The Committee to Save the Banks Reaches New Lows
In its ongoing defense of the indefensible, the Committee to Save the Banks (Paulson, Bernanke and Geithner) reached new lows this week. This time it was former Fed Chairman Ben Bernanke trying to explain why their crisis response focused on saving the banks wasn’t to blame for our current economic or political state of affairs.
First, he stated what is the current state of our economic and political affairs.
The 2008 crisis deepened a recession that had begun in late 2007 and turned it into the worst downturn since the 1930s, with 8.7 million people thrown out of work. Though the economy has created 19 million jobs since the depths of the downturn and the economy has expanded since 2009, the recovery has been the slowest in the post-World War II period and wage growth has languished.
The resulting economic discontent, fed by widening financial inequality, contributed to Trump’s presidential victory. Similarly weak recoveries fueled populist backlashes in other nations, too.
“Financial crises, particularly big ones, do tend to get followed by a population reaction; that was certainly the case in the 1930s,” Bernanke said, alluding to the rise of Hitler in Germany and other fascist movements.
Then he offered up an easily debunked excuse for why the Committee and its response to the financial crisis wasn’t to blame.
But Bernanke suggested that some disturbing trends — from worsening income inequality to a lack of upward mobility to the opioid epidemic — go back much further than 2008.
“The changes brought about by technology and globalization displaced many people in many communities, and there was not an adequate effort to deal with these displacements,” he said.
Hello, Mr. Bernanke. Did you ever hear of FDR?
Consider for a moment it may have been his Administration’s response to the Great Depression (a financial crisis you claim to have studied) that prevented a populist backlash.
His Administration wrote the playbook for how to respond to a financial crisis. A playbook with which you should have been very familiar.
The response was based on FDR’s observation:
We had to struggle with the old enemies of peace–business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.
They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.
What did FDR do different than the response lead by the Committee to Save the Banks?
For starters, he didn’t try to save the banks or bankers, but rather the real economy and the borrowers.
He made banks recognize losses on their bad investments. This included closing banks that weren’t viable after recognizing all their losses.
He helped borrowers by allowing them to extend the maturity of their mortgages. This dramatically reduced their payments and allowed them to service their loans. While this also helped the banks by reducing losses, this was an added benefit, not the driver behind the program.
He signed into law deposit insurance. This changed how a financial crisis should be responded to and permanently ended any case for bailing out the banks with taxpayer funds. With deposit insurance, the taxpayer automatically becomes an insolvent bank’s silent equity partner. There is no reason to change this relationship by bailing out the bank. With the taxpayers as the silent equity partner, the Fed can extend liquidity for as long as it is needed. As a result, the insolvent bank isn’t threatened by imminent collapse. It can continue in operation until such time as the bank shows it is viable or the government winds it down.
Most importantly, he redesigned the financial system so it was based on transparency. He created the SEC with the mandate to require for all publicly traded securities disclosure of all information an investor would need so they could know what they own. He understood sunlight is the best disinfectant and how this would minimize Wall Street’s business model of fraud.
Now compare that response to the Committee to Save the Banks’ response.
The Committee’s response was the completely unnecessary action of bailing out the banks. Not only did they inject taxpayer money into the banks, but they adopted regulatory strategies to “foam the runway” for the banks so they didn’t have to recognize the losses on their bad assets. They followed this up with the kabuki theatre of stress tests and lying about the condition of the banks (bankers took advantage of these lies to resume paying themselves bonuses). They ended by using the section of Dodd-Frank creating the Office of Financial Research as the place financial transparency could go to die.
No wonder the American people have never bought the idea this was done for their benefit and not Wall Street’s.
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