Larry Summers discovers he's a fool
Throughout the banking crisis, intelligent economists — including Paul Krugman, Simon Johnson and Joe Stiglitz — screamed at the tops of their lungs that our major banks were bankrupt and needed to be temporarily nationalized and that we needed to re-regulate the financial industry to prevent a recurrence of “heads we win, tails taxpayers lose” gambling by banks.
Instead, the Obama Administration shut out the intelligent economists and put policy in the hands of bankers (esp. many from Goldman Sachs) and banks' best buddies (like Timothy Geithner). The Administration and the Federal Reserve also showered worthless banks with trillions in gifts from taxpayers while requiring nothing — like acceptance of re-regulation — in return.
As the aforementioned economists predicted, bank lending remains anemic (because we failed to address the underlying problem of undercapitalized banks), firms like Goldman are taking on large risks again (because no new laws are restricting them from gambling with their implicit taxpayer insurance policy), and bank lobbyists are fighting re-regulation.
Obama’s top bank buddy crony, Lawrence Summers, is expressing shock that banks aren’t playing nice, as Paul Krugman explains:
Citigroup and Bank of America, which silenced talk of nationalization earlier this year by claiming that they had returned to profitability, are now — you guessed it — back to reporting losses.
Ask the people at Goldman, and they’ll tell you that it’s nobody’s business but their own how much they earn. But as one critic recently put it: “There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.” Indeed: Goldman has made a lot of money in its trading operations, but it was only able to stay in that game thanks to policies that put vast amounts of public money at risk, from the bailout of A.I.G. to the guarantees extended to many of Goldman’s bonds.
So who was this thundering bank critic? None other than Lawrence Summers, the Obama administration’s chief economist — and one of the architects of the administration’s bank policy, which up until now has been to go easy on financial institutions and hope that they mend themselves.
Why the change in tone? Administration officials are furious at the way the financial industry, just months after receiving a gigantic taxpayer bailout, is lobbying fiercely against serious reform. But you have to wonder what they expected to happen. They followed a softly, softly policy, providing aid with few strings, back when all of Wall Street was on the ropes; this left them with very little leverage over firms like Goldman that are now, once again, making a lot of money.
But there’s an even bigger problem: while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not. Key banks remain financially weak, and their weakness is hurting the economy as a whole.
Posted by James on Monday, October 19, 2009