18 January 2010

The Banking Oligarchy Must Be Restrained For a Recovery to Be Sustained

Brilliant article really, in its simplicity.

Despite Obama's recent brave words, the US is lagging the world recognition that because of systemic distortions in the financial system the banks are in fact exercising a tax on the real economy that is impeding global recovery. As recently noted in London's Financial Times regarding the structural imbalances in the financial system:

"...as long as they are not addressed, the banks will make profits – or more accurately, extract rents – out of all proportion to any contribution they make to the wider economy."

The US is going in absolutely the wrong direction, lessening competition and strenghtening the grip of a financial oligarchy through its policy of focusing relief efforts on a small group of Too Big To Fail Banks, at the expense of the broad economy. Despite assurances to the contrary, this is the policy being administered by Washington.

This institutionalization of distortion was easier to understand under the Bush Administration with Treasury Secretary Hank Paulson guiding policy, and the Clinton Administration under banking insider Robert Rubin. But why this sort of response from the new reform government? The answer most likely is centered on three men: Larry Summers, Tim Geithner, and Ben Bernanke. None of the three has practical experience in business. All three are creatures of the banking system, and are heavily indebted to the status quo.

The first practical step for Obama would be to dismiss Summers and Geithner, and if he is wise, the person or persons who recommended them. He also should encourage the Congress to investigate the bank bailouts in general, and tie this to Bernanke's reappointment to the Chairmanship and the movement to audit the Fed.

The most recent scandal regarding the collusion between the government and the Fed to mask the backdoor bailouts to a few big banks via AIG should be proof enough that the Fed has no intentions of acting honestly and openly, and is far exceeding its mandates in its aggressive expanding its balance sheet and the selective monetization of private debts.

There are disturbing indications that the US is using a few of its large banks as elements of its policy to achieve certain objectives in the world markets. Such collusion between the corporate and the government sectors is the prelude to fascism.

We should keep in mind that financial crisis was indeed created during both Democratic and Republican administrations, and that simply replacing the Democrats with traditional opponents is unlikely to achieve genuine change.

Change is what is required. But while the foul stench of corruption hangs over the political process in Washington, where Big Money readily buys influence and control over legislation and regulation, there will be no significant changes, and no economic recovery. Recovery will be in appearance only.

Financial Times
How the big banks rigged the market

By Philip Stephens
18 January 2010

When Lloyd Blankfein met politicians in London a little while ago he brushed aside warnings that investment banks faced higher taxes if they ignored the rising public outcry about multibillion-dollar bonus pools. The Goldman chief executive seemed to believe governments would not dare.
That misjudgment – a measure of the breathtaking hubris that, even after all that has happened, continues to separate bankers from just about everyone else – may explain Goldman’s response to the British government’s decision to apply a 50 per cent tax to this year’s payouts

In the description of Whitehall insiders, Goldman executives reacted with anger and aggression. The threat was that the bank would scale back its business in London. For a moment it seemed Gordon Brown’s administration might wobble. In the event, Goldman’s lobbying failed to persuade it to soften the impact of the tax.

Britain, of course, is not alone. France has imposed its own bonus tax. Barack Obama’s administration has just announced a levy to recover an estimated $90bn (£55bn, €63bn) over 10 years. The centre-right government in Sweden has gone further by introducing a permanent “stability levy” to discourage excessive risk-taking.

It is a measure of how far the political debate has shifted against the financial plutocrats that George Osborne, the Tory shadow chancellor, has applauded the Swedish plan. If the Tories win the coming general election, they would support a worldwide levy along similar lines. It is “unacceptable”, Mr Osborne remarked the other day, for the banks to be paying big bonuses rather than building resilience against future crises.

So far, so encouraging. But the process cannot end here. Irritating as it may be to Mr Blankfein, a one-off bonus tax is not going to change anything in the medium to long term. Levies such as that in Sweden mark a recognition that the profits and remuneration policies of the banks are more than a fleeting problem. But forcing bankers to strengthen balance sheets with money they would rather put in their own pockets addresses only part of the problem.

The next stage must be scrutiny of the structural distortions that allow these institutions to rack up such huge profits. Broadly speaking, the leading players in at least three areas of investment banking – wholesale markets, underwriting and mergers and acquisitions – have been operating natural oligopolies.

Their profits have been in significant part a reflection of the absence of robust competition. There are different reasons for this in the different areas of business – what economists call asymmetries in some and market dominance in others. But as long as they are not addressed, the banks will make profits – or more accurately, extract rents – out of all proportion to any contribution they make to the wider economy.

Read the rest of this article here.