline. Even if they were well capped and well managed they wouldn’t be lending enough to prevent deflation. They would be stupid to do so.
That leaves four options:
1. nationalise them and then just lend lend lend. Will result in inflation > growth and negative real rates, and much handwringing about socialism.
2. leave them private and ask them nicely to lend. Will result in deflation and in the end collapse of the banking system and FDIC followed by massive printy printy to make good on FDIC commitments, leading to much handwringing about socialism.
3. force them to lend and then monetise the banking losses. More or less 1, but with far greater opportunity for moral hazard and taxpayer ripoff, leading to much handwringing about socialism and facism.
4. force them to lend and have savers take the losses, leading to handwringing about how prudent savers are being taxed. tricky to implement but the lesser of 4 evils IMO and my preferred option, as it is the most free market of all the options.
November 3rd, 2009 at 6:05 am
“Socialism” seems to be a spam word (?!?)
So too (more obviously) “Casino”.
I’ll look into fixing the first
November 3rd, 2009 at 6:09 am
Dollar soaring today…futures hate that. I love it…will lower gas prices and delay the plan to debase our currency.
November 3rd, 2009 at 6:42 am
Banks won’t lend when the economy is due for a multi decade decline, no matter how well capitalised they may be.
Forced lending is required. The key questions are:
1. who does the forcing?
2. who takes the inevitable losses?
My view would be that the answer should be that the fed forces by charging for excess reserves and savers take the losses via banking fees or an explicit negative interest rate.
Makes perfect sense for the distribution of funds in an economy with delcining real output.
November 3rd, 2009 at 6:57 am
There should be “do overs”…the money is sitting at the Treasury anyhow. The Fed should just recapture their bailout $ and let capitalism do the rest.
November 3rd, 2009 at 6:59 am
http://www.bloomberg.com/apps/news?pid=20601087&sid=aG8YOdEMfVRE&pos=1
Nov. 2 (Bloomberg) — Commerce Secretary Gary Locke was “imprecise” when he said President Barack Obama’s advisers are considering a second stimulus measure, his spokesman said today.
Locke, in an interview with Bloomberg Television, said: “If there is to be another stimulus — and that’s being hotly discussed and very seriously considered within the administration as well as members of Congress — it needs to be very targeted, very specific and we need to be very mindful of the deficit as
…Well scepticus, if forced lending is what you want, forced lending is what you’ll get. Notice the word “imprecise”…imprecise, I think in government-speak is not a denial.
…Forced lending of the taxpayer’s money to those who don’t deserve it…..I think Obama likes your forced lending idea…he’s already come up with it..
November 3rd, 2009 at 7:13 am
Forced lending is unavoidable. Considering the case in which lending is not initially forced and the QE comes to an end, we go straight into deflation which busts the banks. However in their infinite wisdom TPTB have insured deposits. Ergo deflation leads to bust banks which leads to printy printy (aka forced lending) to cover deposits.
QE – issuance of base money – is simply public forced lending because the taxpayer incurs a liability on the CB balance sheet, without having a choice. If you consider it inflationary or theft then this also equates to forced lending of savings.
So the way I see it we get forced lending with taxpayers taking the hit or forced lending with savers taking the hit. Nasty choice, but given that savers have a choice whether to save or not and taxpayers don’t get no choice, free market principles dictate the latter course.
November 3rd, 2009 at 7:18 am
Forced lending and free market principles? I think you need more coffee…
November 3rd, 2009 at 7:25 am
Yeah… right… more brilliant counterfactuals from the economic “industry.”
You see why these prizes from a tiny committee in Norway aren’t worth the print spilled to discuss them?
November 3rd, 2009 at 7:26 am
Here’s what I see.
Interest rates are rising…I bought some Bank of India, FDIC insured cd’s this morning at a higher rate than available for the last 8 months.
Australia tightened for the second time yesterday…we must follow or increase the rate of decline of hollowing out the dollar.
California and other hard hit states are already in huge budget deficit, and the year has just started.
Some countries are protecting the value of their currency, like Germany, who have passed a balanced budget amendment. We, on the other hand, have chosen the other road.
A second stimulus is coming…..I imagine more noises after the employment data later this week.
In an incredibly short time, people have lost faith in government to find the proper solution. Indeed, many feel that government has lost contact with the voter. I don’t see this as a liberal/conservative issue…I think it transcends those labels…
November 3rd, 2009 at 7:34 am
The reason is the financial industry has 5 lobbyists for each and every of the 535 Members of Congress.
People can scream “conspriacy theory” all they want, but a small group of bankers has enormous power over the system and the mainstream media is 90% controlled by 10 big corporations.
November 3rd, 2009 at 7:38 am
“They would be lending and the economy would be stronger.”
———–
Whatever happened to the concept of too much debt out there?
If they did the right thing, the economy would be contracting. All the bad debt would get written off and only the good projects would get financed. Net net, we would be witnessing deleveraging.
November 3rd, 2009 at 7:39 am
RBS, Lloyds Get $51 Billion in Second Bank Bailout
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJcfqfeCplbA&pos=1
November 3rd, 2009 at 7:41 am
Barry,
We’re not governed by fools, we are the fools. We’re governed by greedy special interest groups and politicians. The power of the lobbyists in the financial, healthcare, oil, automobile, and defense industries has destroyed the middle class and eviscerated any semblance of true capitalism in the U.S. What we have is a corporatist, semi-fascist state and we are the greater fools for it. It matters not which party, they are all the same. Money, power and influence are concentrated in the country like never before. It is only going to get worse before it gets better.
Nik
November 3rd, 2009 at 7:43 am
We need a Mulligan to roll back the clock to one year ago, then implement the Swedish Solution.
November 3rd, 2009 at 7:45 am
danm:
I think the creation of debt by the government, in time, will be seen as you see it. Not a good idea. It creates legacy debt, that must be paid off, or heaven forbid, otherwise addressed for future workers. As I’ve stated before, it is the endgame, the getting out of the increasing government debt, that carries the sting. If you could merely create the stimulus and not have to pay the piper later, wouldn’t that be nice…? But as California, Fannie, Freddie, FHA, and others are finding…debt is debt. There was a reason the old folks who came through the Great Depression were so fiscally conservative, and now we get a taste of it here…
B in T
November 3rd, 2009 at 7:49 am
bruce says:
In an incredibly short time, people have lost faith in government to find the proper solution. Indeed, many feel that government has lost contact with the voter. I don’t see this as a liberal/conservative issue…I think it transcends those labels…
Any informed citizen knew what was to come voting for bho. Remember, it was a close margin and 80 mil did not vote at all. This, even with the worse rep candidate to choose from.
The dumming down of citizens starting in grade school,many, many intentional diversions on the part of the admin. like our dear leader and his king maker axelrod assaulting fox news, rush as the face of the rep. party blah, blah,blah keep the sheep asleep.
Except for our beloved and talented military, the gov. is NEVER THE PROPER SOLUTION.
Both parties are in bed together to retain control. Living things don’t want to die. They don’t want their power to die.
We need a reshift in power to the responsible citizens.
Common! There are 545 of them and 300+ mil. of us. Well, i’ll say 200mil who are informed (I pray).
It blows being lied to,no?
November 3rd, 2009 at 7:51 am
Read “The 5000 Year leap”
http://www.nccs.net/ftyl.html
November 3rd, 2009 at 7:56 am
The problem isn’t that banks aren’t lending. It is that credit-worthy *borrowers* aren’t willing take on new debt. It is the *demand* for credit that’s declining. The people who aren’t credit-worthy are unable to take on new debt. The answer is to breakup the banks and clean them up. Make bankruptcy easier-get the bad loans out of the system. The government needs to print and spend directly to take out the deflationary slack.
November 3rd, 2009 at 8:13 am
It is that credit-worthy *borrowers* aren’t willing take on new debt. It is the *demand* for credit that’s declining
————
Most of the credit worthy individuals are 50+, that’s where the wealth is. And at that age, you should be reducing debt, not increasing it.
November 3rd, 2009 at 8:18 am
Why are we constantly governed by fools?
Some people think it is because we voted for them… but who paid for the PR to get them in front of the voters? Who keeps them in office by subsidizing their campaigns? Who gives them perks, treats them like royalty, promises them fat jobs when they are out of office?
Who owns them?
November 3rd, 2009 at 8:22 am
The US is consuming way too much energy.
If you include all the energy burned by other countries to produce stuff shipped to the US, the numbers are even more significant.
Considering that most US development was not built thinking of sustainabliliy, the demand for energy will be ballooning at the exact same time the US needs the emerging markets to take off and burn their own energy so they can import US exports.
The writing is on the wall. No matter what the leaders do, Americans are in for a shakeout. Inflation, deflation, good leaders, bad leaders; all of it is moot. The world is entering a huge fight for resources.
November 3rd, 2009 at 8:38 am
When the US declared the Immortal 19 Banks TBTF they threw “moral hazard” out the window. They turned a baseball game into Home Run Derby, all 19 can swing from the heels at every pitch because they have nothing to lose, they’ll always get another pitch
November 3rd, 2009 at 8:43 am
I do think the wars we are fighting are a waste of American lives. Stated that many times. But I don’t like the Carter decisionless decisions that Obama is making here. He’s been asked by his main general to increase troop strength in Afghanistan. But he’s been dithering for weeks, and will apparently continue to dither. It is like he’s going to make this decision by committee. Hell, you are the “Buck stops here” guy. A yes or a no…don’t you think the Taliban have noticed that we can’t make a decision….? What is with this guy? Fish or cut bait. The same sort of hand wringing in the economy costs us here too. I noticed today Nokia is cutting several thousand more jobs today. And yes, in recessions, the government has always acted as the counterweight to the private sector. But in deciding to grant most stimulus ideas that are going through congress, we have in essence decided NOT to make a decision…certainly not a tough decision…
Private industry has slimmed down and is ready for the upturn. Government, by not being more focused, has probably made things even more difficult in the years to come..
November 3rd, 2009 at 8:45 am
Barry Ritholtz Says:
November 3rd, 2009 at 6:05 am
“$ocialism” seems to be a spam word (?!?)
So too (more obviously) “Ca$ino”.
I’ll look into fixing the first
________
The blogger always the last to know.
November 3rd, 2009 at 8:46 am
“Why are we constantly governed by fools?”
Because the lust for power takes a certain calibre of individual. Sigh …
Perhaps Barney Frank should be the new poster child for the pro-abortion movement. The economy would be at least $400 billion better off.
November 3rd, 2009 at 8:50 am
Bruce, forced lending is what is going on all the time.
Those excess reserves at the FED are taxpayer liabilities and commercial bank assets. If the banks are hoarding them then the government/taxpayer is being forcibly lent that money (and the taxpayer is paying interest on them!).
It is entirely in keeping with free market principles that the fed may decide it wants to shrink its balance sheet and say – hey we don’t want these deposits, take em away or we’ll charge you. Any commercial bank if it wishes to shrink its balance sheet is quite at liberty to divest itself of deposits by making them unnattractive. Why is it wrong for the fed to do the same?
Likewise I would say that if one feels one has a ‘right’ to deposit money in a bank at 0% no matter what (especially if you expect to be insured also) then that is also an instance of forced lending. In a scenario of severe deleveraging banks would need to shed assets and theye would therefore need to shed deposit liabilities at the same time.
November 3rd, 2009 at 8:56 am
We also now find the fallacy in the “Don’t sweat the small stuff, and it is all small stuff” idea that has taken over society for years now. It turns out the devil truly is in the details. GM found that out when it was easier to grant everything to the unions until they became non-competitive. And it ultimately was bad for the unions too….COLAs? Most of us thought automatic colas were not the greatest idea, but what the heck? We understood why whomever was being affected by the cost of living would want an automatic adjustment…so now, things are very dicey on how to pay for those things. Want to add a drug arm to medicare? Sure, we’ll worry how to pay for it later. Repeal Glass-Steagall? Just another small detail, and so on almost ad infinitum….
November 3rd, 2009 at 9:00 am
They’re not fools; their decisions are governed by corruption and nepotism and therefore *appear* illogical.
And, yes, by failing to nationalize, we’ve chosen Japan’s path, where the banks are still holding those CRE assets on the books at full value because, you know, they’ll come back to full value any day. Extend and pretend is the bankers’ delusion.
November 3rd, 2009 at 9:01 am
A “do-over” sounds about right. Revolution, anyone?
November 3rd, 2009 at 9:06 am
scepticus:
The banks’ decisions have been forced upon them by the fed. All the fed has to do is let interest rates rise. The rest of the world is already moving in that direction.
The fed, by its bullheadness, has made the decisions by the banks what they are. If you force them to lend to less than creditworthy applicants, you are simply adding to the socialism.
You are already forcing the taxpayer to pay for foolish decisions. You might force some of these banks into insolvency if you set the criteria and then make them lend.
Do you REALLY want the government to have even more say-so in these decisions? I didn’t think so…
November 3rd, 2009 at 9:07 am
JNJ gonna cut 8k jobs worldwide
November 3rd, 2009 at 9:37 am
Saying the US is governed by fools is misleading and causes everyone to shrug their shoulders and carry on.
Politics in the US is about narrow benefits and dispersed costs. Whether it is ethanol subsidies or bank bailouts, GM bankruptcy, it is about making decisions that benefit well-connected groups at the cost of the public.
November 3rd, 2009 at 10:04 am
> Why are we constantly governed by fools?
Because politicians are not paid what bankers are.
Who in their right mind would want to go into politics? Maybe one way to fix the government is to pay politicians more so that it becomes an attractive career path for someone with a brain.
November 3rd, 2009 at 10:07 am
I don’ think they’re “fools” at all. The powers that be know damn well what they’re doing – - bailing out themselves and their friends in their vain attempts at keeping things goin “the way they were” – keeping the status quo.
November 3rd, 2009 at 10:35 am
In addition we are letting these Banksters borrow money from the Fed at 0 % so they can lend it to credit card holders at 29%, and crush consumers who are the only ones that can lift us out of this hole. But I guess a 2900 bp spread is needed so they can feed all their bonus babies (couse what a disaster if they began crying and refused to play).
November 3rd, 2009 at 11:25 am
Letting interest rates rise will simply cause widespread bank failures (mutiple lehmans) and leave the fed prining billions for deposit insurance. In any case, if the market were able to set rates properly right now it would set a very low rate, like -5%. But it can’t do that in the current economic paradigm in which rates can’t go below 0. And don’t tell me the fed sets rates – all they can do is set short rates within a band of where the narket would set them left to itself. Long run, the fed can’t control what happens even to short term rates.
Raising rates simply increases the gap between where rates want to be due to supply and demand for money (much lower) and where they are. It’s called a liquidity trap, when risk premium totally dominates supply/demand for money and that is a one way street to uttercollapseville.
November 3rd, 2009 at 11:29 am
Regarding spreads, here in the UK the government is offering a 1 year savings bond at 3.5% I think, while talking now about charging the banks for excess reserves.
This IMO is a great way to force banks to compete and reduce those spreads and stop ripping off borrowers and savers.
Long term, one has to realise where interest comes from. It doesn’t come from the tooth fairy, it comes from borrowers, and if enough new borrowers can’t be found (like more than before) then depositors can’t earn interest unless the government plans to print it. Likewise, if we’re going into a gentle deflation (best case scenario), and loans are being wound up then by definition some depositors are going to have to take a hike.
November 3rd, 2009 at 11:30 am
Barry, we are NOT GOVERNED BY FOOLS. We are governed by crooks. I’m surprised you don’t know the difference.
November 3rd, 2009 at 12:21 pm
bruceintn,
GM granted those things because the unions had representation, the unions whole arguement for twenty years had been, Mr. CEO and others if your doing so well and the company is doing so well you grant yourself 5 million dollar paychecks and bonueses on lower sales, well, we won’t are piece also, and rightly so……………..ross perot got out quick when he saw how they ran the bizzz, when you have a legacy product that is worth x dollars no matter what, parts etc., plus you have X share there is always a case for working things out……………..since michael morres movie came out over 20 years ago GM and the union fought in public, i guaranteee you for every positive article about a GM product there were 30 negative one, like price and time, publicity and time also works, there main buyers got older and were now saving for retirement versus buying a new car every 3-5 years, and the younguns didn’t find them hip, although, in china buick is king, lol……….perception, context……………
ever since Nixon, politicians say, I know the problem, I have the answer, elect me, and what do we get, we have little trust in government, it has been created over time, i’m not a fan of clinton at all, but he did save money for a rainey day, and then dumped glass stegal, arghhhhhhhhh
November 3rd, 2009 at 12:47 pm
Why are we constantly governed by fools?
We are governed by tools. They do the bidding of narrow interests like financial firms at the expense of the country. They aren’t stupid, they are being highly paid to ignore facts and ethics.
The bigger fools are the idiots who vote for them, voting against their own interests, easily distracted by shiny objects like religious showboating, culture-war bullshit and who they’d “like to have a beer with”.
November 3rd, 2009 at 1:00 pm
Barry et al,
I for one, am relieved the banks aren’t increasing lending. Our public and private sectors are carrying overwhelming debt loads. When the banks begin lending, not only will our debt loads increase, but we will be faced with increasing inflation. I believe the banks refusal to lend is one of the few things they have done to benefit this nation (albeit selfishly). It is part of the incompetence in government that is fueling Obama and congress to insist that banks increase lending. We are a consumption addicted society and are in the process of cleansing that addiction. Unfortunately, the political powers that be (who are largely influenced by private concerns) are not able to tolerate the pain that will come with losing the addiction to overconsumption. Consequently, it is my belief that unless this paradigm shifts, we as a nation are destined for further destruction of the freedoms we have taken for granted.
IMO, the banks should not have been nationalized, which would have put too much control in the hands of a bumbling federal government and devious federal reserve. Rather, they should have been allowed to fail, with well managed and well capitalized financial institutions allowed to bid for their assets, and those assets going to the highest bidder with no gevernment assitance. We would likely have had several years of contracting economic production, but we would have come out on the other end as a more cautious, ethical, and strong nation with reasonable fiscal practices.
People seem to be willing to do anything to avoid recession, and god forbid, depression. In my mind this is the elixir that will drive us to devastating consequences. A nation cannot live the life of excess without having to feel the pain of contraction a t some point. The longer we delay contraction in our economy, using stimulus measures that are in my mind a symptom of a weak, spoiled governing body and general populous, the greater will be the eventual financial reckoning.
Mitch Block
November 3rd, 2009 at 2:56 pm
I find it fascinating that the Republican lunatics constantly rant that Obama is bringing Marxism to the United States.Have they not figured out that the goal here is to save capitalism?
That, uh, catastrophic crashes lead to very, very, very bad political systems? Anyone else done much reading of 1930’s literature? Looked at Europe? Roosevelt saved us a LOT of trouble.
These morons still haven’t figured out that the problem is 30 years of GDP gains swallowed up by the top .01 percent. That’s what caused the crash, and that’s what will lead to a destructive, raging populism. 10% unemployment means that a LOT of people who didn’t much care about private jets are now starting to figure out that this ain’t trickle down: this is negative growth with a zero sum game.
It’s not Marxism to say hey, for an economy to function need money going to consumption, to taxes, and to private investment. When you give too much money to Wall Street, the system collapses. This isn’t rocket science. We’ve got to fix this balance so we can restore real, sustainable growth. Without it, we will have economic stagnation and a political collapse.