After a decade of writing about the crisis, we are now subjected to an orgy of yet more chatter with not much insight. It speaks volumes that the likes of Ben Bernanke, Timothy Geithner, and Hank Paulson are deemed fit to say anything about it, let alone pitch the need for the officialdom to have more bank bailout tools in a New York Times op-e titled What We Need to Fight the Next Financial Crisis.
The fact that they blandly depict crises that demand extraordinary interventions as to be expected confirms that greedy technocrats like them are a big part of the problem. Their call for more help for financiers confirms that they have things backwards. How about doing more to make sure that future crises aren’t meteor-killing-the-dinosaurs level events, and foisting more costs and punishments on the financiers who got drunk and rich on too much risk-taking? The first line of defense should be stronger regulations, including prohibition of certain activities.
As the Financial Times’ Martin Wolf pointed out in a recent crisis retrospective, the response of central bankers and financial regulators to the crisis was to restore the status quo ante, and not engage in root and branch reform, as took place in the Great Depression. But as we’ve pointed out, the response to the crisis represented the greatest looting of the public purse in history. The post-crisis era of super-low interest rates represented an additional transfer of income from savers to the financial system. In the US, the so-called “get out of massive mortgage securitization liability for almost free” card otherwise known as the National Mortgage Settlement represented a not-widely recognized second bailout of banks and mortgage servicers. No wonder banksters are seeking a rinse and repeat.
An overfinancialized economy is good for no one save banksters and their paid retainers. Economists in recent years have been describing how larger financial systems hurt growth. For instance, the IMF found that the optimal development of a financial system was roughly where Poland is. The IMF conceded that it might be possible to have a larger banking system not drag down the economy if it were well regulated. Other studies have found that economies with large financial sectors typically have more inequality, and inequality is separately seen as a negative for growth. So there’s no sound policy reason to coddle banks rather than cut them down to size.
But the winners get to write the histories, and the friends of Big Finance came out on top. Despite the press occasionally listing the economists like Michael Hudson and Steve Keen who saw the crisis coming, they have only marginally higher profiles now than they did a decade ago. Nassim Nicholas Taleb wrote bestsellers, yet his blistering descriptions of how financial risk analysts and managers are intellectual frauds has had virtually no impact on practice.
Similarly, Andy Haldane, the Bank of England’s executive director of financial stability, is often called one of the most creative and insightful economists of his generation, but his studies and speeches on what went wrong and what might be done, like forcing more specialization and diversity among financial firms, are regularly praised in academia and the press and ignored as guides for reform.1
And none other than the New York Fed’s William Dudley came up with a way to bring partnership-type incentive structures back to big banks by requiring executives and producers to have a high percentage of their bonuses retained in the firms as a type of junior equity to be the first funds tapped in the event of losses or large legal settlements. Not only would this lead key players to be far more concerned about risk, but as Dudley pointed out, it would also lead everyone to be far more concerned if they saw another business unit engaged in dodgy practices that they might wind up paying for, and apply pressure to have them shut down. Predictably, this idea made far too much sense to get any traction.
By contrast, Bernanke was a true believer in the Great Moderation, the mid-2000s self-congratulatory mainstream economist view that they had produced the best of all possible worlds. Bernanke in fact continued the so-called Greenspan put which incentivized investors and bankers to take on financial risks, since they knew if anything bad happened, the Fed would rush to their rescue. The Fed, and Bernanke in particular, were badly behind the curve. In May 2007, Bernanke said that subprime was contained, and in July 2008, gave Fannie and Freddie clean bills of health.
Geithner, when he was head of the New York Fed, did acknowledge that the brave new world of slicing, dicing, and distributing risk might make it more difficult to manage a crisis, but then insisted that there was no way to roll the clock back. Linear projections of trends is naive but a great excuse for inaction. Geithner said nary a peep when banks who had just been bailed out gave a raised middle finger to the American public by paying their executives and staffs record bonuses in 2009 and 2010 rather than rebuilding their balance sheets. The Bush Administration considerately left $75 billion of TARP monies unspent for the Obama Administration to use to fund mortgage modifications. Funny how the Treasury never took that up. Instead, Geithner instituted supposed mortgage assistance programs like HAMP whose purpose, as Geithner put it to SIGTARP head Neil Barofsky, was to “foam the runway” for banks by spreading out when foreclosures would happen rather than preventing them. Recall that 9 million homes were foreclosed upon. Many had missed only a payment or two due to job loss or hours cutbacks; some were victims of bad servicing. Giving borrowers with viable levels of income mortgage modifications would have been a win for investors too. But the Treasury never cared about borrowers and convinced itself that taking care of banks would help the real economy, in a Wall Street variant of trickle-down theory.
And Paulson? Although he wasn’t on the scene as long as Bernanke and Geithner, recall that Treasury staffer Neel Kashkari whipped up a 50,000 foot “How do we deal with a crisis” think piece that Paulson & Co. deemed to be just terrific and tossed in a drawer. Recall that Paulson’s first TARP proposal was a mere 3 pages demanding $700 billion, more than the hard costs of the Iraq War, and even worse, put the Treasury beyond the rule of law with this provision:
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
At the time, we called it a financial coup d’etat.
So the bailer-outers-in-chief are keen to prescribe more of what they foisted on the American public. It should come as no surprise that they didn’t pump for stronger financial reforms, were perfectly content to allow the Fed to authorize banks subject to stress tests to pay dividends and bonuses rather than have them build up much bigger capital cushions, and in Bernanke’s case, call for a resumption of austerity policies in 2012.
Each one of this terrible trio has a much longer rap sheet. But the mere fact that they have the temerity to subject the public to their cronyistic blather, and worse, the New York Times dignifies it, shows that, as Talleyrand said of the Bourbons, that policymakers and pundits have learned nothing and forgotten nothing.
1 Haldane, with former Bank of England governor Mervyn King and Adair Turner at the FSA, did fight hard for a Glass-Steagall type bank breakup, but the UK Treasury succeeded in watering down their proposal to mere ring-fencing.