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Old 04-20-2009, 07:19 AM
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Arrow Nationalization in Denial?

Nationalization in Denial?




As this blogger and others have noted, the bank rescue programs have been designed to work around constraints more than to fix the underlying problem, which is a lot of bad debt that needs to be restructured and renegotiated, including the debt of the banks themselves. Instead, the boundary conditions have included "No more Lehmans", "We don't do nationalization", "Sanctity of contracts" (aka no trying to cut the securitization Gordian knot), an unwillingness to have bank bondholders take hits (with WaMu an odd exception) plus a fear of going back to Congress for more dough.

As the economy keeps downshifting, the Administration seems to be coming to the recognition that it has to relax one of those constraints, but it appears to perceive otherwise. From the New York Times:
In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.

While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.

The Treasury has already negotiated this kind of conversion with Citigroup and has said it would consider doing the same with other banks, as needed. But now the administration seems convinced that this maneuver can be used to make up for any shortfall in capital that the big banks confront in the near term.
So we may get to the government as majority owner in some banks (with a Citi conversion, its stake would be 36%) and unwilling to act like it (or perhaps only until the next regime change). And let us not forget that significant minority stakeholders generally have significant rights, particularly when they come in as rescuers (they extract more). Board seats and lots of veto rights are the usual minimums.

As Joseph Stiglitz and pretty much any private equity investor would tell you, the worst position is to have ownership and no control. The US choosing to act as absentee owner (or merely throwing its weight around on the odd political hot button) is the worst of all possible worlds. But that seems to be the Obama bank policy hallmark, so why should this decision be any different?

http://www.nakedcapitalism.com/2009/...in-denial.html
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  #2  
Old 04-20-2009, 07:38 AM
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Redefining Capitalism After the Fall
By RICHARD W. STEVENSON

Published: April 18, 2009
Washington Brian Stauffer

Related

THE recession will end. No one is marking the calendar, least of all President Obama, but the president is hinting at an audacious ambition as he waits for that inevitable if distant day: a redefining of American capitalism.




In a series of comments in recent weeks, Mr. Obama has begun to sketch a vision of where he would like to drive the economy once this crisis is past. His goals include diminishing the consumerism that has long been the main source of growth in the United States, and encouraging more savings and investment. He would redistribute wealth toward the middle class and make the rest of the world less dependent on the American market for its prosperity. And he would seek a consensus recognizing that an activist government is an acceptable and necessary partner for a stable, market-based economy.

“We cannot rebuild this economy on the same pile of sand,” he said last week.

In beginning to articulate a long-term approach, the president is putting an early stamp on a debate of historic importance — and ideological underpinnings — just getting under way in the United States and around the world.

For the better part of half a century after World War II, democratic capitalism built its modern framework against the backdrop of its death match with totalitarian Communism. In the two decades since the fall of the Berlin Wall, the American model of capitalism, largely unchallenged by ideological alternatives and increasingly dominant around the world, drifted toward what conservatives viewed as a more pure form of economic liberty and what liberals came to view as misguided free-market fundamentalism.

But now, as the United States and other nations look for lessons in the wreckage from the excesses of that period, political leaders are confronting uncertainty about what economic structures and values should define capitalism’s next chapter. Even before the current crisis, there were calls to rethink basic assumptions about the economy. Growth during the Bush presidency was slower than in any decade since before World War II, and incomes for most families have been growing slowly for much of the last three decades.

Mr. Obama is stepping into the debate characteristically intent on avoiding polarizing labels, and his advisers describe his philosophy in terms of pragmatism rather than ideology.

They said that the president’s approach is based on a belief that recent economic cycles were driven too much by financial engineering; reserved most of the fruits of good times for the wealthy; relied excessively on foreign capital to finance domestic debt; and ultimately gave way to painful busts. Mr. Obama, they said, simply wants a more stable economic model.

“It’s a strategy directed at having a somewhat different and healthier expansion than we’ve had in the past, driven by a sense that the expansion is likely to be more secure and its benefits more widely shared,” said Lawrence H. Summers, the director of the White House’s National Economic Council.

But economic policy is never just technocratic, especially not when times are tough.

Conservative activists whipped up emotional anti-tax, anti-Obama “tea parties” around the country to mark tax-filing day last week, saying the White House was headed down a path of fiscal profligacy that would ultimately require broad tax increases. And the prospect of a Democratic administration pushing the United States to the left is seen by many conservatives as a political rallying cry.

Arthur C. Brooks, president of the American Enterprise Institute, the conservative research organization, said of the administration, “They want much more of a European-style social democracy in which people are far less exposed to the vicissitudes of a market economy, and they want to have much easier access to manipulating the private-market economy.”

Mr. Brooks said it was “overheated and silly” to suggest that Mr. Obama was leading the United States into socialism, but that even an effort by the administration to “file off the rough edges of capitalism” would no doubt prompt a continued strong backlash from people who object to the direction the president is heading. “Of course conservatives are overstating the case against him because they want to win again, just like the left massively overstated the case against Bush,” he said.

Those on the left who have criticized Mr. Obama for being too timid in addressing the immediate crisis are similarly concerned that he will miss an opportunity to reshape American capitalism more fundamentally once the economy recovers. And even liberals allied with him suggest that the risk is that his ambition will prove too limited rather than too expansive.





“Again and again, Obamanomics, as well as his instincts in other areas of domestic policy, has been animated by a bold vision of what we need to do but has been quite cautious in practice,” said Robert Reich, who was labor secretary under President Bill Clinton and advised Mr. Obama in the campaign.

“The benefit is that he can feel his way,” Mr. Reich said. “The downside is that none of the initiatives may be quite bold enough to solve the problems at the scale they present themselves.”

The economic philosophy that Mr. Obama developed during the presidential campaign drew from across the ideological spectrum even as it remained rooted on the center-left. As that philosophy has been tested in practice through his early months in office, the president has if anything become more comfortable with an occasionally intrusive government as a counterweight to market forces that are now so powerful and fast-moving that they cannot be counted on to be self-correcting when things go wrong. He regularly rebuts conservative criticism on that score by pointing out that it was George W. Bush, just before he left the White House, who put the government in the business of deciding which financial institutions would fail and which would be allowed to survive.

Yet if Mr. Obama’s position brings the United States full circle from Ronald Reagan’s nostrum that government is the problem, it also stresses continuity and a commitment to the most basic conservative tenets: the power of markets as an engine of innovation and prosperity, and the necessity of economic growth for improving incomes and living standards.

“There is a vibrancy to our economic model, a durability to our political model and a set of ideals that has sustained us through even the most difficult times,” Mr. Obama said on his recent trip to Europe when asked about the decline of the American version of capitalism.

He would be willing to use the usual liberal policy tools to redistribute wealth after a recent period in which the gains have gone primarily to a relative few at the top of the income scale. But he would stress personal responsibility rather than entitlement. He would promote trade, but codify the Democratic push of the last 15 years for more labor and environmental protections in trade agreements.

If more activist government is the most controversial aspect of his long-term approach, the most ambitious might be his aspiration to reduce the degree to which the United States is a consumer-driven economy — or at least to develop policies that recognize the likelihood that consumer demand cannot grow at the rates it has been without being accompanied by a growing and destabilizing mountain of debt.

“We must lay a new foundation for growth and prosperity — a foundation that will move us from an era of borrow and spend to one where we save and invest, where we consume less at home and send more exports abroad,” Mr. Obama said in his economic speech last week.

Embedded in that approach is a far-reaching implication: that the rest of the world should no longer count on the United States to snap up imported goods or run up large trade deficits.

It is by no means clear that Mr. Obama has the policy tools needed to bring about that kind of change; we are, after all, fundamentally a consumer society. His advisers point to his support for innovative ways of increasing personal savings.

To drive economic growth in the place of debt-fueled consumption, Mr. Obama is banking on the emergence of alternative fuels, pollution-limiting technology, health care technology and other new industries linked to broader policy goals.

But the viability and scale of those opportunities is open to debate. And some of the administration’s own policies suggest that there are limits to Mr. Obama’s willingness to bolster investment in new production capacity at home. His unwillingness so far to confront China aggressively over its currency and trade practices, for examples, leaves many American manufacturers at a disadvantage.

Even with the economy and the financial markets showing a few tentative signs of improvement, which may be deceptive, it will be some time before Mr. Obama has the luxury of focusing on the long run. Still, in his first three months in office he has not been reluctant to think big — and there may be no better time to start redirecting an economy as huge and complex as this one than when it is in flux.


http://www.nytimes.com/2009/04/19/weekinreview/19stevenson.html?pagewanted=2&_r=2&ref=weekinreview
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Old 04-20-2009, 01:28 PM
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Do Not Repay This Loan


The Financial Times reports that banks and other financial institutions which received TARP funds may not be allowed to repay the loans. Yes, that is correct:
Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.


“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”
I understand that there are systemic issues as to liquidity, but I don't recall any discussion when TARP passed that the government would not allow the loans to be repaid. The original purpose of TARP was to rescue failing financial institutions and stabilize the housing market by using federal funds to buy bad mortgages; and then TARP was changed to provide direct investment into financial institutions in order to stabilize balance sheets and provide liquidity.

According to the Financial Times article, the purpose has morphed yet again, this time into a recession management tool:
The official, meanwhile, said banks that had plenty of capital and had demonstrated an ability to raise fresh capital from the market should in principle be able to repay government funds.

But the judgment would be made in the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable”.

Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”.
Something is wrong here. This is taxpayer money, to the tune of $246.73 billion, handed out to banks to avoid a banking system collapse. That collapse, if it ever were a real threat, no longer is a threat. If this were a consumer loan, the banks which received the money could cry fraud:
JPMorgan Chase Chief Executive James Dimon said Thursday that his firm is eager to return the $25 billion they've received from the government, and will do so as soon as possible.

"We could pay it back tomorrow," Dimon told reporters Thursday morning. "We're waiting for guidance from the government."
The justification for refusing to take the funds back is that the administration wants more lending. But maybe the problem is not a lack of liquidity, but a lack of credit-worthy borrowers. If we force banks to keep the money, the next step will be to require banks to lend the money by lowering credit standards, which is exactly the policy which got us into this problem in the first place. And to the extent the banks want to remove executive compensation restrictions to keep personnel, forcing the banks to keep the money and the restrictions may feel good, but it won't get banks to lend.

There also is evidence that the government is contributing to the problems. Fannie Mae and Freddie Mac have added a 0.75% surcharge to all condominium loans regardless of the borrower's credit rating, in addition to other surcharges on other types of properties.

It is one thing for the government to lend money to banks to help the banks survive. It is someting quite different to use the lending to maintain control of the private sector when the specific borrower-bank no longer needs the money. And the greatest irony is that many banks which didn't want or need TARP money took it at the insistence of the feds, and now they can't pay it back.
http://legalinsurrection.blogspot.co...this-loan.html
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Old 04-20-2009, 03:43 PM
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Geez. So, mabe I don`t, and you don`t, and that guy over there don`t. I mean, why feel compelled to repay our loans if like, we don`t have the dough? POOF! There goes America, huh?
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