Saturday, February 14, 2009

Nationalizers Inside the House

One of my favorite horror movies is When A Stranger Calls. The line that made my stand up and shriek in a New Jersey theater full of strangers in 1980 comes when a cop calls back the babysitter who's been getting crank calls ("have you checked the children?"). He tells her, "we've traced the call. It's coming from inside the house." Shrieeeek.

Progressive and left economists have been doing this. It's worth reading the whole transcript of Michael Hudson and Robert Kuttner on Democracy Now yesterday. Here's Kuttner:
if you look at Citigroup, the Treasury has put in $45 billion of direct equity capital into Citigroup. It’s guaranteed another $306 billion of toxic assets. You can buy all of Citigroup for about $25 billion. So the taxpayers effectively own it. What the government ought to do is exercise the rights of ownership, go in there, put a majority of public appointees on the board, get rid of existing management. I think in the case of Citigroup, the best thing you could do is break it up, because it is a zombie bank in the sense of it being insolvent. And most of the large banks are insolvent. Their debts exceed their capital. And what Geithner is doing, he’s trying to just disguise this by one more effort to double down using the same kind of financial razzle dazzle that got us into this trouble. So it would be much cleaner to put these banks into receivership.

And if that sounds radical, it is radical, but it’s important to keep in mind that the FDIC, which is the one agency that’s behaved responsibly in this whole mess, the FDIC does this every day of the week.
But here's self-described "free market economists" Matthew Richardson and Nouriel Roubini of NYU's Stern school saying "We're All Swedes Now." Why? Because they have traced the call and it's coming from inside the house:
The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.
In other words, they are scared out of their minds.

Same goes for the experienced but polite-society NYT business journalist Joe Nocera, who finds members of his corporate "kitchen cabinet" saying "Nationalize It!" The process all begin with a real stress test, which I prefer to call the Banking Inquisition.

It's interesting to watch a certain kind of capitalist rationality pushing on its long-time advocates. The first element is correct accounting, the second is actual market value, and the third is rights of ownership. The first shows up when a former IMF official tells Nocera that governments must take over insolvent banks: "This is exactly what the I.M.F. tells an emerging market country to do when it is facing a crisis — like Thailand in 1997, or Russia in 1998."

The third shows up in Nocera's final salvo:
Whatever solution winds up working, it is going to cost the taxpayers billions. That’s a given. The S.& L. crisis — which was a piffle compared to what we face now — cost well over $100 billion by the time it was over. In return, shouldn’t the taxpayer be the one to hold the majority ownership stake in the banks? And shouldn’t the government have the right to decide that perhaps Ken Lewis should no longer be running Bank of America? And isn’t the best way to protect taxpayers — the mantra we heard all week long — to take control of what they are financing? It can be done right. It has been before.
We're seeing a convergence of left solutions to the crisis and moderate insider solutions. This is the inside call that is frightening Republicans.

But only the left will follow through with what we really need: a democratized banking system that is much cheaper for the overall economy than the current one. Democratization requires a distribution of knowledge about the financial system that is beyond anything seen so far in modern history.

The reorganized "sustainable economy" party will need the political organization to fend off attacks, but also a vast intellectual base. In addition to the folks mentioned above, there is William Greider on the ongoing banker squeeze on Social Security, and Dean Baker's weekly critiques of the Washington Post's relentless campaign against the big "entitlements." There are excellent longer analyzes like Peter Gowan's in the New Left Review.

Can we have some Principles from all this?
  • a end to the financial double standard: a bank may be borrowing at 4% and charging you 21% on your credit card. This has to stop. End it through
  • anti-usury laws. these are a subset of
  • regulatory equity. Investment firms need to be part of general legal frameworks just like everybody else. And this would lead to:
  • tax equity. Financial transactions are largely untaxed. The "Tobin Tax" of even 0.25% on currency trading was one example, has been completely blocked by the financial industry.
For any of this to happen, we need massively more consistent popular attention to the financial details coming from the 80-90% of the population that will otherwise be paying the bill. That's where the next call needs to come from.

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