Big banks still in bad shape

... as Paul Krugman explains in this column on economic policy, The Banks Are Not Alright New York Times 10/18/09. Krugman and others argued early in the year that if the mortgage-backed securities on the balance sheets of banks like Bank of America and Citigroup had been realistic valued, i.e., valued much lower than what the banks were claiming for them, those institutions would be insolvent. That would call for the federal government to take them over, let the stockholders take their losses, clean up the bad loans and recapitalize the banks. A temporary nationalization, in other words, which is what government often does in cases of smaller banks that fail.

Instead, the Obama administration bailed out the big banks with federal subsidies. This let them survive. But their ability to make loans that would fuel the recovery is still badly impaired, and are likely to remain so for a while. Krugman has been warning against what is known as a "liquidity trap" such as Japan experienced through most of the 1990s. That is a situation is which capital is available but the banking system isn't able to make the kind of lending needed to generate a healthy recovery. And at the moment, we have the obscene spectacle of big banks that just recently took billions in bailout money from the federal government now handing out billions of bonuses. Economist Peter Morici in the current issue of Business Week comments, "We wouldn't let Con Edison in new York pay its executives $10 million a year and then let the lights go out." But investment bankers wreck the financial system and still get paid megabucks, with major financial help from public funds.


Krugman also provides a dramatic picture of the dynamics of policy. In February-March, a determined Obama administration could have pulled off a temporary nationalization politically. Now, as Krugman says, "as a political matter the moment for radical action on banks has clearly passed." The bank bonus scandal even gives the Republicans a chance to posture as defenders of the regular folks against the greedy rich bankers subsidized by the Democrats with taxpayers money, or something along those lines. And, at least nominally in the search for holy "bipartisanship" on the economic recovery/stimulus package, the Democrats agreed to cut out the additional funding that the House had passed for state and local governments, who are now having to lay off large numbers of workers, thus adding to the downward drag on the economy.

I say "at least nominally" because it's obvious on the health care debate that the corporate-owned Democrats like Max Baucus use the alleged need for bipartisanship as an excuse to water down badly needed legislation to tilt it more in favor of corporate lobby pressures. some of the same may have been going on with the economic recovery bill.

A Republican Congress or Presidential administration wouldn't fix those problems any faster than the current policies. In fact, their all-purpose solutions for every economic problem - cut taxes for the wealthiest and de-regulate some more - would make the problems of workers and most business worse than it would be under the current approach. But the economic problems that people are feeling are very real. And if Democrats with the White House and large majorities in both Houses of Congress can't even get an extension of unemployment insurance through while unemployment is rising and looks to be high for a long while, then it would be a miracle if some independent voters don't vote for Republicans in hope of a chance of something better.

Since the beginning of the Reagan administration, large-scale job programs aimed at systematically reducing the levels of unemployment like the work programs of the New Deal or the CETA program under the Carter administration have been regarded as unthinkable by the Beltway Village consensus. Like on many economic policy issues, that consensus is a bad one. But if the Obama administration and the Democratic Congressional leadership can't stand up to the Blue Dogs and to President Olympia Snowe on aid to state and local governments and the critical public option on health care reform, initiating a major new federal job-training and job-creation program isn't likely to happen soon.

Tags: democratic party, paul krugman, us economy

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