Question for Banker: are high gas price a good thing in regards to the struggle to mitigate the dangers of climate change? Is “market pressure” pushing certain actors towards investing into other energy sources and bringing us alternatives to petroleum sooner?
-Hippie
Not sure if you saw this article from Bloomberg News: http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html
But the gist is that while the federal government was providing the 700 billion dollar TARP bailout, the Federal Reserve was providing about 7.7 trillion in loans to many of these same banks.
An excerpt:
“TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says.”
So while the TARP money “insulated” the Fed from losses, the Fed continued to loan money to the banks at discount rates to ”protect” Treasury’s TARP investment. So the treasury and the Fed are protecting each other from losses by issuing discounted loans to the banks? Even if there is a perfectly legitimate reason for all the money moving and special privileges, forgive us regular folk if we feel left out of all this “protecting” and “insulating”.
Another excerpt:
“Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard — the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.”
I have yet to see as good of an explanation of “too big to fail” as that. I’d like to phase out the use of that phrase since it has been used so much and replace it with “moral hazard” because as explained in the excerpt, I think it’s the operative concept here.
I had some other excerpts to point out but I want to get too far off track and I’m sure this Bloomberg report will be weaving its way in and out of our discussions to come. Frankly, 8 trillion dollars is a such a huge amount of money I don’t even know how to take this.
My first question would be: did the banks pay back the Fed these loans? Language I’m seeing isn’t making that clear. If they did, I think the crux of the argument stays the same but is exacerbated by the magnitude of lending we’re seeing here.
You can probably still make the same argument that it’s different giving money to these big banks than to the states because the banks are likely to pay them back.
I can probably still make the same argument that it’s not the idea of lending and paying back that bothers people but the head-spinning rapidity with which the financial services sector receives help as compared to the average person or even local governments’ access to help from societal institutions. The jaw dropping amount of 7.7 trillion in quickly doled out loans (the linked article gives a portrait of time frame and specific loan amounts) only serves to demonstrate how rigged for the elites the system is when you think about the fact that our congress debates and deliberates over unemployment benefit extensions and a payroll tax cut for the middle class but doesn’t seem to take all that much time at all to give financiers all of the help they need. The 7.7 trillion figure can’t help but make me think about mortgage relief for regular Americans or a bailout for the states and how such projects could be financed with even a fraction of the kind of money being dealt with in these Federal Reserve transactions.
I recently watched all of Barney Frank’s Charlie Rose interviews at the below link.
http://www.charlierose.com/search/?text=barney+frank
In one of the post-crisis interviews he talks about how Ben Bernanke was basically walking around with a trillion dollars in his back pocket with which to save the global economy. Congressman Frank talked about how no man should ever have such a burden; if he only knew.
Something to key to keep in mind regarding what is detailed in the Bloomberg report(http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html) , Congress was kept in the dark about these transactions until Bloomberg News successfully extracted the needed documentation with a Freedom of Information Act request. I am not even fully sure how to react to this, the amount of money is just so staggering but here’s a start:
The Bloomberg headline was: Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress.
The 13 billion is referred to in the article later on and it seems to basically be the profit that the 6 biggest banks in the country made as a result of the remedying methods of the Federal Reserve and the Treasury department. This is crazy to me, that trillions would be spent, measures rammed through Congress, a people enraged all so that 6 companies could see a few billion when they expect to?
Give me liberty or give me a break!
-H
Hippie: No Free Lunch
in response to http://tumblr.com/Z8XNfwC1cvsF
All of us, low and middle income people included, pay taxes that fund such government initiatives as the American Recovery & Reinvestment Act. So no one’s gettin’ a free lunch, we all already paid for this government program.
The American Recovery & Reinvestment Act provided funds to keep cops on the streets and teachers in classrooms. Last time I checked, cops protect the private property of the wealthy. Last time I checked, teachers teach poor kids and rich kids.
The American Recovery & Reinvestment Act funded state transportation departments. Last time I checked, the rich and employees of the financial services sector also travel, even occasionally driving, on publicly funded and built highways and roads.
Almost half of the American Recovery & Reinvestment Act was tax cuts; not exactly a liberal social program; tax cuts that helped people of many different income levels as well as businesses.
Lastly, even IF the American Recovery & Reinvestment Act was several thousand dollar checks sent to every household in America (which it was not), guess where regular people would have spent their money? At stores that would send the money right back to the corporations that got the financial services sector bailout money so I am not sure why corporate beneficiaries of U.S. government’s policies have anything to complain about in this context.
-H
Up until now, I haven’t written about the OWS movement. That’s because until now, OWS hasn’t done anything that I wholeheartedly disagree with. Before I go on, I just want to say that I am not against OWS; not completely anyway. There is some legitimate anger. That doesn’t mean I agree with every decision OWS has made. The Boycott Black Friday movement, in particular, is harmful to the US economy and will increase unemployment.
The idea behind this movement is that Chinese workers that make the products we consume are protesting against their factories so we should boycott Black Friday in solidarity. Also, apparently Black Friday was created to make consumers pepper spray and turn against each other. (Don’t take my word on the summary, here’s the source.) This boycott will do more harm to the 99% than to the “evil corporations.” (because apparently now any corporation that creates products is evil and should be boycotted?) This boycott will backfire because corporations and consumers are connected through a feedback loop.
This loop has a different effect when we are in good vs bad times.
Good times: Consumers buy products and demand more. Corporations make more products by hiring people and paying them. Consumers use some of the extra money to buy more products. Corporations respond by creating even more jobs.
Bad times: Consumers don’t have the money to buy as many products so they buy less. Corporations lower the amount they produce so they don’t need all the workers anymore. People get fired.
One of the properties of this cycle is that it builds on itself - it makes the good times even better and the bad times even worse.
OWS’s efforts to make this cycle even worse by trying to persuade people to boycott on the biggest shopping day of the year could have serious consequences. Let’s step away from Econ101 for a moment and just use common sense: Stores increase hiring during the holiday season to accommodate the increased demand. What’s going to happen if OWS convinces people not to buy during the holidays? Also, many stores use the success of Black Friday as an indicator of how many people they are going to need to hire during the holidays. If OWS has its way and Black Friday is unsuccessful, do you think stores are going to want to hire people during the holiday season?
For those that are at the front line of the protests, speak out against these actions that will end up harming the American people. Your loyalty is to this country, not to Occupy Wall Street.
image: Henry Paulson (cc) kelnishi
If we are going to put up an unflattering pic of Henry Paulson, let’s at least use one with more pizzazz. Oh and look, according to this pic, he gave away $700B to the banks. Actual truth is here.
Hippie, you are right that the government acted very quickly to help out the banks. The reality of the situation was that the government had to act quickly. When times are rough, markets can get sour very quickly, which could potentially lead to more expensive bailouts. Just ask Jim Cramer. 10 days after he recommended Lehman Bros as a hot buy, the company went bankrupt.
Your point is still valid though. The government has acted quickly to help corporations. Especially these days, there is so much bi-partisan crying and moaning that videos of Congressional meetings are starting to look like episodes from Rugrats. But this point misses the main picture: the government has not ignored the people.
Those that decry the government aiding the banks have either forgotten or chosen to ignore that just a few months after the government LOANED money to banks, it GAVE $800B to the taxpayers through the stimulus package. I’m not saying it was bad that the government helped out taxpayers in this way, my point is that the government doesn’t just help out the banks while ignoring the average person.
Here is another fact that the public seems to have forgotten. The banks were forced to take the bailout! Some needed the money, sure, but not every bank was in dire condition. Source.
Myth: Government helps out banks and ignores the taxpayers
Truth: Taxpayers got free money, banks were forced to take expensive loans.
I agree with Banker that it is regrettable that most people are not aware that the banks paid back the bailout money.
I have mentioned to you before, I think people are mad that individuals or even states did not get bailouts. You answered with a good point: that banks are not charities and individuals and states are far less likely to pay back debt than the big banks.
I think these are all good points but what ultimately disgusts me about what happened is how the speed with which the bailout came together illustrates elite access to government versus the access of the average person to government. To me it’s not that banks got a bailout, it’s that they got a bailout in 72 hours.
It’s been 3 years since the economy took a crap, people are still waiting for a program or a plan but Congress has to think about it, they gotta revise it, Republicans are skeptical…it just makes it obvious that regular people are not a priority. Big banks had a problem and Secretary of the Treasury Henry Paulson former C.E.O. of Goldman Sachs walked right into Congress and the White House and explained what was needed. Overnight votes were held to process the initial bailouts under George W. Bush so within a week after the initial scare of late 2008, there was relief and a plan for the banking sector. It’s been 3 years and regular Americans are still waiting for a relief plan and their overnight vote.
So, I think financial services lobbyists should pressure Congress to act faster with its plans to relieve middle class burdens with actions like passing the American Jobs Act and moneyed elites should put funding behind initiatives to clean up campaign finance reform so that the access elites have to government compared to working class people isn’t quite so offensive. Overturning Citizens United might be a good start but that’s easier said than done.
-H
A ground rule in this discussion is that neither of us has to stand by things that we didn’t say or that don’t represent our beliefs so while a hippie-ish dude in many regards, I am not one who says Wall Street is the enemy or that it must be weakened. I get its necessary role in keeping our nation competitive but what I often read in the news is a resistance among the financial services sector lobby to regulation that borders on bratty; often to the point where government efforts are expended on countering efforts that resist regulation.http://www.bloomberg.com/news/2011-04-19/wolin-says-treasury-will-resist-efforts-to-slow-dodd-frank-rules.html.
There haven’t only been isolated incidents but patterns of predatory behavior, where regulation is avoided and questionable practices are performed upon unsuspecting customers. People seem to be upset that Wall Street risk taking can lead to the depletion of their 401K. People don’t like that powerful business lobbies integrated the real estate and commercial banking markets with disastrous results. That seemingly unlimited side bets can be made. In previous discussions, you have told me that without these risks there can be no reward but the people in general would like there to be as much protection from these risky situations as possible. I could go on but I have a feeling we agree that there needs to be sensible regulation but I guess that’s the rub: “sensible” is a subjective word and what we think “sensible” is will differ. This will surely be something we revisit, possibly on a topical basis in future posts.
Also, if people at large are this unaware of the basic ways in which Wall Street benefits our economy, maybe we need more tax revenue from high income earners to go to public schools so that the citizenry is more likely to be educated and understand what it is Wall Street does and thus won’t advocate for potentially misguided populist policies.
In the interest of further getting on the same page as far as terms so we can discuss further, what is a “CDO”?
-H
The bailout is one of the main sources of public anger. The common perception is that our government is willing to give handouts to the big mega banks while completely ignoring the little guy. Thus Wall St. can make risky bets, keep the profit if they work, and foot the taxpayer the bill if they lose too much money. That sounds horrible indeed, but it’s not exactly true. Here are the facts:
* The Troubled Asset Relief Program was not a handout, there was nothing free about the bailout. In fact, it was actually quite expensive.
* The total amount distributed was $580B. Of that, $345B has been returned. Ok so so far there are losses, how much do the major banks owe the taxpayers?
* It turns out that not only have the major banks returned the money, they have also generated a nice profit for the government.
As the chart shows, the large banks created a return of investment as high as 27%. All the major banks generated a profit for the taxpayers. This bailout was not cheap for the banks.
* So if the banks aren’t generating the losses, where are the losses coming from? What most people don’t know is that the bailouts weren’t just given to the large banks, the money was also given to small local commercial banks, AIG, Fannie Mae/Freddie Mac, even automobile companies. A large portion of the losses are coming from Fannie/Freddie. Out of $169B they received, the government has received $28B. These losses are not coming from the major banks.
As this analysis illustrates, the bailouts did not privatize the gains for the banks at the expense of the taxpayer. In fact, it was the taxpayers that profited from the major banks and it was the banks that took the loss . I’m not saying that it was a good thing that the bailouts happened. The point of this post is to show that the Wall St. banks did not use the bailouts to screw over the taxpayers as most people seem to believe.
Note: This site provides all the numbers that were used in this analysis. Feel free to use it to see for yourself where all the money went and how much each company has returned.
Banker: 3 ways Wall Street Helps our Country
I think H did a good job at pinpointing why we started this blog but I wanted to add my own viewpoint. I currently work on Wall St doing the type of job that the protesters would jeer at. I wasn’t born into this role, not by a long shot. My parents did not have much growing up. They were immigrants that started off in the lower class and moved there way up to the middle through hard work and perseverance. I followed in their footsteps and was fortunate enough to get into an ivy league school. I am living proof that the American dream is possible. Yet despite my success and hard work, there are many that hate me simply because of what I do for a living. I don’t blame most people for hating Wall St. The media and the industry do a horrible job at explaining what exactly it is that Wall St. does and how those functions bring any value to society. This stops now. Here are 3 lesser known benefits of Wall St.
1. It provides insurance to corporations and thus saves jobs.
Let’s say that oil currently costs $80/barrel and if oil goes up to $100/barrel it will be too much for American Airlines to handle. If that happens, AA would have to respond with massive layoffs, reducing benefits, etc. Wall St. can reduce the probability of this outcome by entering into a trade with AA that goes like this: A year from now, AA will buy oil from the bank at a price of $90/barrel. If oil goes to $120/barrel, AA has made a profit of 120-90 = $30/barrel and Wall St has lost that amount. If it goes to $70, however, AA loses $20/barrel. Either way, the probability of AA shutting down due to oil prices is greatly reduced. Now banks aren’t charities, they know that if the price of oil goes too high, they will lose money. They will remove this risk by entering into an offsetting trade with a speculator: a hedge fund, mutual fund, etc. It is crucial for the speculator to be in the market in order to do the offsetting trade with American Airlines!
Then you hear the media say “speculators in the commodity markets are manipulating prices.” Should the speculator not be involved and let the Wall St bank take the oil risk? That is called a proprietary trade and is what the Volcker Rule is set to eliminate. Then you hear “the banks are gambling and putting the economy in danger!” So then maybe the bank just shouldn’t do the trade at all. I can see the headline now: “American Airlines forced to fire people because Wall St banks refused to help them.”
2. It lowers the cost of loans and thus saves jobs.
Unless you are talking about Apple, with its $75B in cash reserves, most corporations will need to borrow money at some point. Companies will have to pay back the loan and also pay interest on it. If the interest payments are too high, the company will have to cut costs elsewhere. This translates into jobs being lost, benefits reduced, even, gasp…cancelling the annual Christmas party. Enter Wall St. Banks match investors with the debt of corporations. Here is the kicker, the more successful the banks are at generating investor interest, the less the corporation will have to pay back in interest!That is the law of supply and demand in action. Even some of the more complicated financial products that people love to hate (CDOs) are created to lower the cost of loans. Hmm maybe we can have that Christmas party after all.
3. It brings wealth to the USA….and thus saves jobs!
Sadly, our country is not the manufacturing powerhouse it once was. Our financial sector is one of our last global advantages. Wall St literally directs the world’s flow of money towards the US. Many argue that the bonuses are excessive but what is certain is the impact the money has on our tax revenues. Many other jobs and businesses create additional revenue by servicing the financial industry. Wall St was once the only place that investors/corporations/countries/people would turn to for financial services. Now that list has increased to include London, Dubai, Frankfurt, Hong Kong, Tokyo, Zurich, Amsterdam, etc. As the US continues to grow by 2-3%, while the emerging markets grow 6-8%, business opportunities, and thus financial services will leave the US.If they leave, so will the trail of money. Wall St. is not the enemy. If we lose Wall St., we will also lose our prominence in the global economy.
-B
HIPPIE: The Last Time This Happened…
Banker has asked me to open this up with my understanding of what happened the last time our nation had a crisis this calamitous.
A lot of liberals today like to talk up FDR like he was this raging progressive, brave enough to stand up for a level of socialism in our governance. Many conservatives like to talk about FDR like he is proof that Democrats are really communists.
My understanding is that Roosevelt was always of the privileged class and had a good close relationship with the financial sector in New York while Governor of that state. As the depression developed, millions of people in the country were prepared to abandon capitalism and the two major parties, protesting and agitating for economic relief and even espousing some socialist ideas and groups -sound familiar?
Historical consensus among many today is that FDR co-opted the leftist agenda of liberals, labor, farmers and minorities precisely so those groups would not work towards a socialist shift in the United States. Smart capitalists knew that as much as policies of higher taxes and taxpayer subsidized relief for the needy hurt their wallets in the meantime, it was nothing compared to how bad they would hurt if the needy were so needy that they start to tear at the foundations of the country itself and as a result the economic system that benefited them so much.
So FDR at once got with the left and got with the right: he told the Left, look we’ll do the New Deal and help people out so you don’t have to bring the Socialist Party here into power. He told the right, look you’ll have to pay some taxes and help us provide a social safety net to some of those suffering, but it’s better than losing the national economic system that is your livelihood.
Occupiers would do well to notice that the liberal agitators that forced Roosevelt to co-opt them started Socialist parties and other politically organized actions to actually threaten the held offices of Democrats and Republicans. Protests weren’t enough, they had to get involved in their local governments and participate in the democratic process to scare the powers that be enough to concede power to them. They had to get informed and learn how to access the levers of the system they so often wanted to change or even destroy.
The business class would do well to notice that sometimes a reasonable amount of regulation and tax revenue concessions is necessary to provide the long term social contract in this nation that benefits them so very much; it’s hard to maximize next quarter’s profits when the nation is in a state of socialist upheaval so sometimes, extending a hand to the poor can work to the benefit of the rich.
Here’s an article from the Hoover Institute laying out a lot of the history I just discussed: http://www.hoover.org/publications/hoover-digest/article/7076
We thought this brief discussion would be valuable context when as we go forward discussing our current economic crisis.
To further get things started, I’d like Banker to explain in relatively layman’s terms for the benefit of us all, his basic idea of how the financial services sector, specifically that of Wall Street and the New York Stock Exchange benefits the average person or working person in America.
I think it’s a question too often ignored by both sides even though its answer is pretty pertinent to the issues at hand.
That’s all for now!
-H
