Fear and loathing make strange bedfellows. Who said the following? “Only in a world of crony capitalism would bankers, whose faulty decisions caused bankruptcy, be allowed to cash out as the middle class absorbs the losses.”
Elizabeth Warren? Bernie Sanders? No, Rand Paul in his new campaign book, “Taking A Stand.”
A good litmus test for 2016 candidates would be where they stand on more vigorous bank regulation, a return to a separation of banks that lend and banks that gamble, as under Glass-Steagall whose repeal made the 2008 catastrophe possible, and the break-up of behemoths deemed too big to fail, and therefore big enough to cost taxpayers a bundle when they do fail.
Almost all Republican candidates would fail such a stress test and Hillary would have a hard time passing it. Almost everyone in Washington is on the receiving end of large contributions from banking industry malefactors. In any discussion of crony capitalism, as Paul indicates, the most egregious cronies are the politicians who shirk the job policing banks and instead become their enablers because they are paid for their complaisance.
Ron Suskind’s “Confidence Men” of 2011 is a damning dissection of how Obama’s investment-bank friendly appointees, especially Treasury Secretary Tim Geithner and NEC Chairman Larry Summers, contrived to save he banks who’d caused the mess while letting the average taxpayer take a financial beating while footing the bailout bill. Both are now reaping their reward, Geithner with the presidency of private equity firm Warburg Pincus, Summers with consultant gigs at the D.E.Shaw hedge fund and Citigroup and various seats on corporate boards.
Suskind reminds us that the socially useful function of commercial banks, S&Ls and credit unions is “to assess credit worthiness and lend out money accordingly.” Under Glass-Steagall deposits in such institutions received the protection of federally-insurance, but in exchange they had to adhere to “strict limits on how they could invest their assets.” Under this regime, “banking was boring, prudent and reliable…a sturdy backbone for the U.S. economy.”
After it was replaced by Gramm-Leach-Bliley in 1999, with the aforementioned Summers playing a leading part, the wall between Wild West investment banking and prudent Main Street banking came down, banks began to behave like casinos at best, criminal enterprises at worst.
All this risky business was was wildly profitable. By the time of the 2008 crash, the financial services industry accounted for 41 percent of all corporate profits, and the six largest banks had assets equal to 60 percent of the entire country’s Gross National Product. Much of this gelt was generated by the use of CDSs, CDOs and other banking “innovations” that Warren Buffet called “financial weapons of mass destruction.”
And destroy they did, coming close to crashing the world economy, plunging it into years of recession and inflicting irreparable pain on millions of average men, women and children. Yet the too-big-to-fail banks were saved from their own folly by the infusion of government money while continuing to pay out whooping bonuses to the men who had steered the economy onto the rocks. And in the aftermath, they fought reform so successfully that they are still up to their old tricks.
A week ago, four of the largest banks in the world, JPMorgan, Citi, Royal Bank of Scotland and Barclay’s were forced to plead guilt to felonious activities in rigging currency markets to enrich themselves at he expense of unsuspecting investors. A fifth bank, UBS, admitted to illegally manipulating interest rates. For trying to rig the game, UBS was fined $203 million, the other four a total of $5 billion.
The culprits at the big four, who called themselves The Cartel on a chatroom where they met to collude, might as easily have called themselves the Cabal or the Cosa Nostra, but as usual no actual human actors were held responsible. No one pled guilty to felonies or went to prison or paid a fine out of their own pocket.
No, apparently the corporations committed the crimes without any human volition being involved. The corporations will pay the fines, with customers and shareholders actually footing the bill. To the corporations, paying fines for criminal activities is like spraying for bugs or paying the electric bill, just another cost of doing business.
Until CEOs do the perp walk, pay the fines out of their own pockets, are issued orange jumpsuits and do the time, banks will keep enriching themselves at the expense of the rest of us. They will game the system, create toxic “innovations,” and engage in criminal behavior that damages the public and imperils the economy.
It is not just time to really reform banking, but to rethink the weird fiction that treats corporations as human beings who have free speech, the right to buy elections and commit felonies while shielding the actual persons who are pulling the levers from all responsibility, culpability and liability for their actions.
Apologists for laissez faire capitalism are fond of warning of the dangers of moral hazard whenever they think an out-of-work woman with a student loan or a mortgage borrower with a serious illness asks for a little slack or begs to be given a break, but the biggest immoral hazard to the economy is banks too-big-to-fail who keep putting the rest of us at risk without ever being forced to behave prudently. They foreclose on others, but are themselves never held to account.