The More Things Change
In the great Italian historical novel The Leopard, the Sicilian prince asks his nephew Tancredi why he is joining Garibaldi's revolt against their king. Tancredi replies, "Unless we...take a hand now they'll foist a Republic on us. If we want things to stay as they are, things will have to change."
Treasury Secretary Tim Geithner, economic adviser Larry Summers and the rest of Barack Obama's merry band of Wall Street revolutionaries certainly seem to have brought change. Building on the bank bailout of the waning days of the Bush era, they have committed at least $4 trillion in cash, credit and guarantees to rescuing the nation's bankers and brokers from their own reckless behavior. America's modest level of crony capitalism has swollen to full-service financial-firm welfare. Inasmuch as US corporations can live forever, this is the cradle of a corporate socialism that potentially has no grave.
Federal Reserve chair Ben Bernanke says he understands that citizens are "concerned" that the people who caused the problem are being rewarded. But suck it up, he advises. "Our economic system is critically dependent on the free flow of credit."
Just so. But on what, the concerned citizen might ask, does the flow of credit depend? Last fall, one could have reasonably argued that lenders, their capital having evaporated in the crash, had no money. The TED spread, which tracks the difference between Treasury and interbank interest rates and is the most closely watched measure of credit availability, was then at an all-time high (460 basis points)--reflecting the heavy risk premiums banks were charging one another.
By January the spread was back to its pre-crisis level of less than 100, indicating that banks were lending to one another again. Why? Because, given the new government safety net, they trust that they will get their money back with interest. But why aren't they lending to the rest of the economy? It's not a cabal against the public; banks make their money by lending. It's the recession; with rising unemployment and falling sales, making loans to businesses is generally too risky.
So banks have used the bailout to increase their reserves, finance mergers, overpay their executives and hire lobbyists to kill Obama's bill to allow bankruptcy judges to protect homeowners from foreclosure. Geithner, Summers, Bernanke and the rest of their cohort certainly know this. It follows that the purpose of the multitrillion-dollar bailout is not to spark a recovery through increased lending but to preserve our financial behemoths until the economy recovers. Then, unburdened by their self-created bad debt, the hedge-funders, arbitrageurs and leverage artists will be in good shape to get back into the credit-bubble business.
The real recovery, which will be financed when banks begin to see customers coming into their clients' stores with money in their pockets, is being left to the comparatively modest stimulus package. Many economists think we will need a new round of government spending perhaps by the end of the year.
The president correctly says that the source of growth has to shift from debt-driven consumption to the production of goods and services that produce jobs and higher living standards. But his team's priority is to restore things to pretty much as they were. How else do we explain the kid-glove handling of Citigroup, AIG, Merrill Lynch et al., compared with the harsher treatment of the auto industry? Downsizing the auto companies, bankrupting suppliers and slashing autoworkers' wages is hardly a way to accelerate an economic rebound. If real growth was your primary objective, would you leave the fate of GM and Chrysler to "auto czar" Steve Rattner, a hedge-fund operator whose firm is deep in a pension-fund bribery scandal?
The pervasive influence of Wall Street on this government's "change" agenda was evident at the recent G-20 economic summit in London. The first priority for the US economy--and, one would think, for Obama's future--was to get the other developed nations to expand their economies. Unless they do, much of the undersize US spending stimulus will be lost to an increased trade deficit. The Europeans--led by the fiscally conservative Germans--were disinclined. Instead, they argued for the international regulation of finance.
In the interest of most Americans, the response should have been obvious: offer to accept international financial regulation in return for a European agreement on a stronger domestic stimulus. A deal may or may not have been struck. But Wall Street, not wanting to be subject to international regulators who might be beyond the reach of their money and influence, would have none of it. If that weakened the US recovery, so be it. The administration concurred. The meeting ended with a few coins tossed to the International Monetary Fund, and the status quo was preserved.
The public feathering of the corporate nest will certainly continue. After releasing the results of the Treasury's big bank "stress tests," in early May, Geithner told ten banks to go out and get more private capital. At first, bank stocks rose. But when the markets realized that the stress tests were more like open-book exams, the stocks fell back. That there might be more toxic assets in the vaults than the rushed and understaffed government audit teams could find dampened investor interest. Since these banks are "too big to fail," the Treasury will have to further sweeten the pot, either with more cash or by converting the preferred bank shares it already owns into common stock--or both.
Angst about government ownership, of course, babbles through the business media. But the smart money understands that the revolving door of cash and people between Wall Street and Washington will protect the plutocracy. In this regard, the revelation that Summers moonlighted as a hedge-fund consultant while serving as president of Harvard is certainly reassuring. As was the New York Times report that a bill the Treasury sent to Congress expanding the government's bank takeover powers was drafted by a law firm that works for the finance industry's lobbying group. And if a Democratic president elected on a message of transformation brings us a treasury secretary who is a protégé of Robert Rubin of Citigroup, Pete Peterson of Blackstone and Henry Kissinger, what's the worry?
"All will be changed," the prince repeats to a retainer. "Then all will be the same."