Big Bank Welfare Queens Unprofitable Without Government Subsidies, So Why Don’t We Regulate Them Like Utilities?

Quite a few readers excitedly sent a link to a Bloomberg editorial, “Why Should Taxpayers Give Big Banks $83 Billion a Year?” which summarizes a study by Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz that the editors used to extrapolate that the five biggest US banks are “barely profitable” if they weren’t able to borrow at artificially cheap rates thanks to the market perception that they are too big too fail.

The Bloomberg article, while analytically flawed, still winds up being too charitable. It looked at only one subsidy, how the implicit guarantee too big to fail guarantee lowers the borrowing costs of the biggest banks. Now on the one hand, Matt Levine is correct to point out that Bloomberg sloppily applied a funding cost advantage based on bond yields to deposits and short-term funding as well. However, he also cheerily acts as if deposit insurance is fairly priced (as in banks are “paying” for deposit insurance, hence no subsidy there). That’s bollocks, and Levine ought to know better. Even Greenspan conceded that FDIC insurance was too cheap.

The highly respected Andy Haldane of the Bank of England, in a 2010 paper, “The $100 billion Question” reached a conclusion not quite as dire as Bloomberg’s, but still in the ballpark:

Table 4 shows the estimated value of that subsidy for the same sample of UK and global banks, again between 2007 and 2009. For UK banks, the average annual subsidy for the top five banks over these years was over £50 billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums.

So the biggest banks are borderline profitable to unprofitable over the cycle. And remember, the first acute phase of the crisis didn’t start until August 2007, and there were intervening periods through September 2008 where risk spreads fell back.

And remember, we really aren’t looking at the right question. Funding subsidies are only one piece of the puzzle.

Ed Kane of Boston University estimated that in 2009, the cost of systemic risk insurance to the largest banks would have been roughly $300 billion. If we look at the five biggest banks in the Bloomberg list (JP Morgan, Bank of America, Citigroup, Wells Fargo, and Goldman) and look at the proportion of funds they took in the $205 billion TARP Capital Purchase Program plus the additional $20 billion each in equity purchases for Citi and BofA through the Targeted Investment Program, you get that those banks received 57% of the total.* Let be generous and round it down to 50%. You still get an estimated $150 billion in subsides for the five biggest banks. So contra Levine and big bank defenders, doing a more precise tally actually makes matters worse, not better, for the big banks.

Moreover, none of these analyses factor in the ongoing subsidies of ZIRP and quantitative easing. Lest anyone forget, interest rates were dropped to the floor to keep the banks from keeling over and the Fed dares not increase them until it deems the economy to be looking perkier. I’ve seen estimates that the cost of ZIRP to savers is $350 billion. That is yet another subsidy to the banks, particularly the biggest ones. Recall that this is the second time in a decade that the Fed has chosen to impose negative interest rates to help banks. Greenspan also dropped Fed funds rates in the dot bomb era, not for the usual one quarter, which had been the Fed’s previous behavior in a recession, but for a full nine quarters. Greenspan was apparently unduly concerned that a stock market downturn lead to deflation.

QE is a harder-to-measure subsidy. QE has been focused on lowering the cost of mortgage credit, which gooses the value of mortgage-related assets. Even though the Fed focuses on how it helps homeowners, it isn’t hard to imagine that the central bank is at least as concerned with how it flatters bank balance sheets.

And we have other important forms of government support. The US has been pushing, hard, for foreign countries to open their financial markets so they can be conquered by US financial firms. They strong-armed the Japanese to deregulate banking, with the result that they went head over heels for zaitech (speculation financial engineering), which no doubt served to make their joint real estate/stock market bubbles worse. The Asian crisis served as another opportunity to wedge the door open in formerly protected markets. How much is it worth to have Bob Rubin, Larry Summers, and Timothy Geithner lobbying on your behalf?

And make no mistake that the decision to treat banks as favored children is long-standing. Consider this:

Our current approach to regulating commercial banks is bankrupt….After years of benign neglect, we are now engaged in debate over the future of our banking system at a time when our banking system is, along with our economy, fundamentally weaker than at any time since the Depression….

In fact, a credit crunch is underway…As the economy weakens, the cash flows of supporting the debt payments of all sectors of the economy erode. As defaults mount, bankers curtail credit further. Borrowers curtail their expenditures further. Economic activity falls. Cash flow falls. Credit flows are curtailed further. Given the heavy debt burden of many sectors of the economy, and the weakness of the banking system, a downward spiral, once started, could continue for quite a while…

Even if we are lucky and are able to arrest this spiral, the recovery is likely to be anemic…

Today, the banking system is like a long-neglected bridge. The nation has not been paying attention to it; its functions are taken for granted. It is now beginning to show signs of rapid deterioration. Unless a major effort is taken to shore it up, it is likely to collapse.

Fortunately, President Bush, the Treasury department, the Federal Reserve, the Federal Deposit Insurance Corporation, and many members of Congress are well aware that the problems in the banking industry need to be addressed now, and a new answer is needed. Indeed, in early 1991, there appeared to be a concerted effort by government to improve the profitability of the banking system….This is the central issue we face.

The book was Bankrupt, and author was Lowell Bryan, one of the three leaders of McKinsey’s banking practice at the time. It is typical McKinsey leading edge conventional wisdom: banks desperately needed to rebuild their capital bases, ergo, they needed regulation oriented towards making them more profitable. Since the deregulation of the 1980s had led directly to the savings & loan industry blowing itself up impressively (aided in many of the most dramatic cases by Mike Milken), one might conclude that haphazard deregulation is not such a bright idea. And the weakened equity bases of banks also might mean they needed breaks until they got back on their feet, not permanently.

It turned out that Greenspan’s engineering of an extremely steep yield curve in fact did enable banks to earn their way back out of the hole they were in much faster than the pundits expected. But banks had been pushing to get into higher-return investment banking businesses since the 1960s, and used the change in regulatory assumptions to their full advantage. All restrictions on interstate banking were eliminated in 1994. By 1996, Glass Steagall was a dead letter.**

The point is that the banking industry has been profitable (at times, seemingly very profitable) only at the result of long standing government intervention to assure its profitability. It is no exaggeration to say that the banking industry enjoys so much public support that it can in no way be considered to be a private enterprise. But we’ve put in place the worst of all possible worlds: we’ve allowed an industry that couldn’t figure out how to operate profitably on its own to extract undeservedly large subsidies, with the result that financial services industry has become extractive. Its pay is wildly out of line with the social benefits it provides (indeed, many of its most predatory activities are also its best remunerated) and it has also grown disproportionately large, sucking resources away from better uses (we’d clearly be better off if math and physics grads were tackling real world problems rather than devising better HFT algorithms. And when you have bank branches displacing liquor stores, you know something is out of whack).

The better solution in 1991 would have been to engineer a modestly and reliably profitable and boring banking industry. But that would have taken a lot more thought than letting bankers do what they wanted, which was enter the Wild West of investment banking. The result has been more frequent and severe financial crises, culminating with one that nearly destroyed the global economy. Unfortunately, no one in the officialdom seems able to recognize that the only time we had a long period of stability in the banking system in the US was when banks were strictly regulated and made only modest profits. Until policymakers are willing to act on that understanding, financiers will keep up their extortionate practices until they bleed their host dry.

*Trying to factor in AIG would not improve the picture, since the reason for saving AIG was that banks were its credit default swaps counterparties, so the salvage operation for AIG was a backdoor bailout of the big US and international banks. You would show the spillover to foreign banks, but Kane’s number was for domestic banks only.
** The Fed issued a ruling that permitted bank holding companies to obtain as much as 25% of their revenues from investment banking activities.

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    1. lakewoebegoner

      the simplest solution would be to cap each bank at no more than 3% of the country’s total deposits—-it would only affect the top 10-ish big banks. Or just split each megabank in half at the Mississippi River.

      Never going to happen while the current Democrats (or the Republicans) are in charge.

    2. nonclassical

      …likely because the bushitter DEregulated “Public Utility Holding Company Act of 1930’s” too…Puget Sound Electricity sold off by 5 man bushit “investigative commission”:

      ..should point out the LIE involved here: “State regulators have approved the sale of Puget Sound Energy for $7.4 billion to a group of investors from Canada and Australia.”

      Read more here:

      …makes it appear WASHINGTON STATE “regulators” approved sale-COMPLETE LIE…”state regulators” were 5 man commission sent from D.C. to DEregulate..
      I personally spoke with State Senator Kilmer-who told me in no uncertain terms, Washington State legislators were told to say nothing-stay completely away from commission efforts-findings..

  1. from Mexico

    The happy bankster

    It’s MMT for me,
    And AusteriT for thee.

    Its LiberT for me,
    And TyrannY for thee.

    Its LiesurelY for me,
    And SlaverY for thee.

  2. Really?

    Us seriously regulate them? Man is that putting the cart before the horse. Maybe after the coming collapse, but certainly not one day before. And I seriously doubt collapse will fix anything either, other than naturally limit bank sizes until everything comes back. But then again, that assumes that any of the current mega-capitalist porn will be coming back again, which looks to be pretty doubtful to me. One can hope anyway.

  3. from Mexico

    The degenerative process, which we’ve seen everywhere from 1930s Germany to 1970s Chile to contemporary Europe and USA, follows the following pathway:

    Capitalism → Facism → Nazism

    Capitalism is crisis-prone because the theory upon which it is founded is so detached and remote from reality. Crisis does not always serve as a curative to the degenerative process, and in many cases only works to move it along. A leading dissident economist compares the “cure” often adminstered for capitalism’s ills as being like bleeding a patient … small quantities of blood from a patient to cure or prevent illness and disease.

    An alternative to the above progression is as follows:

    Capitalism → Marxism → Bolshevism

    Thus, as Reinhold Niebuhr alleges, Marxism “is an even more grievous mistake than the liberal error.”

    Here’s how Martin Luther King put it:

    It is a sad fact that because of comfort, complacency, a morbid fear of communism, our proneness to adjust to injustice, the Western nations that initiated so much of the revolutionary spirit of the modern world have now become the arch anti-revolutionaries. This has driven many to feel that only Marxism has a revolutionary spirit. Therefore, communism is a judgment against our failure to make democracy real and follow through on the revolutions that we initiated.

    Some scientific materialists have come to the same conclusions as the moralist/spiritualists. The theories upon which liberalism and Marxism, as well as their begets, are based are fatally flawed. As the evolutionary biologiest David Slaon Wilson put it:

    Instead of minimalistic assumptions such as the utility maximization of rational choice theory or the blank slate of behaviorism and social constructivism, we need to discover a complex psychological architecture that evolved by genetic evoluton and that causes small groups to self-organize into coordinated units… Conscious intentional thought is just the tip of an iceberg. The rest of the iceberg operates beneath conscious awareness, and must be discovered scientifically, like vision, despite the fact that it takes place within us every moment of the day.

    DAVID SLOAN WILSON, Evolution for Everyone

    And as the psychologist Andrew M. Lobaczewski notes:

    The more we progress in this understanding, the more social doctrines strike us as primitive and psychologically naive, especially those based on the thoughts of thinkers living in the 18th and 19th centureis which were characterized by a dearth of psychological perception. The suggestive nature of these doctrines derives from their oversimplification of reality, something easily adapted and used in political propaganda. These doctrines and ideologies show their basic faults, in regard to the understanding of human personalities and differences among people, all rather clearly if viewed in the light of our natural language of psychological concepts, and even more so in the light of objective language.

    — ANDRES M. LOBACZEWSKI, Political Ponerology

    1. mafer

      Where Marxism was flawed was the view that Industry would always be central to Capitalism. In fact, the casino-financialized form that Capitalism has evolved into is far more pernicious and parasitic then anything Marx had ever imagined.

      On the other hand, the Marxian criticism on the insufficiency of market mechanism and the contradiction of demand destruction turned out to be absolutely correct.

      The central problem inescapably boils down to political power. The contradictions of Capitalism could possibly be resolved (or at least attenuated) if Liberal Democracies were independent arbeiters. However, the exteme opportunism, ignorance, and insouciance that we are witnessing in the US and Europe is driving a stake in heart of the theoretical basis of the model that has been the ideal since the Enlightenment.

      This is not merely an economic crisis, but rather a political crisis that has yet to be realized.

    2. jsmith

      So, if you think – as you consistently try and point out using Arendt (who misread Marx), Niebuhr (a former Marxist who also misread Marx and was the philosophical godfather of the neoliberal movement) and other assorted thinkers – that Marx is too simplistic and erroneous – not that I remotely accept those ideas – then how do we effectively create, communicate/promulgate and actualize a new rubric of ideas for the billions – many of them terribly uneducated mind you – of people who suffer under the capitalistic yoke?

      I mean, you mention – for example – Wilson and Lobaczewksi who call for an entirely new paradigm replacement that speaks to among other things the psychological complexity of mankind.

      Ok, let’s hear it.

      Sock it to us.

      Give the billions of workers who are RIGHT NOW being murdered and exploited worldwide due to the capitalist regime something to grab onto.


      You don’t have anything concrete?

      Oh, we just need some more time to figure something out that is guaranteed to NEVER EVER mutate into something that it wasn’t originally supposed to be, huh?

      Hold on, let me tell that to the currently oppresed:

      Hey guys, yeah it sucks that you’re going to early graves and your life is a sh!thole of exploitation but don’t worry some smart guys somewhere are studying the complexity of the human psyche to try and formulate something new that hopefully will never ever become something bad maybe at some point in future so sit tight for a few more generations – maybe a dozen or so – while we try and hammer things out, kay?

      What, you say this guy called Marx pretty accurately described the situation you’re in right now and you think maybe you would like to use his prescient works as the basis for your movement?

      Nah, see, some serious people – who misread Marx and were not in any position to criticize him – think that it might be a bad idea because they’re scared of what might happen.

      What, you don’t care as your lives suck @ss right now?

      Well, sorry gents, better to fight the imagined terrors of the future than concretely and accurately address the ills of today, right?

      A ton of prevention is worth a milligram of cure, doncha know?

      Let’s just all remain scared of what might be and hope that someone a la Asimov’s Foundation trilogy finally comes up with a practical theory of psychohistory which will free us in the 26th century.

      Until then:


      1. from Mexico

        @ jsmith

        So what you’re saying is that you don’t do reality, and you don’t do uncertainty. Your solution: active nihilism.

        This is a solution, however, that in practice has proven disastrous. The best rebuttal to active nihilism that I have come across is this from Nihilism Before Nietzsche:

        The world exercises an enormous force upon us. Natural necessity, chance and contingency, subconscious passions and drives, the structure of economic and political life, and many other factors determine us in ways we do not understand and cannot ultimately control. At our best and most courageous, we confront the questions this world poses and in our own limited ways seek to answer them. This quest, however, is not without its dangers. Questions disrupt and unsettle our lives and we are often all too ready to accept partial truths and gross simplifications to escape from their perplexity. The tragedies of our own century have taught us, however, that it is better to suffer the anxiety that questions engender than to give overhasty answers to them. With these difficulties and dangers in mind, we must still attempt to give at least tentative answers to the perplexing questions that punctuate our existence.

        — MICHAEL ALLEN GILLESPIE, Nihilism Before Nietzsche

      2. jsmith

        No, I would definitely be in the more pragmatic camp in that I believe that right now at this critical point in history the best course for mankind would be to use as theoretical underpinnings a Marxist understanding of the world and work from there as I don’t believe that the Bolshevist manisfestation which we saw last century should be construed as the final word on Marxist theory put into practice.

        Do I really believe all of Marx’s prophecies as to how the future will unfold?

        Not necessarily.

        But I do believe that if the billions of exploited human beings had a more accurate grasp of their station in life vis a vis Marx then there would be greater movement towards mankind’s benefit no matter how those forms were then put into practice; Bolshevism/Stalinism be damned as the constant boogeymen that are invoked to scare everyone from thinking about how they are constantly getting screwed.

        Thus, instead of having seemingly the best and most widely circulated ideas of societal/economic reform being mere mutations on capitalism people utilizing the Marxist worldview would inherently understand that the problems with capitalism are systemically intrinsic to capitalism itself.

        Sure, anarchical syndicalism and related ideas are nice but do they have the damning criticisms of the current system and theoretical rigor that Marxist thought does?

        In addition, I say pragmatic in the sense that 1) it’s just laying there, all ready written just waiting to be used and that will save time in not having to wait around for new ideas around which people should coalesce 2) it’s inherently political and therefore – as evidenced in America’s past – useful in reaching people and organizing and 3) since the TPTB have so blatantly waged a propaganda campaign against Marxist thought over the last century it clearly is a belief system that scares the shite out of them so it has the value of being inherently antithetical/confrontational to the current system we suffer under.

        No, I’m not a nihilist.

        I am a pragmatist who thinks that in Marx we have a tool/weapon which is just sitting there idle while good people of world – either due to being propagandized or ignorance – float at sea unable to come to terms with what is happening to them and what has been happening to them for generations.

        Gotta run.

        1. from Mexico

          jsmith says:

          But I do believe that if the billions of exploited human beings had a more accurate grasp of their station in life vis a vis Marx then there would be greater movement towards mankind’s benefit no matter how those forms were then put into practice.

          So Marx was aware, and concerned, that human exploitation exists. So what? As Robert Hughes pointed out: “Pace the hardliners, you do not have to be an ideologue to spot human oppression and injustice, and to want to do something about it; long before The Communist Manifesto, men and women burned with indignation when they saw the strong depriving the weak of hope, and they will keep wanting to redress the injsutices the rich inflict on the poor long after the last Marxist regime collapses.”

          Martin Luther King was a little kinder than the jocular Hughes when he wrote of Marx that “in so far as he pointed to weaknesses of traditional capitalism, contributed to the growth of a definite self-consciousness in the masses, and challenged the social conscience of the Christian churches, I responded with a definite ‘yes.’ ”

          But that’s as good as it gets. The last part of your above quote — “no matter how those forms were then put into practice” — is what King identified as “one of the greatest tragedies of communism” (New York Times Magazine, 5 August, 1962). As King explained:

          Since for the Communist there is no divine government, no absolute moral order, there are no fixed, immutable principles; consequently almost anything-force, violence, murder, lying-is a justifiable means to the “millennial” end.5 This type of relativism was abhorrent to me. Constructive ends can never give absolute moral justification to destructive means, because in the final analysis the end is preexistent in the mean…

          In communism the individual ends up in subjection to the state. True, the Marxist would argue that the state is an “interim” reality which is to be eliminated when the classless society emerges; but the state is the end while it lasts, and man only a means to that end.

          And if any man’s so-called rights or liberties stand in the way of that end, they are simply swept aside. His liberties of expression, his freedom to vote, his freedom to listen to what news he likes or to choose his books are all restricted. Man becomes hardly more, in communism, than a depersonalized cog in the turning wheel of the state. This deprecation of individual freedom was objectionable to me. I am convinced now, as I was then, that man is an end because he is a child of God. Man is not made for the state; the state is made for man. To deprive man of freedom is to relegate him to the status of a thing, rather than elevate him to the status of a person. Man must never be treated as a means to the end of the state, but always as an end within himself.

          1. skippy

            “King wasn’t anyone’s dupe – and that means that he was critical of the Soviet Union too, as you’ll see in the excerpt below, and from the line:

            “Communism forgets that life is individual. Capitalism forgets that life is social, and the Kingdom of Brotherhood is found neither in the thesis of Communism nor the antithesis of capitalism but in a higher synthesis.”

            So how to reconcile the fact that King rejected communism, but claimed to be a Marxist? One way is to observe that the practice of the Soviet Union had very little to do with Marxism. To see that governments’ actions in the name of an ideology may be systematically at odds with that ideology is not a bad argument. It’s one that helps to the Dalai Lama reconcile his ‘economic and social Marxism’ with the horrors of the Chinese Communist state or, indeed, for Chicago economists to say that the reason the US is a mess is because it’s insufficiently capitalist. But this is to sell Dr. King short. King had specific quarrels with Marx, while finding more social justice in Marx than in the works of Milton Friedman. King was critically engaged with Marx.

            “I always look at Marx with a yes and a no. And there were some thigns that Karl Marx did that were very good. Some very good things. If you read him, you can see that this man had a great passion for social justice… [But] Karl Marx got messed up, first because he didn’t stick with that Jesus that he had read about; but secondly because he didn’t even stick with Hegel…Now this is where I leave Brother Marx and move on toward the Kingdon [of Brotherhood] … I am simply saying that God never intended for some of his children to live in inordinate superfluous wealth while others live in abject, deadening poverty.”

            (As quoted in the excellent Fairclough, A. (1983). “Was Martin Luther King a Marxist?” Hist Workshop J 15(1): 117-125.)

            Ultimately, King thought of himself as a Democratic Socialist, suspicious of the state but wanting to reclaim it through grassroots organising. Toward the end of his life he said to an SCLC planning meeting that “Something is wrong with capitalism as it now stands in the United States. We are not interested in being integrated into this value structure… a radical redistribution of power must take place.” His vision was translated into action. The Poor People’s Campaign was a direct attempt to answer the questions about society, about distribution, about value, and do something about them.

            It is this Martin Luther King that we ought to celebrate today. As always, we celebrate him best, when we organise. Here’s excerpt from his own thoughts of Where We Go From Here.” – snip

            A comment from this blog…

            Gebre Menfes Kidus says:
            August 16, 2012 at 1:57 am
            Good article. I get so tired of people calling Dr. King a communist. He was not a saint, and he had some profound moral failures in his personal life; but he most certainly was not a communist.

            A socialist? Yes,fair to say that. But communism is inherently atheistic, and this is why King rejected it in no uncertain terms. The Christian gospel formed and shaped all of King’s beliefs and actions. Rather than trying to put a political label on Dr. King, it is best to understand that he was a Christian first and foremost, and his philosophy and opinions were shaped by Christ not by communism or capitalism.


            Skippy… If you have an account…


          2. from Mexico

            Martin Luther King “claimed to be a Marxist”?

            Do tell.

            That’s almost as big a whopper as the one jsmith told above, that Reinhold Niebuhr was “a former Marxist who also misread Marx and was the philosophical godfather of the neoliberal movement.”

            And to come to this conclusion Patel was forced into some serious cherry picking of what King had written.

            But again, all this goes back to what King said about Marxism, that “almost anything — force, violence, murder, lying — is a justifiable means to the ‘millennial’ end.” They play fast and loose with the truth.

            If Patel were to want to give an accurate picture of King’s take on Marxism, why would he ignore the very paper where King laid out in great detail his beliefs regarding Marx?

            “My Pilgrimage to Nonviolence: The Challenge of Marxism”

            and “My Pilgrimage to Nonviolence: Toward a New Social Synthesis”


          3. skippy


            Firstly the post debunked the ideal of him being a Marxist (communist is another kettle of fish and not applicable) and more correctly defined him as a democratic socialist, yet he did not dismiss Marx in totality, just the state – man thingy, but, such is the quandary of the beautification of the deceased.

            Now on to some more interesting observations ie:

            “Third, I opposed communism’s political totalitarianism. In communism the in- dividual ends up in subjection to the state. True, the Marxist would argue that the state is an “interim” reality which is to be eliminated when the classless society emerges; but the state is the end while it lasts, and man only a means to that end. And if any man’s so-called rights or liberties stand in the way of that end, they are simply swept aside. His liberties of expression, his freedom to vote, his freedom to listen to what news he likes or to choose his books are all restricted. Man be-comes hardly more, in communism, than a depersonalized cog in the turning wheel of the state.
            This deprecation of individual freedom was objectionable to me.

            I am con- vinced now, as I was then, that man is an end because he is a child of God. Man is not made for the state; the state is made for man. To deprive man of freedom is to relegate him to the status of a thing, rather than elevate him to the status of a person. Man must never be treated as a means to the end of the state, but always as an end within himself.

            Yet, in spite of the fact that my response to communism was and is negative, and I considered it basically evil, there were points at which I found it challenging.” – MLK

            Me here… He is opposed Communism’s Political Totalitarianism (the state: an assemblage of persons will expressed) yet is OK with a Totalitarian Religious Creator Myth that is a polyglot of past Myths (an ambiguous belief)… colour me confused.

            Now this opine of totality:

            “I am con- vinced now, as I was then, that man is an end because he is a child of God.” – MLK


            “The late Archbishop of Canterbury, William Temple, referred to communism as a Christian heresy. By this he meant that communism had laid hold of certain truths which are essential parts of the Christian view of things, but that it had bound up with them concepts and practices which no Christian could ever accept or profess.6” – MLK

            Me here… The proclamation “man is an end because he is a child of God” is unfounded and asserted with out any evidence save he said so – I believe. Further more he creates the ultimate axiom by which to anchor his entire ethos… and people talk about Bernard… shezzz.

            Now we have the Archbishop of Canterbury claiming “communism as a Christian heresy” as retold by MLK. What a thingy, to claim certain ethical – moral values as historically – owned – just by breathing it when others have made the same observation through out antiquity.

            Although MLK did say:

            “But in spite of the shortcomings of his analysis, Marx had raised some basic questions. I was deeply concerned from my early teen days about the gulf between superfluous wealth and abject poverty, and my reading of Marx made me ever more conscious of this gulf. Although modern American capitalism had greatly reduced the gap through social reforms, there was still need for a better distri-bution of wealth. Moreover, Marx had revealed the danger of the profit motive as the sole basis of an economic system: capitalism is always in danger of inspiring” – MLK

            Me here… So he’s not completely at odds with wealth distribution issues, yet fails to understand the actual history and mechanisms… cough *complexity* he employs against Marx ie:

            “Obviously this theory left out of account the numerous and significant complexities-political, economic, moral, religious, and psychological-which played a vital role in shaping the constellation of in-stitutions and ideas known today as Western civilization. Moreover, it was dated in the sense that the capitalism Marx wrote about bore only a partial resemblance to the capitalism we know in this country today.” – MLK

            As I have stated in comment below:

            “In the Communist Manifesto there is a bit of prophesy that turned out not to be accurate. There are owners of the means of production and then there are workers. The middle class was supposed to disappear into one of these two categories. History took a different path in the 20th century, especially in America.

            Camus writes about how Marx could not have anticipated investment by the middle class in publicly owned corporations. This allowed a greater number of people to prosper, financially, as partial owners of the means of production.” – skip

            Cough jr. partial owners voting rights to property – assets, which are being looted – removed – lawfully – as we breath and transferred increasingly – exponentially to the *owners* of capital and for quite dubious reasons… personal freedom maybe?

            Skippy… Disclaimer not into ism and ologys of antiquity nor the beautification of the dead nor the exaggerated opines of persons which were un-willfully ignorant… the data is still coming in… sigh.

        2. skippy

          OK… on to Reinhold Niebuhr.

          “Karl Paul Reinhold Niebuhr (/ˈraɪnhoʊld ˈniːbʊər/; June 21, 1892 – June 1, 1971) was an American theologian, ethicist, public intellectual, commentator on politics and public affairs, and professor at Union Theological Seminary for more than 30 years. Also known for authoring the Serenity Prayer,[1]

          Niebuhr received the Presidential Medal of Freedom in 1964.[2]

          Among his most influential books are Moral Man and Immoral Society and The Nature and Destiny of Man, the latter of which was written as the result of Niebuhr’s delivery of the Gifford Lectures. Niebuhr was also the brother of another prominent theologian and ethicist, H. Richard Niebuhr.[3] Starting as a leftist minister in the 1920s indebted to theological liberalism, he shifted to Neo-Orthodox theology in the 1930s, explaining how the sin of pride created evil in the world, and created the theo-philosophical perspective known as Christian realism. He attacked utopianism as ineffectual for dealing with reality, writing in The Children of Light and the Children of Darkness (1944):

          Man’s capacity for justice makes democracy possible; but man’s inclination to injustice makes democracy necessary.”

          Niebuhr’s realism deepened after 1945 and led him to support the United States’ efforts to confront Soviet communism around the world. A powerful speaker, he was one of the “most influential religious leaders of the 1940s and 1950s in American public affairs.[4]

          Niebuhr battled with religious liberals over what he called their naïve views of the contradictions of human nature and the optimism of the Social Gospel, and battled with the religious conservatives over what he viewed as their naïve view of scripture and their narrow definition of “true religion”. During this time he was viewed by many as the intellectual rival of John Dewey.[5] Niebuhr was also one of the founders of Americans for Democratic Action and spent time at the Institute for Advanced Study in Princeton, New Jersey.[6][7][8]

          Niebuhr’s long-term contributions to political philosophy and political theology involve relating the Christian faith to “realism” in international relations and foreign affairs, away from idealism, and his contribution to modern just war thinking. His work has significantly influenced international relations theory, with political scientists such as Hans Morgenthau, Kenneth Waltz and Andrew Bacevich noting his influence on their thinking.[9][10][11]

          Numerous politicians and activists such as former President Jimmy Carter,[12] Martin Luther King, Jr., Hillary Clinton, Madeleine Albright, John McCain, and Eliot Spitzer have also noted his influence on their thinking.[11][13][14][15][16]

          Historian Arthur M. Schlesinger, Jr. described Niebuhr “the most influential American theologian of the 20th century”.[4][17] and Time Magazine posthumously called Niebuhr “the greatest Protestant theologian in America since Jonathan Edwards”.[18] Recent years have seen a renewed interest in Niebuhr’s work, in part because of President Barack Obama’s stated admiration for Niebuhr.[19][20][21][22] – snip

          After seminary, he preached the Social Gospel, then started attacking what he considered the brutalization and insecurity of Ford workers.[31] Niebuhr had moved to the left and was troubled by the demoralizing effects of industrialism on workers. He became an outspoken critic of Henry Ford and allowed union organizers to use his pulpit to expound their message of workers’ rights. Niebuhr attacked poor conditions created by the assembly lines and erratic employment practices.[32]

          Because of his opinion about factory work, Niebuhr rejected liberal optimism. He wrote in his diary:

          We went through one of the big automobile factories to-day. . . . The foundry interested me particularly. The heat was terrific. The men seemed weary. Here manual labour is a drudgery and toil is slavery. The men cannot possibly find any satisfaction in their work. They simply work to make a living. Their sweat and their dull pain are part of the price paid for the fine cars we all run. And most of us run the cars without knowing what price is being paid for them. . . . We are all responsible. We all want the things which the factory produces and none of us is sensitive enough to care how much in human values the efficiency of the modern factory costs.”.[33]

          The historian Ronald H. Stone thinks that Niebuhr never talked to the assembly line workers (many of his parishioners were skilled craftsmen) but projected feelings onto them after discussions with Rev. Samuel Marquis.[34] As some studies of assembly line workers have shown, the work may have been dull, but workers had complex motivations and could find ways to make meaning of their experiences; many boasted about their jobs and tried hard to place their sons on the assembly line. Ford tried but failed to control work habits.

          After extensive sociological studies in which workers were interviewed, management concluded that the workers were more interested in controlling their home lives than their work lives. The Ford solution was welfare capitalism, paying relatively high wages with added benefits, such as vacations and retirement, that reduced turnover and appealed primarily to family men. Link and Link conclude that by tying half a man’s wages to the company’s profit, Ford managers offered “a highly successful wage incentive plan that simultaneously increased job satisfaction and raised the productivity of labor.”[35][36]

          Niebuhr’s criticism of Ford and capitalism resonated with progressives and helped make him nationally prominent.[32] His serious commitment to Marxism developed after he moved to New York in 1928.[37]

          In 1923, Niebuhr visited Europe to meet with intellectuals and theologians. The conditions he saw in Germany under the French occupation of the Rhineland dismayed him. They reinforced the pacifist views that he had adopted after World War I. – snip

          During the 1930s, Niebuhr was a prominent leader of the militant faction of the Socialist Party of America, although he disliked die-hard Marxists. He described their beliefs as a religion and a thin one at that.[47] In 1941, he cofounded the Union for Democratic Action, a group with a strongly militarily interventionist, internationalist foreign policy and a pro-union, liberal domestic policy. He was the group’s president until it transformed into the Americans for Democratic Action in 1947.[48] – snip

          Within the framework of Christian Realism, Niebuhr became a supporter of American action in World War II, anti-communism, and the development of nuclear weapons. However, he opposed the Vietnam War.[49][50]

          At the outbreak of World War II, the pacifist component of his liberalism was challenged. Niebuhr began to distance himself from the pacifism of his more liberal colleagues and became a staunch advocate for the war. Niebuhr soon left the Fellowship of Reconciliation, a peace-oriented group of theologians and ministers, and became one of their harshest critics.

          This departure from his peers evolved into a movement known as Christian Realism. Niebuhr is widely considered to have been its primary advocate.[51] Niebuhr supported the Allies during World War II and argued for the engagement of the United States in the war. As a writer popular in both the secular and the religious arena and a professor at the Union Theological Seminary, he was very influential both in the United States and abroad. While many clergy proclaimed themselves pacifists because of their World War I experiences, Niebuhr declared that a victory by Germany and Japan would threaten Christianity. He renounced his socialist connections and beliefs and resigned from the pacifist Fellowship of Reconciliation. He based his arguments on the Protestant beliefs that sin is part of the world, that justice must take precedence over love, and that pacifism is a symbolic portrayal of absolute love but cannot prevent sin. Although his opponents did not portray him favorably, Niebuhr’s exchanges with them on the issue helped him mature intellectually.[52]

          Niebuhr debated Charles Clayton Morrison, editor of The Christian Century magazine, about America’s entry into World War II. Morrison and his pacifistic followers maintained that America’s role should be strictly neutral and part of a negotiated peace only, while Niebuhr claimed himself to be a realist, who opposed the use of political power to attain moral ends. Morrison and his followers strongly supported the movement to outlaw war that began after World War I and the Kellogg-Briand Pact of 1928. The pact was severely challenged by the Japanese invasion of Manchuria in 1931.

          With his publication of Moral Man and Immoral Society (1932), Niebuhr broke ranks with The Christian Century and supported interventionism and power politics. He supported the reelection of President Franklin D. Roosevelt in 1940 and published his own magazine, Christianity and Crisis.[53] In 1945, however, Niebuhr charged that use of the atomic bomb on Hiroshima was “morally indefensible”.

          Arthur Schlesinger, Jr.[54] explained Niebuhr’s influence:

          Traditionally, the idea of the frailty of man led to the demand for obedience to ordained authority. But Niebuhr rejected that ancient conservative argument. Ordained authority, he showed, is all the more subject to the temptations of self-interest, self-deception and self-righteousness. Power must be balanced by power. He persuaded me and many of my contemporaries that original sin provides a far stronger foundation for freedom and self-government than illusions about human perfectibility. Niebuhr’s analysis was grounded in the Christianity of Augustine and Calvin, but he had, nonetheless, a special affinity with secular circles. His warnings against utopianism, messianism and perfectionism strike a chord today….We cannot play the role of God to history, and we must strive as best we can to attain decency, clarity and proximate justice in an ambiguous world.[55]

          Niebuhr’s defense of Roosevelt made him popular among liberals, as the historian Morton White noted:

          The contemporary liberal’s fascination with Niebuhr, I suggest, comes less from Niebuhr’s dark theory of human nature and more from his actual political pronouncements, from the fact that he is a shrewd, courageous, and right-minded man on many political questions. Those who applaud his politics are too liable to turn then to his theory of human nature and praise it as the philosophical instrument of Niebuhr’s political agreement with themselves. But very few of those whom I have called “atheists for Niebuhr” follow this inverted logic to its conclusion: they don’t move from praise of Niebuhr’s theory of human nature to praise of its theological ground. We may admire them for drawing the line somewhere, but certainly not for their consistency.[56]

          After Joseph Stalin signed the Molotov–Ribbentrop Pact with Adolf Hitler in August 1939, Niebuhr severed his past ties with any fellow-traveler organization having any known Communist leanings. In 1947, Niebuhr helped found the liberal Americans for Democratic Action (ADA). His ideas influenced George Kennan, Hans Morgenthau, Arthur Schlesinger, Jr. and other realists during the Cold War on the need to contain Communist expansion.

          In his last cover story for Time magazine (March 1948), Whittaker Chambers said of Niebuhr:

          Most U.S. liberals think of Niebuhr as a solid socialist who has some obscure connection with Union Theological Seminary that does not interfere with his political work. Unlike most clergymen in politics, Dr. Niebuhr is a pragmatist. Says James Loeb, secretary of Americans for Democratic Action: “Most so-called liberals are idealists. They let their hearts run away with their heads. Niebuhr never does. For example, he has always been the leading liberal opponent of pacifism. In that period before we got into the war when pacifism was popular, he held out against it steadfastly.” He is also an opponent of Marxism.[57]

          In the 1950s, Niebuhr described Senator Joseph McCarthy as a force of evil, not so much for attacking civil liberties, as for being ineffective in rooting out Communists and their sympathizers.[58] In 1953 he supported the execution of the Rosenbergs, saying, “Traitors are never ordinary criminals and the Rosenbergs are quite obviously fiercely loyal Communists…. Stealing atomic secrets is an unprecedented crime”.[58] – wiki

          Skippy… out of all the things I could pick out I’ll just point to one he was a proponent of:

          *Just war theory* (or Bellum iustum) is a doctrine of military ethics of Roman philosophical and Catholic origin,[1][2] studied by moral theologians, ethicists and international policy makers, which holds that a violent conflict ought to meet philosophical, religious or political criteria. – wiki

          And highlight:

          Recent years have seen a renewed interest in Niebuhr’s work, in part because of President Barack Obama’s stated admiration for Niebuhr.[19][20][21][22]

          What is the anchor of all this…. Gawd… barf…

        1. skippy

          Be careful of where you tread… Between Existentialism and Marxism… some say… its a lovers spat… cough domestic… between the French and German schools.

          So on one hand we have, “The Existentialist Human Mission” they say, is to find out the meaning of meaninglessness—or at least give some meaning through our words and deeds to an otherwise inscrutable universe.

          And on the other we have, “dialectical materialism”, reality has developed in a lawful manner and is rationally explicable. The rationality of nature and human history is bound up with matter in motion. The concatenation of cosmic events gives rise to cause-and-effect relations that determine the qualities and evolution of things. The physical preceded and produced the biological, the biological the social, and the social the psychological in a historical series of mutually conditioned stages. The aim of science is to disclose their essential linkages and formulate these into laws that can help pilot human activity.

          The rationality, determinism, and causality of the universal process of material development do not exclude but embrace the objective existence and significance of absurdity, indeterminism, and accident.

          Skippy… Ahh Sartre… what have you wrought.

          PS. In the Communist Manifesto there is a bit of prophesy that turned out not to be accurate. There are owners of the means of production and then there are workers. The middle class was supposed to disappear into one of these two categories. History took a different path in the 20th century, especially in America.

          Camus writes about how Marx could not have anticipated investment by the middle class in publicly owned corporations. This allowed a greater number of people to prosper, financially, as partial owners of the means of production.

          Well, with the advent of financial securitization, it seems the middle class is no longer needed as jr. voting partner, in a post industrial landscape thingy. It looks like micro securitization is the next wave of the day ie dollars a week insurance stuff et al… what could go wrong… snort!

  4. Stan

    Robert Kennedy spent a lot of the time chasing organized crime, i.e. the mafia. News of the mafia and organized crime in general has dropped off to almost nothing. Banking has made the mafia irrelevent. Banks have stepped in to launder drug money,provide protection via their legal departments, payday loans, no doc mortgages, hijack individuals and other companies with impunity and on and on. It would be fun to see Bobby Kennedy come back and hold banks accountable. Sadly we no longer have a functioning government.

    1. jake chase

      Robert Kennedy spent most of his time chasing tail. What we don’t need is another overprivileged folk hero and closet bastard.

      The solutions to plutocracy are simple. Organizing to effect them is probably impossible. The next crash will simply produce the next bank bailout, and its victims will again be those who remained prudent and will get to watch their wealth evaporate, while everyone on the left whines about the unemployed and the speculators who took on unaffordable mortgages and subsequently lost their “homes”.

      1. Lambert Strether

        Yeah, the poors should have predicted the economy would collapse and they’d lose their jobs like the smart money did. Dear Lord.

        NOTE Dunno why “homes” is in shudder quotes. The myth that homeowners (“speculators”) caused the crash has been repeatedly debunked at NC, and at other responsible outlets — if that’s what’s meant here.

    2. NotTimothyGeithner

      I thought Bobby spent much of his time chasing “Reds” out of the U.S. government with Joseph McCarthy.

  5. Schofield

    Very important article. Not a good day for Neo-Liberals who argue that the marketplace is the measuring stick for any worthwhile human activity. Yves is telling us loud and clear that a serious effort to quantify all subsidies for private banks would make the measuring stick come up very short indeed if not disappear completely. This leaves the dilemma of how on earth can the 97% of the money private banks create from nothing be better created to avoid repeated financial instability or a sociopathic politician using a monopoly on money creation to wreak social havoc like Hitler. Serious thinking is now in order to get an optimal money creation system.

    1. Susan the other

      Yves is right to say that our math and physics grads should be analyzing how to make banking (and capitalism) actually work. Look at all the presidents who seriously tried and failed: Jefferson, Jackson, Lincoln, Hoover, FDR, Eisenhower, JFK, LBJ, Carter, Reagan, Clinton, Bush, and now Obama. It is the perennial problem. And now it has become so critical that every hour of government is devoted to making it work because without it the economy doesn’t work. It is not surprising that bank branches are displacing liquor stores. It seems poetic. In Russia vodka was a substitute for rubles for a while. It’s almost as if this is a problem as thorny as the cure for cancer. Money is so important to our survival that the thought of screwing up money in the process of making banks work properly is very intimidating. But it’s pretty clear that so far, for 250 years in this country, banks have not really ever worked. If they can’t make a profit without harming the rest of us they should be non-profit. I’m not sure what a banking utility would look like. I do wish more people in government were discussing this.

      1. jake chase

        Interesting list. Lincoln didn’t fail; they shot him. You left out Garfield, and they shot him too.

        Hoover got his ideas from Andrew Mellon; FDR was too busy making the world safe for Rockefeller; Eisenhower? I don’t recall him doing anything except paving the country and draining American oil first; Kennedy didn’t do much of anything except confront Roger Blough and cause a stock market hiccup; Johnson was owned by Haliburton and Bell Helicopter. Carter appointed some Texas nitwit as Fed Chairman and produced interest rates of 19% (wish I had money in those days); Reagan stood up when they played Send in the Clowns. His idea of bank regulation was deregulating savings and loans; Clinton’s idea was creating mega banks on the European model and unleashing derivative trading; Bush wouldn’t have known an idea if one bit him on the ass, and Obama’s one big idea is creating a cushy life for himself after retirement as our first half White Bullshitter in Chief.

        Expecting anything from Presidents makes as much sense as smoking filter tip cigarettes.

      2. Enslavedlikeme

        Has anyone here been following this?

        The put-back suits supposedly forced upon Bank of America by Fannie Mae (Jan. 07, 2013) have been obsorbed by bottom feeders like Walter Investment Management, Ocwen, Nationstar (Fortress) , Blackstone, Blackrock, and WL Ross & Co. LLC. – They’ve brilliantly formed participatory profit sharing agreements intended to control MSR, mortgage servicing rights by capturing the assets so that they can continue to milk the indentured servants (Enslavedlikeme), Taxpayers (current and future), and like Jake Case hinted upon, those around the world buying into the next “sales pitch”. Although, Jake Chase seems opposed to JFK getting a little sumpin sumpin, I on the otherhand fully support all persuasions having some sort of pressure relief.

        Hopefully, this link from Walters S-3 filing from their website works for you all. The “family” is still alive and doing quite well.

        Sorry for the length of this posting, but this is just one part of the “great land grab plan”.

        ResCap Asset Purchase – On October 24, 2012, Ocwen Loan Servicing, LLC and Walter Investment Management Corp. (who bought Green Tree July/Aug. 2011) were jointly awarded the highest and best bid for the mortgage servicing and origination platform assets of Residential Capital, LLC (ResCap), a wholly-owned subsidiary of Ally Financial Inc., in a bankruptcy court sponsored auction. The bid, with a purchase price of $3 billion, is subject to definitive documentation and Bankruptcy Court approval. Ocwen’s portion of the purchase price is approximately $2.46 billion of which $0.83 billion is for MSRs, master servicing contracts and subservicing contracts, and $1.63 billion is principally for advances acquired at a discount from their par value of $1.72 billion. Ocwen will add to its servicing portfolio loans with $203.7 billion of UPB at August 31, 2012 including $126.6 billion through the acquisition of MSRs, $31 billion through subservicing contracts and $46 billion through master servicing contracts.

        Without a pot to piss in I’ll likely be
        a well executed control fraud plan I did not see.
        It’s unlikely on the street our new master we’ll see so pass on a special message from others Enslavedlikeme.


        1. LucyLulu

          This Walter Investments is a real sweetheart firm, NOT! I’m not sure where OP’s Bank of America reference came from, but Walter Inv. have 1 million accounts with an unpaid balance of $78 billion, based out of Tampa (the crooks love FL, very friendly state for bankruptcy), specializing in mortgage servicing rights on “high-touch” (distressed) loans. They acquired Green Tree in 2011, and ResCap/Ally’s GSE business in 2012, and have some kind of tie-in with MetLife (didn’t read that far). They also recently acquired a couple reverse mortgage businesses out of TX and CA.

          Take a look at the “complementary services” they will offer:
          • Asset Receivables Management: performs collections of delinquent balances on loans serviced for third-parties after they have been charged off.
          • Insurance Agency: acts as a nationwide agent of primarily property and casualty insurance products for both lender-placed and voluntary insurance coverage. (in that order, no doubt)
          • Loan Originations: facilitates refinancings as a retention and recapture solution for loans we service.

          They tout that they follow all regulations which offer them an advantage over their competitors! So how do they they deal with missing/nonexistent paperwork?

    2. rob

      Serious thinking is exactly what is needed.I don’t think there can be enough discussion about this.Our monetary system.How;and who creates our money.
      As A nobody,
      I can’t understand why the best work that I have seen done about this monumental subject,Is pretty much ignored.
      the concept, is first laid out in the thirties and was called”the chicago plan”, which had nothing to do with the later “chicago school economics” of friedman and the like.This was most recently modified and codified in the 111th and 112th congress by dennis kuciniches “NEED act”,in the 112th congress HR2990.
      The american monetary institute has done a lot of study in this area, and also the head modeler of the IMF has even done a model of this type of paradigm, in his paper…His name is kumhof(sp?).
      So, considering that there has been a working outline on how to nationalize the money creation power for over seventy years,why this idea isn’t in the lexicon, the way MMT is starting to be…is baffling.
      It is one of those things…It is possible.Annd if people have points to quibble over, lets quibble.This idea is like giving water to someone without it.a good idea.
      The body of the bill as proposed by kucinich, enumerated the path to shifting the money creation power away from the presently monopolized powers of the fed,to the US Treasury.This is where the huge sums the gov’t pays for the private fed to create our money,starts going into productive use to enhance public spending.
      This idea is great, where is the problem?The models support this idea.Not only kumhofs.but another japanese economist,Yamaguci.It then would restrict banks to banking.End fractional reserve banking and end the free ride these TBTF banks get today,because then they really wouldn’t be profitable. and they wouldn’t be able to influence through their speculative investments the commodities markets in things like food and energy.

  6. drdj

    US attorneys have the time and money to pursue Aaron Schwartz, Roger Clemmons, and now Lance Armstrong, but can’t seem to find the time to even investigate Wall Street fraud. Instead of thousands of pages of hard to interpret and enforce regulations we need to return to Glass Steagal type laws. Commercial banks need to operate businesses that are more easily managed with easily understood and enforced regulations. Investment banks need to operate either as old fashioned partnerships or as quasi partnership corporations where the partners and corporate principals have their personal fortunes on the line every day for every decision they make. My fear, however, is that we have gone to far down our current path and there is no way back.

    1. lucky

      “US attorneys have the time and money to pursue Aaron Schwartz, Roger Clemmons, and now Lance Armstrong, but can’t seem to find the time to even investigate Wall Street fraud.”

      A fringe benefit of small government, low taxes, and austerity.

    2. jake chase

      We need to confine banks to one location in a single state, enforce mark to market accounting, even if it puts all the major banks in bankruptcy, wiping out stockholders and bondholders, outlaw bank derivative trading, incarcerate the top executives of all banks that fail.

      We can turn all those unused branches into liquor stores, because we’re going to need all the booze we can get.

      1. ambrit

        Dear J.C.;
        Like all those motels now being converted into “Efficiency Apartments?” Anyway, some of those branch banks I helped build in the past could be very easily turned into Neo McMansions. On a more pro elite note; all those empty strip malls can be turned into nifty “Holding Centres” for ‘rioters’ and other such riff raff. Everything will have its’ place in our coming Neo-Liberal Paradise.

  7. Bridget

    BArry Rithotz had an interesting article over the weekend on the topic of how economists of different political persuasions can agree on certain important subjects, albeit for different reasons.

    I tend to lean libertarian, but do understand that deposit insurance is desirable to protect small investors. I totally agree that deposit insurance ought to be more fairly priced, and that any institution accepting federally insured deposits ought to be subject to strict regulation. The taxpayers underwriting the guarantees have the right to expect no less.

    I also thought that the Occupy call for boycotting the big banks was a perfect Libertarian solution. I can’t fathom why any sentient American would continue to do business with any of the lot of them. Shows what I know.

  8. jurisdebtor

    Given the post-LTCM deregulation of the 1990s, I have little faith that our policymakers will respond to obvious and dangerous risks in the banking/financial markets/industries. The GOP is delusional with its ‘free-markets are the panacea’ rhetoric, and the Democrats are unwilling to demand real reform (real, not Dodd-Frank) and are just complicit in the ‘let Wall St. do whatever it wants’ policy.

  9. Paul Niemi

    Thank you for this article. From my viewpoint, it looks like the Fed and the big banks, the hen and its chickens, have become established as the unelected fourth branch of government. This reality, through the growth of influence and power among these institutions, could be the issue of our times. Within this system, power can be exchanged for money and money for power through the revolving door and the canalizing of capital flows toward arbitrary ends. I don’t think it is certain that this environment can not persist. However, I do see a danger. This system has facilitated movement of capital out of our country to fund foreign investments, thus moving jobs offshore. The safety of those assets relies implicitly on the good will of foreign governments, and it has been many years since nationalization of American-owned assets overseas was perceived as a possibility. Nevertheless, financially, we could be in a world of hurt if war breaks out in the wild East or when foreign governments collapse.

    1. from Mexico

      Paul Niemi says:

      The safety of those assets relies implicitly on the good will of foreign governments…

      Nah. The safety of those assets relies explicitly on the long arm of the US security state. I suggest this:

      When governing groups are deprived of their special economic privileges, their interests will be more nearly in harmony with the interests of the total national society. At present the economic overlords of a nation have special interests in the profits of international trade, in the exploitation of weaker peoples and in the acquisition of raw materials and markets, all of which are only remotely relevant to the welfare of the whole people… Furthermore the unequal distribution of wealth under the present economic system concentrates wealth which cannot be invested, and produces goods which cannot be absorbed, in the nation itself. The whole nation is therefore called upon to protect the investments and the markets which the economic overlords are forced to seek in other nations.

      REINHOLD NIEBHUR, Moral Man and Immoral Society

      Or this:

      Imperialist expansion had been touched off by a curious kind of economic crisis, the overproduction of capital and the emergence of “superfluous” money, the result of oversaving, which could no longer find productive investment within the national borders. For the first time, investment of power did not pave the way for investment of money, but export of power followed meekly in the train of exported money, since uncontrollable investments in distant countries threatened to transform large strata of society into gamblers, to change the whole capitalist economy from a system of production into a system of financial speculation, and to replace the profits of production with profits in commissions…

      After the financiers had opened the channels of capital export to the superfuous wealth, which had been condemned to idleness within the narrow framework of national production, it quickly became apparent that the absentee shareholders did not care to take the tremendous risks which corresponded to their tremendously enlarged profits. Against these risks, the commission-earning financiers, even with the benevolent assistance of the state, did not have enough power to insure them: only the material power of a state could do that…

      The various national governments looked with misgiving upon the growing tendency to transform business into a political issue and to identify the economic interests of a relatively small group with national interest as such. But it seemed that the only alternative to export of power was the deliberate sacrifice of a great part of the national wealth. Only through the expansion of the national instruments of violence could the foreign-investment movement be rationalized…

      The first consequence of power export was that the state’s instruments of violence, the police and the army, which in the framework of the nation existed beside, and were controlled by, other national institutions, were separated from this body and promoted to the position of national representatives in uncivilized or weak countries. Here, in the backward regions without industries and political organization, the so-called laws of capitalism were actually allowed to create realities… Money could finally beget money because power, with complete disregard for all laws — economic as well as ethical — could appropriate wealth… Only unlimited accumulation of power could bring about the unlimited accumulation of capital.

      — HANNAH ARENDT, The Origins of Totalitarianism

      1. jake chase

        Mexico, you remind me of a kid I knew in high school, who tried to read every book in the public library. He got through D, I think, before going off to Yale.

        What are you reading right now?

      2. Paul Niemi

        Thank you for the reply. If you think any historical theory both predicted our present world and can be used to describe our present world, then I would not disabuse you of that. I’m still not sure why the big banks are big, or why they are apparently a law unto themselves. Perhaps I should have said above that “the safety of those assets relies implicitly on the good will of foreign governments and the irrational idea investors have that they will be bailed out if they are in partnership with big banks when their risky foreign investments go south.” I disagree that the safety of those assets relies on the “long arm of the US security state.” The US has a very large military and numerous security agencies, nevertheless projection of political hegemony is not their mission nor forte. Certainly that has been tried, but the results over the past fifty years should have taught us to mind our own business most of the time.

        1. from Mexico

          Nah. It’s you that’s hyping liberal internationalist theory. I’m just trying to point out that history has demonstrated about a gazillion times in the last 200 years that the “reality” this theory excogitates is like Erewhon: it is nowhere. Nor does this theory ever deliver on all its beautiful promises.

          Let’s repeat what you said:

          This system has facilitated movement of capital out of our country to fund foreign investments, thus moving jobs offshore. The safety of those assets relies implicitly on the good will of foreign governments…

          First, an explanation of the theory you are hyping:

          The early champions of the free market, most of them British, had in fact looked to industry mainly to create the wealth of nations, as the title of Adam Smith’s classic book had it, not the power of nations, which had been the preoccupation of their mercantilist predecessors. The advocates of laissez-faire declared the independence of economics from state power. (The eventual coining of the word “economics,” identifying a distinct realm of human activity subject to its own laws, was one sign of their faith in that independence.) The market worked best, the worldly philosphers of the late eightennth century believed, when the government kept its hands off it. Classical economics, in fact, “had no place for the nation, or any collectivity larger than the firm.”

          — JONATHAN SCHELL, The Unconquerable World

          Now the reality, as Schell goes on to explain:

          However, events did not proceed as the liberal imperialists expected — neither in Asia nor in Africa nor in the Ottoman Empire. The economic arrangements forced upon those lands did not strengthen and liberalize their governments but undermined them and drove them, one after another, toward collapse. The Egyptian government, for example, accepted loans from Europe, spent the funds on large but unproductive public projects, and, when these failed, sought to keep up payments on the loans by raising taxes on the poor, who grew discontented and rebellious. The imperial powers were then forced with what seemed a drastic choice: between withdrawing entirely and imposing direct rule. They chose direct rule.

          Kevin Phillips does an even better job of pointing out the unreality of the Alice in Wonderland world you imagine:

          One vital component of that ebbing pax [Britanica], the openness of the world economy from 1870-1913 — reexamined with interest as the debate over the next great globalization heated in 2000 — was less a phenomenon of global fraternity than a projection of British power and its demand that investment and export opportunities remain open. The notion that Britain did this through laissez-faire rather than government activism is a Victorian fairy tale. From 1845 to 1870, laissez-faire dominated British domestic policy in the sense of denying any role for government in aiding the masses or ameliorating poverty. Globally, however, Britain spent huge sums on the principal supervisory force that watched its world commerce — the Royal Navy. Steel development had more than a little to do with the navy; India was run by mercantilist precepts; the Bank of England was charged with maintaining the pound sterling; and the British government subsidized transatlantic steamers ans telegraph calbles and bought half the shres in the Suez Canal Company. With that kind of laissez-faire, Britain built an empire and projected the globalization regime of open sea-lanes, open ports, and (relatively) free movement of investment.

          –KEVIN PHILLIPS, Wealth and Democracy

          1. skippy

            Cough… Britanica imported raw materials to value add multiply and exported Laissez-Faire Market Law in dicta.

            Skippy.. it is good to be the bottle neck nexus creator[!], all things must pass my desk!

          2. Paul Niemi

            If my views coincide with Liberal Internationalism, then I am comfortable with that, and I especially like having ethics and morality as features of my adopted approach to foreign policy. Perhaps you believe, as indicated above, that what is Realpolitik is the real thing, and I hope you don’t quote Richard Nixon to me next, but in our post-modern perspective I believe we are seeing the big banks used more and more as instruments of Realpolitik, for their ability to move money internationally and for their opacity. This could help to explain the special status given to them and why their bad behaviors are tolerated.

          3. from Mexico

            @ Paul Niemi

            Well again, you’ve managed to take reality and turn it on its head.

            The situation we face now is not one where the government has captured the banks, but one where the banks have captured the government.

        2. jonboinAR

          I’m not academically rigorous in any way, nor particularly well read, but I’m thinking, in my impressionistic (somewhat fuzzy) way of percieving things, that the US military/state as it projects power around the world has most often been quite successful at advancing US the interests of the US financial and big business class.

  10. David Kelley

    Great insights as usual that capitalism and the discipline of the markets (and the law!) does not apply to the big banks. Clearly, they should be regulated more like public utilities at the very least. Hypocrisy is too weak a word for the 1%ers on Wall Street; it is lawlessness. We now know that all banks are equal but some banks are more equal than others. Let me suggest another subsidy to the big banks that could be added to your total: the sneaky (and excessive) fees that banks extract from customers. Half the bank profits come from fees, many of them truly sneaky and unwarranted. Because a truly representative government would not allow such plunder we must add them as a government subsidy delivered by the politicians they put into office. As Bob Sullivan points out in Gotcha Capitalism the average American pays some $946 a year in sneaky fees – many of them in banking. That does not include basic overcharges for services. Legislators know about those fees because they hear from enough voters and even seemed ready to act – before the crash. After that both parties decided to let the looting go on as usual so banks could return to profitability. Most Americans could not even begin to explain congressional resistance to the new consumer agency or the vitriol heaped on Elizabeth Warren until they saw the corporate puppet masters pull the strings on their marionettes in Washington to preserve their right to pillage and plunder – along with their well-established right to commit fraud.)

  11. diptherio

    The answer to the question posed in the title of this post is simple: because some of those subsidies get funneled back to the politicians who champion the subsidies in the first place. Why don’t we regulate banks like utilities? Because that would be rational. We don’t do rational in this country anymore.

    Hell, for the last 15 years or so we’ve been deregulating the traditional utilities of electricity, telecom, etc. (like here in MT, for instance), so in a way, we are regulating them like utilities, which is to say barely at all.

    1. craazyman

      actually the electric utilities have been largely re-regulated in most states after a disastrous venture into deregulation in the late 1990s/early 2000s.

      Some holding companies still maintain competitive generation divisions but these are typically prevented by state law from financially threatening the regulated subsidiaries (which most people get their power from).

      What’s interesting is that, unlike banking, utility executives largely acknowledged that deregulation was mostly a disaster. Rather than fight the return of regulation during the last decade, they mostly argued in favor of it and welcomed it.

      Despite the heated rhetoric that descends upon utilities when power goes out or bills go up, it’s an industry that generally works pretty well. The managements have a well-defined mandate — to produce reliable and affordable electricity — and are closely supervised by regulators. Utility managements generally want to be seen as effective managers and good citizens. It helps a lot with regulatory relations.

      State regulators generally are civic-minded, knowledgeable and take their jobs seriously. It’s never perfect, and like all political arrangements it’s subject to bouts of immature rhetoric, but all in all it works decently well in most states.

      It’s an interesting contrast with banking. It may be possible to regulate basic banking like utilities, with state commissions overseeing credit extension, interest charges, service quality, etc. Maybe it used to be this way when it was state regulated. I’m not a financial historian so I don’t know.

      It may be that product and service quality metrics are easier to formulate for electricity than they are for banking services, since electricity is easily measurable but loan quality is often not (until after the fact). And there’s less downside risk in extending credit to a residential utility customer than extending a loan to a retail banking customer, since the monetary magnitudes are usually much smaller.

      It seems like it’s easier to subordinate electricity to politics than it is to subordinate money to politics. Money is so abstract and optimism about it usually reigns — people think they deserve it, it becomes a social justice issue (often rightly so) — until the fan is hit. Generally speaking, hope usually triumphs over rationality.

      1. chris9059

        “Despite the heated rhetoric that descends upon utilities when power goes out or bills go up, it’s an industry that generally works pretty well. The managements have a well-defined mandate — to produce reliable and affordable electricity — and are closely supervised by regulators. Utility managements generally want to be seen as effective managers and good citizens.”

        But isn’t it generally the case that municipally owned utilities provide power at lower rates?

        1. craazyman

          Rates depend a lot on the fuel used for generation and on lots of other issues aside from ownership structure.

          For example, if a municipal utility is buying low-cost hydropower from dams built long ago, like big Depression-era dams, rates will be less than from a shareholder-owned utility running natural gas plants (if natural was as expensive as it was several years ago; it’s way down now).

          If a shareholder-owned utility has low-cost long-term purchased power contracts from a nuclear generator, it may well have lower rates than a municipal utility lacking generation assets and without the buying power to compete for equally low power prices in competitive power markets.

          If municipal and shareholder-owned are both running coal plants, rates may depend on the type of coal, emissions control investments capitalized in rates, coal transportation costs, the thermal efficiency of the plant, etc.

          There’s lots of issues that go into rates — they are insanely complicated. I don’t believe it’s the case that a municipally owned utility will necessarily have lower rates. It may seem like it “should be” the case from a progressive political perspective, but I don’t believe the facts would support that.

      2. diptherio

        The first public testimony I ever gave was at a Public Service Commission (PSC) meeting here in MT on electricity deregulation. At the time, we had the fourth cheapest power in the nation, due mainly to the fact that the Montana Power Company (MPC) owned both the production and distribution facilities and was closely regulated by the PSC. As a result, power was cheap, MPC employees were well paid and the company was profitable, but boring.

        Then someone had the bright idea to deregulate since everyone knows that competition lowers prices. This is the argument I tried in vain to refute before the PSC at the ripe old age of 19, with two whole econ courses under my belt. Electricity is a natural monopoly, I said, deregulation will lead to higher prices, not lower. It’s basic, non-controversial economics, I said. Of course they didn’t listen. Even the “progressives” in my department bought into it. Shameful.

        So, MPC was deregulated, split up, and sold off to two different out-of-state companies; the lines to Northwestern and the dams to Pennsylvania Power and Light (PPL). PPL immediately upped their rates, since the previous prices were below the market rate, and Northwestern obligingly passed the cost on to us.

        I can’t speak for any place but Montana, but we sure haven’t undone the damage of deregulation. PPL still owns the dams that we paid for and Northwestern still has to go to the market to contract our power supply. Electricity rates sure never went back down to any appreciable degree. And I strongly doubt that we’re getting the cheapest power in the nation.

        Honestly, I was less upset with the power companies involved than with the PSC. They should have known better, but they listened to the pretty lies and gave corporate spokespeople the benefit of the doubt. Here in Montana, we’re still paying the price for their naiveté.

        1. damian

          you should add the part about the clown CEO – who had a house on the penninsula on Flathead Lake – whose motive was laying fiber in the MPC right of way for high speed communicatio and making billions – that was a disaster – and he walked off with millions!!!

          i had a house in bozeman and the electric rates were cheap in the dead of winter –

          this was a disaster for the state and the stock- MPC

          1. diptherio

            There’s only room for so much in one comment, lol!

            How about all the MPC retirees who lost their pensions when MPC became Touch America and promptly went tits up? Or the fact that House rules had to be suspended in order for the Republicans to browbeat the bill through the legislature (at 1:00 in the morning).

            More recently, the PSC signed off on selling Missoula’s water to Carlyle Group. It just goes on and on…

  12. Min

    How about post office banking?

    How about state banks? Aside from giving states direct access to Fed money, their credit cards would be subject to the usury laws of their states. :)

    1. Lambert Strether

      Maybe Post Office banking so I can put my income where it won’t get stolen, and state banks for new ventures? Don’t know how that would work financially, so maybe somebody smart about that kind of thing could straighen me out…

    2. diptherio

      State banking is a great idea. The Bank of North Dakota has pioneered a successful, stable model that could be more or less easily adapted for any of the rest of our states, or even for municipalities/counties.

      The key for the BND is that they partner with local private banks and credit unions. Rather than competing with local banks to provide loans to customers, BND partners with local lending institutions in various programs like interest rate buy-downs and loan participations that make credit more affordable for borrowers and allow local banks to make larger loans than they would otherwise have the capital to support. Local banks in ND, therefore, are better able to compete with the big, bad banks for large loans.

      It is totally conceivable that 50 state banks along the lines of BND could eliminate entirely the need for Wall Street financing. That’s optimistic, I know, but public banking seems to me like one of our best bets for changing the banking system. Reform is doomed to failure, what we need to do is to make the TBTF banks irrelevant, imo.

  13. McMike

    Wondering how much we subsidize banks is like wondering how much I subsidize my children.

    Without us, they wouldn’t freaking be here for starters. We buy their food and provide them shelter, their mommy carried them for nine months then opened herself up to bring them inot the word and then and nursed them as their sole sustenance, we hold them when they cry and stroke thier foreheads when they are sick, we watch over them to keep them out of the street and buckle them in their car seats.

    And so the banks, much like our kids, merrily play on in thier own little imaginary world. Oblivious to the God that has given them life and blows our breath softly into their spirits every day.

    How can you put a number on giving them life?

    The taxpayers swooped in on angel’s wings and saved the banks a million ways, qualitative and quantitative, active and passive, monetary and legal, through subsidy and forebearance, which we do to this day.

    Like my kids, they make me a breakfast of PB&J sandwiches on fathers’ day. And then they are so proud of themselves, so they award each other $40 million in bonuses.

  14. Eric Zuesse

    The study by Edward Kane (with Armen Hovakimian and Luc Laeven) is titled “Valuation in Systemic Risk at US Banks During 1974-2010” and is actually still in draft, with the latest being 29 May 2012. The $300 billion figure that Yves cited was only for the peak-risk year 2008. The paper showed the “Mean Systemic Risk Premium for Large Banks Only” to be near zero after 2009, so the Bloomberg estimate is actually far higher than is shown in that paper. The Kane (-H-L) study is linked to at

    1. Yves Smith Post author

      I didn’t realize they were doing this using bank equity volatility as the proxy. He did not make clear how he was going to do about it in the talk. Methodologically, that’s crap (even Levine, who is pro bank, sniffs at the approach in passing). Equity is a residual claim and its value is a function of a lot of things, including the legal/regulatory regime that sits around it. If the idea was to find an analogy to an insurance premium, this isn’t it. The idea is that you set the premium at a level you pay every year to cover the risk of the storm when it happens. You don’t vary the premium based on how many storms are happening right now. Since the average holding period of a stock is under four months, it also says they don’t expect banks to teeter over and die really soon. But come on, do you seriously think the systemic risk insurance for big banks in 2010 should be zero? That alone is proof that the study methodology is really flawed.

      So the flattening of what Kane depicts as the systemic risk premium reflects that the government is shielding banks from systemic risks and investors know it. It existed only in the crisis years because Mr. Market woke up and realized how big it was and wasn’t sure whether the Feds would or could rescue the big banks. That was an open question until February 2009 (recall there were discussions of nationalizing BofA and Citi then). Geithner made the idea that no large bank would be allowed to fail explicit policy and it has also been embodies in Dodd Frank. To continue the storm analogy, the government has built a monster dike and they know it.

      Geithner made it clear when he announced the stress tests (March 2009) that the banks would meet the test no matter what, as in they’d either raise equity publicly or the Treasury would provide it via TARP. That was seen as putting a floor under bank equity risk. That led to a rise in bank equity prices. So the Treasury was basically assuming large bank equity risk, explicitly, to boot.

      On top of that, we’ve had the Federal government take other measures besides explicit bailouts to help banks. One of the biggest examples was the refusal to consider chain of title issue (which would have created another financial crisis but was quashed pronto) and the Federal/state settlement, which was too low by at least a factor of five. The one bullet they might not dodge is putback liability, where DeMarco is proving to be pretty resolute. The FHFA putbacks are work around $200 billion and DeMarco does not appear to be going away any time soon.

      It has been discussed here and elsehwere, that Dodd Frank resolutions won’t work. Richard Shelby has pointed out how the fact the the resolutions won’t work in combination with other DF provisions means the government can do bailouts, readily, in fact.

  15. RBHoughton

    What we have here is an update on a mercantilist trick used by the old British Chartered Companies of 17th – 19th century.

    For the punters, your company must look solidly profitable and pay regular divvies; for the government, the accounts should look superficially satisfactory whilst actually hinting on a detailed and critical inspection at your total insolvency.

    This can be achieved if you trade overseas, beyond the purview of a national government where the East India Company, for example, kept all its Indian Promissory Notes out of the accounts. Then you can keep all the balls in the air, use some new money to pay down any old debt that has come to public knowledge and keep as much of your dealings as possible off balance sheet.

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