[Vice]The Bailouts for the Rich Are Why America Is So Screwed Right Now

This was one of those topics I was incredibly pissed off at the time. Later revelations came out that these architects under the 08 admin were handpicked well before Obama officially won the primaries.

https://www.vice.com/en_us/article/...-rich-are-why-america-is-so-screwed-right-now
Did they prevent a full-scale collapse? Yes. Was it necessary to do it the way we did? Not at all.

In 1948, the architect of the post-war American suburb, William Levitt, explainedthe point of the housing finance system. "No man who owns his own house and lot can be a Communist," he said. "He has too much to do."

It’s worth reflecting on this quote on the ten-year anniversary of the financial crisis, because it speaks to how the architects of the bailouts shaped our culture. Tim Geithner, Ben Bernanke, and Hank Paulson, the three key men in charge, basically argue that the bailouts they executed between 2007 and 2009 were unfair, but necessary to preserve stability. It’s time to ask, though: just what stability did they preserve?

These three men paint the financial crisis largely as a technical one. But let’s not get lost in the fancy terms they use, like “normalization of credit flows," in discussing what happened and why. The excessively wonky tone is intentional—it's intended to hide the politics of what happened. So let’s look at what the bailouts actually were, in normal human language.

The official response to the financial crisis ended a 75-year-old American policy of pursuing broad homeownership as a social goal. Since at least Franklin Delano Roosevelt, American leaders had deliberately organized the financial system to put more people in their own homes. In 2011, the Obama administration changed this policy, pushing renting over owning. The CEO of Bank of America, Brian Moynihan, echoed this view shortly thereafter. There are many reasons for the change, and not all of them were bad. But what’s important to understand is that the financial crisis was a full-scale assault on the longstanding social contract linking Americans with the financial system through their house.

The way Geithner orchestrated this was through a two-tiered series of policy choices. During the crisis, everyone needed money from the government, but Geithner offered money to the big guy, and not the little guy. First, he found mechanisms, all of them very technical—and well-reported in Adam Tooze’s new book Crashed—to throw unlimited amounts of credit at institutions controlled by financial executives in the United States and Europe. (Eric Holder, meanwhile, also de facto granted legal amnesty to executives for possible securities fraud associated with the crisis.) Second, Geithner chose to deny money and credit to the middle class in the midst of a foreclosure crisis. The Obama administration supported this by neutering laws against illegal foreclosures.

The response to the financial crisis was about reorganizing property rights. If you were close to power, you enjoyed unlimited rights and no responsibilities, and if you were far from power, you got screwed. This shaped the world into what it is today. As Levitt pointed out, when people have no stake in the system, they get radical.

Did this prevent a full-scale collapse? Yes. Was it necessary to do it the way we did? Not at all.

Geithner, Bernanke, and Paulson like to pretend that bank bailouts are inherently unpopular—that they were wise stewards resisting toxic (populist) political headwinds. But it’s not that simple. Unfair bank bailouts are unpopular, but reasonable ones are not. For an alternative, look at how a previous generation of Democrats handled a similar, though much more serious, crisis.

In 1933, when FDR took power, global banking was essentially non-functional. Bankers had committed widespread fraud on top of a rickety and poorly structured financial system. Herbert Hoover, who organized an initial bailout by establishing what was known as the Reconstruction Finance Corporation, was widely mocked for secretly sending money to Republican bankers rather than ordinary people. The new administration realized that trust in the system was essential.

One of the first things Roosevelt did, even before he took office, was to embarrass powerful financiers. He did this by encouraging the Senate Banking Committee to continue its probe, under investigator Ferdinand Pecora, of the most powerful institutions on Wall Street, which were National City (now Citibank) and JP Morgan. Pecora exposed these institutions as nests of corruption. The Senate Banking Committee made public Morgan’s "preferred list," which was the group of powerful and famous people who essentially got bribes from Morgan. It included the most important men in the country, like former Republican President Calvin Coolidge, a Supreme Court Justice, important CEOs and military leaders, and important Democrats, too.

Roosevelt also ordered his attorney general "vigorously to prosecute any violations of the law" that emerged from the investigations. New Dealers felt that "if the people become convinced that the big violators are to be punished it will be helpful in restoring confidence." The DOJ indicted National City’s Charles Mitchell for tax evasion. This was part of a series of aggressive attacks on the old order of corrupt political and economic elites. The administration pursued these cases, often losing the criminal complaints but continuing with civil charges. This bought the Democrats the trust of the public.

When Roosevelt engaged in his own broad series of bank bailouts, the people rewarded his party with overwhelming gains in the midterm elections of 1934 and a resounding re-election in 1936. Along with an assertive populist Congress, the new administration used the bailout money in the RFC to implement mass foreclosure-mitigation programs, create deposit insurance, and put millions of people to work. He sought to save not the bankers but the savings of the people themselves.

Democrats did more than save the economy—they also restructured it along democratic lines. They passed laws to break up banks, the emerging airline industry, and electric utilities. The administration engaged in an aggressive antitrust campaign against industrial monopolists. And Roosevelt restructured the Federal Reserve so that the central bank was not "independent" but set interest rates entirely subservient to the wishes of elected officials.

In 1938, Franklin Delano Roosevelt offered his view on what causes democracies to fail. "History proves that dictatorships do not grow out of strong and successful governments," he said, "but out of weak and helpless ones." Did the bailouts of ten years ago work? It’s a good question. I don’t see a strong and vibrant democracy in America right now. Do you?

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Matt Stoller is a fellow at the Open Markets Institute

 

Given the ten year anniversary of the collapse, I thought it was a good topic of discussion. I would've liked more counterfactual meat to the article, such as extending moral hazard to the consumer rather than just the lender parties and financiers, but I liked the title better.

I don't think the blame solely lies upon the Obama Cabinet because the damage was already done and the fractures in the system was touch and go. I disagree that's the intention of the OP. The anger the writer presents is because Obama was supposed to be our change and reform candidate. That sentiment of disappointment and misdirection could be seen as a political attack or it could be seen as a wasted opportunity felt by common Americans and marginalized at the time with Occupy Wall Street. That Occupy failed in it's ambiguous and uncoordinated scope doesn't invalidate the frustration and outrage held by Americans who blindly trusted Wall Street and ended up losing and paying trillions of dollars in failed assets and bailouts.

Unfettered Capitalism as has been preached has been to privatize the gains and socialize the losses.

We are currently going through that moment again on a far more global level. The stakes get raised higher and higher as moral hazard is flattened as soon as it's been deemed that you're doing God's Work.

Questions that could be broached but not discussed are:

Has Dodd Frank been a success or a hindrance that needs to be rolled back? Did it serve as strong punishment to the asset bubbles and kraven greed shown since Clinton and their Neoliberal Awakening?

Is it possible to create new financial regulation or is the genie really out of the bottle now that pre-Brexit London and other financial centers serve as competition and counterweights?

Is the American culture of over leveraging and using credit to build wealth sustainable? No other nation has been able to build a consumer class to sop up excess global inventory or liquidity. This seems like a great deal for everyone, like it was before 08.

With trillion dollar market cap institutions like Apple or Amazon, are financial companies still the big fish we have to concern ourselves over? The deal AIG took to underwrite risky cds could've been carried out by any other AAA rated company, like Berkshire. What's to say any big tech giant joins the robo investing craze and enventually becomes another GE over time and familiarity? There's a fine line between innovation and over regulation. Robo investors are currently dabbling into being full fledged customer financial institutions that are subject to FINRA and look to become competitors with brick and mortar institutions. Does silicon valley deserve that benefit of the doubt despite endless capital and blind investor confidence?

I just saw some headline about Summers warning large fin institutions that stress test results were comically absurd and the companies in question needed larger capital reserves. It's these reserve requirements that banks said made things harder to lend to people, and on the flipside, they, like Obama's HARP, couldn't find enough qualified candidates to lend to. For me that serves as a warning against irrational exuberance over a time when borrowing money is attached to historically low rates and every investor is trying to figure out a good return (sounds familiar?). The shadow banking system is still largely untouched by regulation and is still prone to swings and the threat of global panics just like before, so having more reserves on hand serves as a double measure.

Maybe with a more stabilized global economy we should restart discussing these stress points rather than pretending everything is on the up and up? Or is that a lesson to forget ten years ago?


The other point of the article is that it blames the financial crisis on current politics. 08 served as the Second Generational milestone right after 9/11 (why do I hate shrub so much... is that an entitled millennial thing?). Wealth generation across different races and classes flatlined. Some among blacks and Hispanics didn't even recover and face de facto redlining to this day. The angry boomers turned tea partiers were seething over their busted 401ks they needed to bank on the coming years. Lastly anti-Globalization, a fringe left wing movement, became populist with both sides claiming Washington politicians were bought and sold by the big Banks. Confidence in Washington and Wall Street cratered during the bust and cauterized after the bailout after bailout after bailout.

I generally think it's too simple to blame our current situation on one thing. But it's definitely not absurd or undebatable. Even if those rubes don't know finance, and their thoughts are basic and invalid.