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Tuesday, July 7, 2009

Stiglitz on corporate welfarism for the big banks

Stiglitz has no definition of socialism. He seems to see it as helping out ordinary individuals. No doubt it would but surely he should know as an economist that socialism is the socialisation of the means of production distribution and exchange through worker or some type of collective ownership and production on the basis of need rather than profit.
What some commentators are calling socialism with American characteristics is not socialism at all but a form of corporate welfare where costs are socialised and profits privatised. As some have put it, it is "socialism" for the rich.

© The Berkeley Electronic Press
The Economists’ Voice
www.bepress.com/ev
Joseph E. Stiglitz

With all the talk of “green shoots” of economic recovery, America’sbanks are pushing back on efforts to regulate them. While politicians talk about their commitment to regulatory reform to prevent arecurrence of the crisis, this is one area where the devil really isin the details—and the banks will muster what muscle they have left toensure that they have ample room to continue as they have in the past.The old system worked well for the bankers (if not for theirshareholders), so why should they embrace change? Indeed, the effortsto rescue them devoted so little thought to the kind of post-crisisfinancial system we want that we will end up with a banking systemthat is less competitive, with the large banks that were too big tofail even larger.It has long been recognized that those of America’s banks that are toobig to fail are also too big to be managed. That is one reason thatthe performance of several of them has been so dismal. Becausegovernment provides deposit insurance, it plays a large role inrestructuring (unlike other sectors). Normally, when a bank fails, thegovernment engineers a financial restructuring; if it has to put inmoney, it, of course, gains a stake in the future. Officials know thatif they wait too long, zombie or near zombie banks—with little or nonet worth, but treated as if they were viable institutions—are likelyto “gamble on resurrection.” If they take big bets and win, they walkaway with the proceeds; if they fail, the government picks up the tab.This is not just theory; it is a lesson we learned, at great expense,during the Savings & Loan crisis of the 1980s. When the ATM machinesays, “insufficient funds,” the government doesn’t want this to meanthat the bank, rather than your account, is out of money, so itintervenes before the till is empty. In a financial restructuring,shareholders typically get wiped out, and bondholders become the newshareholders. Sometimes, the government must provide additional funds;sometimes it looks for a new investor to take over the failed bank.The Obama administration has, however, introduced a new concept: toobig to be financially restructured. The administration argues that allhell would break loose if we tried to play by the usual rules withthese big banks. Markets would panic. So, not only can’t we touch thebondholders, we can’t even touch the shareholders—even if most of theshares’ existing value merely reflects a bet on a government bailout.I think this judgment is wrong. I think the Obama administration hassuccumbed to political pressure and scare-mongering by the big banks.As a result, the administration has confused bailing out the bankersand their shareholders with bailing out the banks.Restructuring gives banks a chance for a new start: new potentialinvestors (whether in equity or debt instruments) will have moreconfidence, other banks will be more willing to lend to them, and theywill be more willing to lend to others. The bondholders will gain froman orderly restructuring, and if the value of the assets is trulygreater than the market (and outside analysts) believe, they willeventually reap the gains.But what is clear is that the Obama strategy’s current and futurecosts are very high—and so far, it has not achieved its limitedobjective of restarting lending. The taxpayer has had to pony upbillions, and has provided billions more in guarantees—bills that arelikely to come due in the future.Rewriting the rules of the market economy— in a way that has benefitedthose that have caused so much pain to the entire global economy—isworse than financially costly. Most Americans view it as grosslyunjust, especially after they saw the banks divert the billionsintended to enable them to revive lending to payments of outsizedbonuses and dividends. Tearing up the social contract is somethingthat should not be done lightly.But this new form of ersatz capitalism, in which losses are socializedand profits privatized, is doomed to failure. Incentives aredistorted. There is no market discipline. Thetoo-big-to-be-restructured banks know that they can gamble withimpunity—and, with the Federal Reserve making funds available atnear-zero interest rates, there are ample funds to do so.Some have called this new economic regime “socialism with Americancharacteristics.” But socialism is concerned about ordinaryindividuals. By contrast, the United States has provided little helpfor the millions of Americans who are losing their homes. Workers wholose their jobs receive only 39 weeks of limited unemploymentbenefits, and are then left on their own. And, when they lose theirjobs, most lose their health insurance, too.America has expanded its corporate safety net in unprecedented ways,from commercial banks to investment banks, then to insurance, and nowto automobiles, with no end in sight. In truth, this is not socialism,but an extension of long standing corporate welfarism. The rich andpowerful turn to the government to help them whenever they can, whileneedy individuals get little social protection.We need to break up the too-big-to-fail banks; there is no evidencethat these behemoths deliver societal benefits that are commensuratewith the costs they have imposed on others. And, if we don’t breakthem up, then we have to severely limit what they do. They can’t beallowed to do what they did in the past—gamble at others’ expenses.This raises another problem with America’s too-big-to-fail,too-big-to-be-restructured banks: they are too politically powerful.Their lobbying efforts worked well, first to deregulate, and then tohave taxpayers pay for the cleanup. Their hope is that it will workonce again to keep them free to do as they please, regardless of therisks for taxpayers and the economy. We cannot afford to let thathappen.

Joseph E. Stiglitz is a Professor of Economics at Columbia University,and a Nobel Laureate in economics. He chairs a Commission of Experts,appointed by the President of the U.N. General Assembly, on reforms ofthe international monetary and financial system. A new global reservecurrency system is discussed in his 2006 book, Making GlobalizationWork.

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