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.