Wednesday, April 15, 2009

If Big Banks Are Terrorists, It's Even More Important We Don't Give In.

In an attempt to explain why the government needed to bail out the troubled banks, President Obama said that AIG is like a suicide bomber.

“We had to step in, it was the right thing to do, even though it is infuriating. The same is true with AIG. It was the right thing to do to step in. Here’s the problem. It’s almost like they’ve got — they’ve got a bomb strapped to them and they’ve got their hand on the trigger. You don’t want them to blow up. But you’ve got to kind of talk them, ease that finger off the trigger.

While that may be true, it is the policy of the United States not to give in to terrorism. We've already eased their fingers off the trigger. At this point, as we enter the second or third phase of the bailout, it's important that we, the people take a stand and tell the financial sector that they do not run this country. We can start by standing up to Goldman Sachs, JP Morgan, Citigroup and Bank of America.

Take Goldman Sachs, who wants to pay back the $10 billion it borrowed from the Troubled Asset Relief Program (TARP). Sounds like a good thing, right?

Wrong, according to former International Monetary Fund chief economist, Simon Johnson, currently Professor of Entrepreneurship at MIT's Sloan School of Management, in addition to senior fellow at the Peterson Institute for International Economics, co-founder of BaselineScenario.com, and a member of the Congressional Budget Office's Panel of Economic Advisers

Initially, the government wanted to carefully manage the flow of information regarding the results of the stress tests that Obama ordered on 19 banks, because any time that kind of sensitive information is revealed, the risk of destabilizing the markets becomes much greater, and increases the pressure on rival banks, who are not ready to pay back TARP funds, by undermining their business models and hindering thier ability to raise capital, possibly putting them in a position of needing more TARP money.

Goldman Sachs, by announcing that they plan to pay back the TARP money, contingent upon the results of the stress test, sent a strong signal that they were going to ace it. This, of course would greatly tilt the playing field to Goldman Sachs' advantage, something we don't want at a time when "too big to fail" is something we are trying to discourage, especially considering that big financial players are even bigger now that Bear Stearns and Lehman Bros. have been eliminated.

Goldman Sachs still receives government assistance created last Fall when the crisis came to a head, that take several forms - access to credit from the Federal Reserve made possible by government allowing them to change legal forms in the midst of the crisis; government (FDIC) backing or guarantee of loans; $13 billion dollars that they received through the AIG bailout, due to thier counter party status to AIG that Goldman will never have to pay back, etc. At the same time that Goldman Sachs receives the continuing support of the government, by paying the TARP money back, Goldman Sachs can remove all the constraints set by the government, including the restrictions on executive pay, the very thing that contributed to the current finanical meltdown.

The very nature of these compensantion schemes encouraged and greatly rewarded the risk taking that brought our financial system to the brink of disaster.

In Simon Johnson's article "The Quiet Coup" in the May issue of The Atlantic Monthly, Johnson explains that in order to improve our economy, we must break the power of the financial oligarchy that is blocking reform. If we do not break this power structure, and allow the financial sector to take back its authority America could face a crisis that in Johnson's words, "could, in fact, be worse than the Great Depression — because the world is now so much more interconnected and because the banking sector is now so big."

"We face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support." - Simon Johnson
If we've learned anything from this financial crisis, it should be that big business is only interested in bigger business, nothing else, therefore we should ask Goldman Sachs, "What's in it for you, and what do we have to lose?" The answer is: everything... to both questions.

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