There is one post and one article that I wanted to bring to your attention. I think they’re best read in combination. The first is from Randall Wray, University of Missouri economist:
Mortgages that were designed to go bad would go bad. CDOs that were designed to fail would fail.
Suddenly there was no collateral behind the loans Wall Street’s thieves had made to one another. Each Wall Street thief looked in the mirror and realized everything he was holding was crap, because he knew all of his own debt was crap.
Hello Uncle Sam, Uncle Timmy, and Uncle Ben, we’ve got a problem. Can you spare $29 Trillion to bail us out?
And that is why we are screwed.
I see two scenarios playing out. In the first, we allow Wall Street to carry on its merry way, as the foreclosure crisis continues and Wall Street steals all homes, packaging them into bundles to be sold for pennies on the dollar to hedge funds. All wealth will be redistributed to the top 1% who will become modern day feudal lords with the other 99% living at their pleasure on huge feudal estates.
You can imagine for yourselves just what you’re going to have to do to pleasure the lords.
This will take years, maybe even a decade or more, but it is the long march Wall Street has formulated for us. To be sure, “formulated†should not be misinterpreted as intention. No one sat down and planned the creation of Western European feudalism when Rome collapsed. To be sure, the modern day feudal lords on Wall Street certainly conspire—to rig LIBOR and muni bond markets, for example—and each one individually wants to take as much as possible from customers and creditors and stockholders. But they are not planning and conspiring for the restoration of feudalism. Still, that is the default scenario—the outcome that will emerge in the absence of action.
In the second, the 99% occupy, shut down, and obliterate Wall Street. Honestly, I have no idea how that can happen. I am waiting for suggestions.
Fortunately, University of Maryland economist Gar Alperovitz has a suggestion ready at hand:
What about breaking up the banks, as many on the left favor? Recent history confirms another Chicago School judgment: while a breakup might work in the short term, the most likely course is what happened with Standard Oil and AT&T, which were broken up, only to essentially recombine a few decades later.
Nationalization isn’t as difficult as it sounds. We tend to forget that we did, in fact, nationalize General Motors in 2009; the government still owns a controlling share of its stock. We also essentially nationalized the American International Group, one of the largest insurance companies in the world, and the government still owns roughly 60 percent of its stock.
That neither the Republican Party nor the Democratic Party is willing to kill the goose that laid the golden eggs take such an extreme step does not seem to phase Dr. Alperovitz.
Under U. S. law there is also one pesky detail: the government is forbidden from seizing private property without just compensation. Leaving aside the question of just how well GM is actually doing, the federal government actually paid more to prop the company up than its full market capitalization. Go back and look through my archives. I calculated the value at the time.
The Wall Street banks on the other hand are worth trillions, possibly tens of trillions. Yes, the Treasury could just spend the money into existence. That’s a frighteningly large scale for such an activity. Would any move be more likely to cause a catastrophic loss of faith in the dollar?
I never cease to be amazed that people who make proposals of the sort forwarded by the good doctors have such a preference for public greed, theft, and corruption over private greed, theft, and corruption. They’re not unique to the private sector, you know. Clearly, neither one of them have ever lived in Chicago.
And remember, as Earl Long pointed out, the feds have the bomb.
I believe that anything that’s too big to be allowed fail is too big to be allowed to exist. We should have been moving to break the big banks up a decade ago. If they got too big again, we can break them up again. Better yet consider eliminating some of the props that allow them to get that big.
However, none of that will happen until people are very, very frightened. And when people are frightened they often grasp at solutions that are much, much worse than those they might have adopted when they weren’t in a state of panic.
We nationalized the steel industry didn’t we?
I’d be curious as to what benefits Prof. Gar thinks we received from “essentially” nationalizing AIG? Nationalization to me means operating an enterprise in the interest of the public. Giving money to a company with either express or implied representations to the public that the government would not be interfering in thedecisionmaking may be necessary for the enterpirse to continue to operate as a private concern, but its not nationalization in my book.
Wray’s commentary strikes me as unhinged as well as ignorant of the late Roman period and the rise of Feudalism.
Is nationalization really necessary? I know I’m showing my ignorance here, but can’t the feds simply make a rule that it won’t provide FDIC insurance or allow a firm to operate in the fed system if it’s over a certain size?
PD
Just a point of order. When did we nationalize the steel industry?
I’m guessing that PD is thinking of when Harry Truman attempted to nationalize the steel industry during the Korean War. Youngstown Sheet & Tube Co. et al. v. Sawyer found that he didn’t have the authority to do it.
Thanks Dave.
In addition, Little known to those outside the business, it was the Kennedy Administration, in a disastrous policy move, that arm twisted the industry over steel price concerns into making a wave of investment in open hearth furnaces, complete with its ingot making practice……….right before the much more efficient basic oxygen furnace and continuous caster became operationally viable, and adopted by the Japanese steelmakers.
The rest is history.
Sorry Drew, Dave is correct about my oblique reference. My actual point is that Nationalization might be as difficult as it sounds. There are not many examples of it in U.S. history, probably all of which were very directly related to a war effort (Korean War doesn’t count) or insolvent companies.
The Wall Street banks on the other hand are worth trillions, possibly tens of trillions.
Why not stop propping them up. Then just wait for the next round of failures and nationalize them THEN?
Personally I don’t think that’s the way to go, as I favor breaking up the banks. But I’m thinking lots of banks could have been had on the cheap in late 2008.
Wray starts out okay in that Wall Street men were primary malefactors in our current problems. However, the notion that we will return to feudalism is rather laughable.
@Andy- There was no FDIC for the investment banks or the shadow banks. That is part of how we got here. Breaking up the big banks has long been my preferred solution. Make them smaller, have fewer but more strictly enforced regs and let them fail when they should.
“However, the notion that we will return to feudalism is rather laughable.”
C’mon. We know you always wanted to be a Baron.
Steve
@steve
@Andy- There was no FDIC for the investment banks or the shadow banks. That is part of how we got here. …
… and let them fail when they should.
The last part was the problem. The mutual funds should have been backstopped, and the rest should have been left to fall apart. They could have thrown in the MBS pools and taken care of the mortgage mess. Done properly, it could have been done for far less than has been spent, and it would no be that difficult.
No need to nationalize the banks when they can simply be poisoned. The Fed could easily be directed to provide services as a public bank, and as monopoly supplier of reserves pay no penalties or interest rates on the loans it makes while requiring the big banks to pay higher rates. Within ten years the heavies would be out of business. FDIC insurance of deposits at commercial banks means secure funds for savers, which would quickly be transferred to the new public bank. Also as the heavies find themselves in bankruptcy the Fed can acquire their assets and infrastructure.
You don’t see any problems with that approach Ben? I can see several, but I’ll leave it to you as an exercise to list at least 2 of them.
@Steve Verdon
That makes as much sense as anything else you post.
steve,
Like I said, I’m showing my ignorance. I might know enough, however, to suggest that it’s possible to implement incentives or for the big banks to break themselves up. At least I think it’s possible….
Ben,
Your grade for your homework is an F.
Two problems I can think of:
1. It wont take 10 years. People will see what is happening with that policy and what you see happening in 10 years will happen much, much sooner. And here we were told about the vast problems with the sudden collapse of the big banks….
2. It would create a reputation for the Fed that would be decidedly anti-growth with everyone sitting around saying, “Okay, which industry is the Fed going to poison next?”