• Monthly
  • $25
  • $50
  • $100
  • $other
  • use PayPal

CounterPunch needs you. piggybank-icon You need us. The cost of keeping the site alive and running is growing fast, as more and more readers visit. We want you to stick around, but it eats up bandwidth and costs us a bundle. Help us reach our modest goal (we are half way there!) so we can keep CounterPunch going. Donate today!
FacebookTwitterRedditEmail

The Banker Boys Are Alright!

Treasury Secretary Timothy Geithner told the country last week that the banks are essentially okay based on his stress tests of the country’s 19th largest banks. Secretary Geithner’s call may not seem quite right. After all, the bad case in stress tests assumed that unemployment would average 8.9 percent for all of 2009 and we just hit that last week, but there’s no reason not to take the Treasury secretary at his word.

So, we are told that the banks have the means necessary to get through the downturn. In that case, why should we spend hundreds of billions of taxpayer dollars to keep these healthy institutions afloat?

As long as the banks were on their death beds there was a plausible argument that taxpayer dollars were needed to keep the financial system from collapsing. But if the banks now have a clean bill of health from the Treasury, then it’s time for the banks to stop relying on taxpayer handouts.

First and foremost, this should mean the end of the Public Private Investment Partnership (PPIP) program that was designed to clear the toxic assets from the banks’ books. PPIP involved a massive subsidy to the banks since it provided enormous leverage to buyers of toxic assets, while assigning them very little risk.

The basic story was that if an investor put up a million dollars, the government would put up $13 million. The investor would have the opportunity to profit on $7 million of this investment (her $1 million, plus $6 million of the government’s money), but could not lose more than $1 million. The government would profit or lose on the other $7 million that it put up directly.

Even assuming that there was no gaming of the PPIP (banks could pay third parties to bid up the price of their assets), this incentive structure would lead investors to bid far more for toxic assets than they would in a free market. The result would likely be that many investors would incur large losses with the taxpayers’ dollars.

If the banks were hopeless zombies, perhaps there is an argument for this sort of subsidy from taxpayers to clear the books and allow the banks to start lending again. But if Secretary Geithner is telling us that the banks are healthy, can’t we just let them sell their loans in the market like anyone else? What’s the argument for special bank welfare now?

Of course the bank welfare goes well beyond PPIP. The banks have the authority to issue hundreds of billions of dollars of bonds that come with an explicit guarantee from the Federal Deposit Insurance Corporation (FDIC). This is a substantial interest rate subsidy, especially for the more risky banks. The savings from a government guarantee can easily be 4 percentage points of interest. If a bank has borrowed $30 billion under this program (which is the case with the largest banks), this amounts to a taxpayer gift of $1.2 billion a year.

In addition to the FDIC guarantees, the banks also benefit from a variety of special lending facilities established by the Federal Reserve Board. These lending facilities allow banks to borrow in secret and possibly pay substantially lower interest rates to borrow the same amount in the private sector. The Fed currently has close to $2 trillion in outstanding loans (a large portion of these loans are to non-financial companies) that were issued through these special facilities. If the banks are really okay, then it should be time to shut down these special channels and to allow the banks to again rely on market financing.

Finally, it should be time to shut the AIG window. Many of the largest banks, including Goldman Sachs and J.P. Morgan, had bought derivatives from AIG’s financial products’ division. If AIG had been allowed to collapse last fall, then most of these derivatives would be essentially worthless. However, the government stepped in and decided to honor in full AIG’s obligations.

This commitment from the government was very helpful to the banks. Goldman Sachs in particular did very well, pocketing $12.9 billion (@ 4.3 million SCHIP kid years) on derivatives that might have been worthless without the government’s helping hand. If the banks are okay, then how about letting them bear the consequences of their bad investment decisions rather than foisting the cost of their mistakes on the rest of us?

In short, we should take the stress test results as good news. Based on what Secretary Geithner has told the news, the bailouts should be over. It’s time for the banks to stand on their own two feet and to get their hands out of our pockets.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

bernie-the-sandernistas-cover-344x550

Weekend Edition
May 24, 2019
Friday - Sunday
Rob Urie
Iran, Venezuela and the Throes of Empire
Melvin Goodman
The Dangerous Demise of Disarmament
Jeffrey St. Clair
“The Army Ain’t No Place for a Black Man:” How the Wolf Got Caged
Richard Moser
War is War on Mother Earth
Andrew Levine
The (Small-d) Democrat’s Dilemma
Russell Mokhiber
The Boeing Way: Blaming Dead Pilots
Rev. William Alberts
Gaslighters of God
Phyllis Bennis
The Amputation Crisis in Gaza: a US-Funded Atrocity
David Rosen
21st Century Conglomerate Trusts 
Jonathan Latham
As a GMO Stunt, Professor Tasted a Pesticide and Gave It to Students
Binoy Kampmark
The Espionage Act and Julian Assange
Kathy Deacon
Liberals Fall Into Line: a Recurring Phenomenon
Jill Richardson
The Disparity Behind Anti-Abortion Laws
Kollibri terre Sonnenblume
Chelsea Manning is Showing Us What Real Resistance Looks Like
Zhivko Illeieff
Russiagate and the Dry Rot in American Journalism
Norman Solomon
Will Biden’s Dog Whistles for Racism Catch Up with Him?
Yanis Varoufakis
The Left Refuses to Get Its Act Together in the Face of Neofascism
Lawrence Davidson
Senator Schumer’s Divine Mission
Thomas Knapp
War Crimes Pardons: A Terrible Memorial Day Idea
Renee Parsons
Dump Bolton before He Starts the Next War
Yves Engler
Canada’s Meddling in Venezuela
Katie Singer
Controlling 5G: A Course in Obstacles
Evaggelos Vallianatos
The Beauty of Trees
Jesse Jackson
Extremist Laws, Like Alabama’s, Will Hit Poor Women the Hardest
Andrew Bacevich
The “Forever Wars” Enshrined
Ron Jacobs
Another One Moves On: Roz Payne, Presente!
Christopher Brauchli
The Offal Office
Daniel Falcone
Where the ‘Democratic Left’ Goes to Die: Staten Island NYC and the Forgotten Primaries   
Julia Paley
Life After Deportation
Sarah Anderson
America Needs a Long-Term Care Program for Seniors
Seiji Yamada – John Witeck
Stop U.S. Funding for Human Rights Abuses in the Philippines
Shane Doyle, A.J. Not Afraid and Adrian Bird, Jr.
The Crazy Mountains Deserve Preservation
Charlie Nash
Will Generation Z Introduce a Wizard Renaissance?
Ron Ridenour
Denmark Peace-Justice Conference Based on Activism in Many Countries
Douglas Bevington
Why California’s Costly (and Destructive) Logging Plan for Wildfires Will Fail
Gary Leupp
“Escalating Tensions” with Iran
Jonathan Power
Making the World More Equal
Cesar Chelala
The Social Burden of Depression in Japan
Stephen Cooper
Imbibe Culture and Consciousness with Cocoa Tea (The Interview)
Stacy Bannerman
End This Hidden Threat to Military Families
Kevin Basl
Time to Rethink That POW/MIA Flag
Nicky Reid
Pledging Allegiance to the Divided States of America
Louis Proyect
A Second Look at Neflix
Martin Billheimer
Closed Shave: T. O. Bobe, the Girl and Curl
David Yearsley
Hard Bop and Bezos’ Balls
FacebookTwitterRedditEmail