The Public Policy
Banks on Welfare
Obamanomics is paving the way to financial ruin.
In his first address to Congress about three weeks ago, President Obama tried to explain how he intends to tax and borrow the nation out of recession. Markets haven’t bought it.
“Obamanomics,” it turns out, is a demand-side economic strategy of higher taxes on production and trickle-down debt designed to increase consumption by putting a debt-ridden people even deeper into debt. The President also announced a gaggle of Great Economy Welfare Programs for financial institutions to implement this New Economic Policy and promised to reward bankers’ bad behavior with an open-ended commitment of unlimited bailouts to keep the credit wine flowing.
He said, “It’s not about helping banks; it’s about helping people.” According to Obamanomics, debt will trickle down from federal handouts to banks through to consumers, allowing them to run out and buy more stuff from struggling businesses. After the speech, Senator Barbara Boxer called it a “slam dunk, a home run…”
It’s a strike out, and history demonstrates why. In 1981, President Ronald Reagan took office in the midst of raging inflation and a shrinking economy. He understood that the key to economic recovery and taming inflation was to stop printing money and increase the rewards for work, saving and investment to increase production, not consumption. Before people can consume, they first must produce something to offer in trade. To produce something, they must have a job or own a profitable business. In other words, to increase prosperity, production first must rise after which consumption will follow. Obamanomics has the cart before the horse.
When President Reagan cut tax rates and reduced regulation to increase incentives for entrepreneurs to work, save and invest to raise economic production and create more jobs, Barbara Boxer called the president’s successful supply-side approach to economic recovery “trickle-down economics” and accused him of cravenly playing on the misfortune of hardworking Americans to reward undeserving rich people. Today, she effuses over Obama’s demand-side, trickle-down-debt strategy based on astronomical bailouts to banks, insurance companies, and big businesses that would fail without government subsidies. I call that corporate welfare in the name of the general welfare.
The same day the President laid out Obamanomics to the nation, Fed Chairman Ben Bernanke in testimony before the Senate Banking Committee tried to reassure the American public that the United States was going to get only a little bit pregnant when it crawls into bed with the big financial institutions and “partially” nationalizes them. Uncle Sam, Bernanke insisted, will not nationalize those banks; just provide them a little financial stimulation. It wasn’t a week before the federal government nationalized Citi by acquiring 37 percent of its common stock. So much for respect in the morning.
Watching the Obama Administration and the Bernanke Fed in action is reminiscent of a scene half way through Ayn Rand’s epic novel Atlas Shrugged when the government bureaucrat in charge of the Federal Bureau of Economic Planning proclaims, “Production is not a private choice, but a public duty. They have no right to fail, no matter what conditions happen to come up. They’ve got to go on producing. It’s a social imperative.”
Politicians and their cronies in the Financial Establishment ensure public acquiescence to endless bailouts by creating night terrors among the people of “systemic risk” that could bring total financial collapse, much as a kidnapper instills terror in the parents of what could happen to the child he holds hostage if they don’t pay up. So even though polls and markets reveal a complete lack of public confidence in government’s ability to fix the banking problem, people are afraid to stop the government from continuing its destructive policies.
When people lose confidence in capitalism they turn to fascism, which it precisely what is occurring before our eyes. In Chairman Bernanke’s testimony before Congress, he said the government has ways other than “nationalization” to control financial institutions, and he rejected the medical metaphor used earlier by Treasury Secretary Timothy Geithner when he announced the stress tests for banks. Bernanke made it clear (and Geithner later confirmed) that the Treasury Secretary’s stress test for banks is not really analogous to the strenuous test for heart disease doctors administer; it is more like a means test for welfare applied by social workers. Both Geithner and Bernanke insist it isn’t a matter of whether banks pass or fail the stress tests. Rather, the assessment is intended to determine how big a bailout they are going to get from Uncle Sam.
Here is how Chairman Bernanke described Obama’s Great Economy Welfare Programs for bankers:
(i) A new “capital assistance program [a federal cash-assistance welfare program like Food Stamps] to ensure that banks have adequate buffers of high-quality capital”;
(ii) A “public-private investment fund in which private capital will be leveraged with public funds [a federal matching-grant welfare program like Medicaid] to purchase legacy assets [aka worthless assets] from financial institutions”; and
(iii) A new Federal Reserve program “using capital provided by the Treasury [a government-financed, third-party, faith-based charity program] to expand the size and scope of the TALF [Term Asset-Backed Securities Loan Facility] to include securities backed by commercial real estate loans and potentially other types of asset-backed securities as well” [aka more worthless assets].
There is no doubt President Obama is a charmer and a smooth political operator. After the past couple of weeks, however, there also is ample evidence his administration has no idea what it is doing economically and is putting the nation on a course to financial ruin.
Letter to the Editor View all comments (27) | Leave a comment
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dennisl59| 3.13.09 @ 6:36AM
Take it all the way and declare Directive 10-289 to be in effect by Presidental Executive Order.
Robert Rosencrans| 3.13.09 @ 7:46AM
Ben Bernake was raised in Dillon, S.C., a nice little town but hardly prosperous. I drive through there several times a month and marvel at some of the beautiful homes there, coupled to the obvious poverty. In fact, South Carolina has the second highest unemployment rate in the nation. I'm not alleging Ben Bernake has or had anything to do with that. It's just that Michigan who is the highest in unemployment, and South Carolina have something in common. They both have a lot of hoops in the systems for the business community to jump through to stay in business, as well as a lot of annoying little taxes.
Ironically cars are still manufactured in South Carolina from a foreign manufacturer, BMW, while Detroit may see just one manufacturer left, Ford.
The elitists who believe in the power of big government have taken a wrecking ball to the business sector and free enterprise.
Their demand side economics works off the principle of larger government, their trickle down economics are based on trickle down pain, which can be seen clearly as many responsible people close their businesses or remove their assets from the investment sector in fear of more government regulations, higher and widespread taxes and more confiscation of wealth through stealth means, including cap and trade.
Obama and his Legion of Doom apparently believe that simply waving around around government largess and regulations will inspire the public to work harder. It will not.
There are documented stories of middle class couples getting ready to stop paying their mortgages so they qualify for government intervention and who can blame them?
In the meantime the investor class is getting ripped to shreds by the angry losers in the White House who figure if you got some wealth, you must have stolen it, not earned it.
Evelyn Guzman | 3.13.09 @ 8:23AM
I laugh at the title of your article but how fitting it is for the banks are on welfare now being handed down money in order for them to survive. My fervent wish for this bailout is for the money to be strictly monitored so they are put to good use and not just for the entertainment of the privileged few.
Evelyn Guzman
Debt Challenger
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Grant Writing Classes Toms Home Business Blog =BB Blog Archive =BB Tips About Real Es links to this page. Here’s an excerpt:
Mike| 3.13.09 @ 10:54AM
Mr. Hunter, your article begs the question. Of course 'Banks on Welfare' are bad, but what is the alternative? Should they all be allowed a free market opportunity to fail? That was my view when Lehman went down but it was hard to find anyone who didn't promote some form of government intervention at the time.
It's easy to say don't like the bank welfare now, but the time to stand up and be counted was last September when a hands off policy would have meant a mind numbing string of bankrupcies including Merrill Lynch, Morgan Stanley, Goldman Sachs, Citigroup, Wachovia, Bank of America, Prudential, MetLife, Hartford, and Genworth to name just a few of the giants. The harm created would have been immense. That's why Paulson and Bernanke blinked.
S.L. Toddard| 3.13.09 @ 11:58AM
JEREMIAH AND BOB: FYI - I haven't been posting here in over a month, since maybe Feb 2nd. There is a troll here who adopts other people's names and posts as them. I never called Bob "blow-bob" or whatever. I saw you also got into some scraps with him, Jeremiah. None of it was me. I don't use terms like "lib" or whatever else this clown said.
Imagine doing that - being that pathetic? Logging on and pretending to be someone else you only know through the internet? It's sad and the sort of thing one would expect of a stalker.
Anyway, none of the posts under my name - S.L. Toddard - have actually been me since the first couple days of February. It's been that same, sad, lonely troll.
MAS1916 | 3.13.09 @ 11:59AM
I am missing the kind of grandstanding that Democrats delivered to the bank presidents some weeks ago. Pontificating about private jets and threatening to hold all salaries to half a million a year was a great performance idea. But then Obama decided to back off on the maximum pay rule saying that he didn't want a 'brain drain' in banking. What? Were all these guys Democrat donors? Oops! Several were!
Jerome Brick| 3.13.09 @ 1:26PM
What's wrong with our banking system? Upon repeal of the Glass-Steagall Act in 1999, a handful of large money center banks (e. g. Citibank, B of A, etc) were allowed to get into the credit bond business and act as surety for third party debt which had previously been prohibited. In other words Federally insured commercial banks could now get into the insurance business and guaranty the creditworthiness of third parties for a fee, thereby exposing the bank's to potentially catastrophic potential liabilities in the event of an economic meltdown such as we are now experiencing. The resulting exposure that these mega banks have assumed has overwhelmed the FDIC bank insurance fund.
Citibank is a case study on how this catrastrophe has come about. With its new power to insure debt, Citigroup (holding company for Citibank) created Special Investment Vehicles (SIV) which were backed by the financial strength and credibility of Citibank - a Federally insured commercial bank. These SIVs sold billions of short term commercial paper at very low interest rates and used to the proceeds to fund long term, much higher yielding mortgage backed securities (MBS) - a seemingly very profitable arbitrage scheme. All this was done off the books of Citibank and hidden from the eyes of the regulatory authorities.
As we now retrospectively know, many of the MBSs were of poor quality and illiquid. Meanwhile the commercial paper holders wanted their money bank. Ergo Citibank was forced to payoff the commercial paper and bring the MBSs back on their books to the tune of $300 billion. To facilitate this transaction the FDIC had to guarantee 90% of the MBS assets which represents a $270 billion exposure to the FDIC. As we know the FDIC has approximatey $50 billion in its insurance fund and shrinking. From that we can conclude that if there is a mere 20% shrinkage in the value of the MBSs, the FDIC fund would be wiped out and put the FDIC into technical insolvency.
That my friends is what's wrong with our banking system (at least in my humble opinion) - the nightmare of "To Big To Fail" at the doorstep of the FDIC.
Appleby| 3.13.09 @ 2:07PM
What, the Sixties Math doesn't add up? Just like we hard working blue collar non-hippie-scum students told our besotted liberal hippie classmates back in 1968?
The only good that will come of this is that finally the Sixties will be buried so deeply that nobody will ever dig them up again.
Now where did we park the tumbrels....
aware| 3.13.09 @ 3:36PM
As long as the Federal Reserve sits like a bloated spider at the center of this web of corruption it will be one mess to cover other mess just like it's been for 90 years. One day the mess will be too big to cover then ...poof. If that day hasn't already come.
Skep41 | 3.14.09 @ 12:28PM
After the speech, Senator Barbara Boxer called it a "slam dunk, a home run…"
My home state's beloved Dwarf Senator got that phrase by listening to guys talk about dates with her in high school. It now seems that the treasury is just as easy to plumb as the engaging Ms Boxer was as a drunken teenager. Thank God I'm not a drunken teenager any more; the current crop of teenagers, drunk on the promises of 'Hope And Change', danced to the polls last November to hand their futures over to the likes of Barbara Boxer and Barak Obama unaware that their thoughtless, feel-good behavior will likely mean that they wake up at some point gravid with debt. The markets have recovered from their post-inaugurative swoon for the moment but the crippled banking system is only a symptom of the general malaise; the idea that all these monetary numbers arent connected to the real world and that all it will take is the right economic formula to make this falling-down shack I live in be worth $800,000 again. And it will, as soon as those geniuses who have loudly announced that they've scored a 'slam dunk home run' by fixing the banking system get to work fixing the weather. And fixing unfairness. And fixing Union elections. And fixing regular elections, which in their broken form threaten to interrupt the 'Change Crusade'. After all them fixins' the US Dollar will be on a par with the Confederate Dollar and my little run-down mid-century termite-infested leaky roofed hunk of slum housing will be worth millions! And those lousy kids and grandkids who, up to now, have been a dead loss financially will get stuck paying for it all. Aint Hope And Change great?
car enthusiast| 11.15.09 @ 12:42PM
Let's get the facts right, please. To mention just a few quickly: The "Bernanke Fed" is the republican Bush Fed. He was appointed by George W.. Obama did not put the Banks on welfare. Again, it was Bush. The massive government bailout of the banks ocurred in September, 2008, during the Bush administration. In addition, Reagan did not inherit "raging inflation", he exacerbated it to unprecedented levels never reached either before or since. His policies also caused unprecedented federal deficits never seen before. These deficits remained until the Clinton administration. Of course, George W. once again took care of that with new massive and crippling spending and deficits. best carbuying method
car enthusiast| 11.16.09 @ 4:50PM
Correction to my above comment (can't edit it). The sentence about inflation under Reagan is incorrect. He did inherit high inflation and it did come down during his administration. The rest of the comment is correct.