Hi Amber,
Me and my class in Stockholm, Sweden are reading your blog in English class today! Thanks for posting. We're reading some real American kids' blogs for practice. Maybe some of my students will leave comments!

/Patrick

Article by Patrick Gallagher published March 17

How will Obama save the banking system?

"The World Bank's former chief economist says Obama has confused his mission to rescue the banks with rescuing the bankers. And it is far from just left-leaning economists who advocate temporarily nationalizing the banks."

 

Barack Obama continues to make headlines. With significant statements coming almost daily, new laws signed each week and a historic speech before Congress, it is easy to miss a random comment from the world's most closely observed man. But last month little Sweden was also mentioned. Obama explained why he did not think it is possible to rescue the U.S. banking system in the way that Sweden saved its banks in the 1990s. There are major cultural differences, said President Obama, which precludes the U.S. government from nationalizing banks that receive its financial support. There are also quantitative differences, says Obama. Sweden bought itself a few banks, but the U.S. has over 8000 banks! 

 

The arguments are familiar, at least for someone who’s been traveling between Sweden and his homeland the United States for the past 20 years. In discussions with American friends and family members about the modern welfare state Sweden's way to solve societal problems, I inevitably hear these two excuses. Sweden is so small, it’s obvious that its problems are easier to solve. And then it's the culture, of course. Americans do not like collective solutions. However, the latter argument ignores for example opinion polls showing that a majority of Americans want government health care.

 

The standard answer is that the U.S. does not believe in socialism (the key word here is "believe" because Americans’ devotion to corporate capitalism is primarily based upon an ideological belief, fostered by the media industry in collusion with the country’s economic elite, rather than on historical or empirical evidence.) That the Federal government would require ownership-control, in return for taxpayers pumping in more credit than the bank's total market value, would apparently be something equivalent to letting workers take over their factory. Socialism is simply ugly. It makes slaves of people - unlike those American success stories like Walmart and Burger King, whose policy is to employ as many part-timers as possible, force them to work overtime and still keep their wages so low that they need to seek social assistance to survive.

 

Size is also a well-known phenomenon in the US. It’s so BIG! Big cars, big houses, wide open spaces and of course, huge problems. Remember, 8000 banks! It goes without saying that the government would never be able to steer that industry in any other way than simply throwing hundreds of billions of dollars in tax money at it and then hoping for the best!

 

But how many U.S. banks are really in danger of going under? And which banks are they, anyway? According to the financial news agency Bloomberg, there are 8349 banks that are FDIC-insured. But the FDIC does not have any major problems with taking over banks. In the last 14 months it has closed 38. That, in itself, isn’t much compared to the savings and loan crisis in 1993, when 50 banks were forced to close and be taken over by the FDIC.

 

It is estimated that 1000 banks in the U.S. are in danger of disappearing over the next five years. Therefore, the FDIC has begun to use their vast resources - 36 billion dollars in reserves and a further 30 billion in government credit - for arranging sales where strong banks buy ailing competitors. But since the buyer does not want to assume the failed bank's deficit, the FDIC covers the difference and/or guarantees to cover the sale of the bank's future losses. The FDIC simply offers banks for “on sale” prices.

 

Last year's biggest bailouts weren’t like that. Take for example when the giant JP Morgon rescued Washington Mutual by buying it for 1.9 billion dollars. JP Morgon received a direct government grant of 55 billion dollars on the purchase and has since received another 25 billion. By comparison, the largest discount that the FDIC has so far offered this year was only 45 million dollars - or .068 percent of its own reserves. It would therefore appear that the vast majority of U.S. banks will survive. Likewise, the FDIC should survive its financial pressures.

 

Where has over half of the 750 billion dollars that the Bush regime received from Congress to rescue the U.S. banking system disappeared? 350 billion is left. But the biggest institutions, which received enormous sums, have refused to explain even to Congress - let alone for any news agency like Bloomberg - what they have been using the money for. The U.S. Treasury Department never even asked the largest beneficiary, the insurance giant AIG, which has so far received 173 billion dollars, about how the money has been spent.

 

One thing is certain, the U.S. credit markets have not been restarted. Like the Iraq invasion never succeeded with its original objective - finding weapons of mass destruction - former Treasury Secretary Paulson’s rescue package failed in its purported purpose ("The bailout is a bust" - Business Week). What a coincidence that Paulson's package also went through Congress quickly and under the threat of global catastrophe, described this time as the whole world’s economic system being destroyed unless the money was immediately granted. One recalls the terrifying warning about Saddam's fictitious WMD's, "the smoking gun that comes in the form of a mushroom cloud."

 

It is well known - for all but the geniuses in the mainstream media - that Paulson's rescue package actually aimed to save the largest institutions and to launch a feeding frenzy in the banking world. While the last century’s largest business scandals were solved by breaking up America’s largest monopolies (eg Rockefellers Standard Oil), the Bush regime applied of course, the opposite strategy; the banking world would be further consolidated.

 

According to the CEO of U.S. Bancorp, Richard Davis, Paulson's rescue package (TARP) was designed to make it easier for strong banks to buy up weaker banks. Davis should know, U.S. Bancorp received 6.6 billion dollars from TARP. So far, Davis’ bank has bought two competitors with a total of 213 branches in California, worth almost 29 billion. But U.S. Bancorp need not risk 1.6 billion in potential losses on the banks' bad loans. That’s insured by the FDIC. And there seems to be a very good reason why large TARP beneficiaries do not indicate what the money is used for. According to Davis, they have been banned by government officials from revealing it.

 

TARP was also driven through in tandem with changes in U.S. tax law, which provides relief to banks that buy vulnerable competitors. The result is a rarely seen bargain hunt in the American banking world. No wonder that bankers do not have time or money to stimulate credit-starved small businesses!

 

Why is it so? Would it not work to apply the Swedish solution to the U.S. banking crisis? And how in hell did it become the Republicans, and the country’s former Fed chief, free-market enthusiast and Milton Friedman-apostle Alan Greenspan, who first began to talk about actually nationalizing banks - something that Obama stubbornly opposes?

 

To answer the first question, we need to first answer the latter two, and define what is meant by the term "nationalization". In Britain the state has gone in as an owning partner, in return for taxpayers' money that kept banks afloat. Unlike in the U.S., banking executives in the UK have actually been fired. In the U.S., it is not so, even when the FDIC forces a bank to close.

 

But if the U.S. won’t try the British solution, why not Sweden’s? The IMF's former chief economist and expert on financial crises, MIT professor Simon Johnson, says that the brilliance of the Swedish solution was that it combined the three options now being weighed heavily against each other in the United States; to create needed equity (TARP), to create a "bad bank "to take over and liquidate the banks' bad loans, and nationalization - ie. the federal government becoming an active partner. However, the third option is considered only if the banks are intended to be returned to private ownership as soon as possible after the recovery, as they were in Sweden.

 

According to Johnson, there is plenty of private capital on hand (as evidenced by the dollar's growing strength; U.S. government bonds continue to be attractive - even as interest rates sink close to zero). If a bank is too large to go under, it is also too large for capitalists to resist, "People would come in and buy the re-privatized banks. And antitrust rules would be applied, so that banks would be broken up."

 

The point of this strategy, says Johnson, "would be to pit opposing forces within America’s powerful banking lobby against each other, "We would be pitting private capital against the inbred, insider bankers. And do this in a way that taxpayers will get to decide who the new owners are. These new owners would come in and do alot of restructuring. They will fire the executives. I can honestly promise you that.

 

Here we approach the real explanation for the White House’s opposition to a Swedish solution. Obama’s closest economic advisers came directly from within the fraternity of the banking world which, despite historical losses, has continued to reward itself with large bonuses - thanks to TARP. Last year, the U.S. financial sector donated a total of 146 million dollars to political campaigns, and the country's commercial banks donated another 34 million. Obama had been praised for having gathered half of his campaign cash from small individual donors, but he received more money from Wall Street than even Republican John McCain. Among the Obama campaign's top 20 contributors, there are four financial institutions which together gave Obama over 27 million dollars. So far these institutions have received over 145 billion dollars in federal aid. 

But the latest campaign contributions from the nation’s banks and financial firms pale in comparison to the total amount invested by Wall Street into Washington over the last ten years. A new report details how five billion dollars which Wall Street has invested through lobbying and campaign contributions resulted in twelve specific deregulatory steps that led to the current economic disaster. And one thing you should be damn well aware of, Wall Street only handles other people’s money irresponsibly. Its own political contributions are considered wise investments.

 

Joseph Stiglitz, Nobel laureate and former World Bank chief economist, believes that Obama has confused the mission to rescue the banks with rescuing the bankers. And it is far from just left-leaning economists who advocate temporarily nationalizing the banks. But leading Republicans and big business spokesmen use the N-word for other reasons: to avoid another kind of feeding frenzy which could threaten the nation’s largest financial institutions, as well as to protect their cronies’ privileged positions there.

 

A change in the accounting rules for banks is also being discussed. Banks want to be allowed them to write down their worst losses, but current regulations would require them to also write down all similar loans. Doing that would immediately reveal many institutions to be bankrupt. The sharks who’ve been wanting to have a go at the big banks would finally get the realistic prices they’ve been waiting for.

 

"That's what this is about. It's not about helping banks - it's about helping people." So said Barack Obama in his first speech as president before Congress. Truer words have rarely been spoken. But the people being rescued by the peculiar way the White House has of handling the credit crisis are the same executives who ran the nations’ economic ship aground.

 

According to Simon Johnson, there is one question that first needs to be answered before we discuss which solution, or combination of solutions, is best. He says: “There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that - they say - will deliver you back to growth.  The person has political support, a strong track record, and every incentive to enter the history books.

 

Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?  The form of these vested interests, of course, varies substantially across situations, but they are always still strong, despite the downward spiral which they did so much to bring about.  And fully escaping the grip of crisis really means breaking their power.”