Newsweek - "A Lonely Success - Don’t forget: the bailouts worked."

[TomCADem]

Here is a very even tempered article by Fareed Zakaria who ignores the politics, and focuses on the policy of the bailout. While many folks bemoan the bailout, and liberals and conservatives alike now say that we should have let the banks fail, the fact is that we did try this back during the Great Depression with Herbert Hoover.

http://www.newsweek.com/2010/09/19/zakaria-don-t-forget-that-the-bailouts-worked.html

September is the month for anniversaries from hell. Last week we remembered 9/11, and this week it’s time to recall the collapse of Lehman Brothers. Most of the discussion about the financial crisis has focused on a question that won’t go away: could the fall of Lehman have been prevented? For many this was the cardinal error that sparked the crisis. Others believe that Lehman was the precipitating factor, but that the financial system was so highly leveraged that something or other would eventually have broken its back.

We will never know what would have happened if Lehman had not failed. But we can be fairly sure that without its collapse, it would have been impossible to shock the political system into action. In the month after the fall, the U.S. government made a series of massive moves to restore stability to the financial system. And it’s clear that those actions saved the American—and thus the global—economy from total collapse.

Consider the facts. After the fall of Lehman, credit froze in the U.S. economy. Banks stopped lending to anyone, even Fortune 500 companies with gold-plated credit. People couldn’t get consumer and car loans at any price, businesses couldn’t get short-term loans to meet payroll. Private-sector borrowing—the lifeblood of modern economies—fell from 15 percent of GDP in late 2007 to minus 1 percent of GDP in late 2008.

The effects on the broader economy were immediate. GDP shrank by 6 percent in one quarter. Some 1.7 million people lost their jobs, the biggest drop in employment in 65 years, which was then exceeded in the next quarter when 2.1 million jobs evaporated. The net worth of American households decreased by $5 trillion, falling at the unprecedented rate of 30 percent a year. The worldwide numbers did not look much better. The contraction in global trade in late 2008 and early 2009 was worse than in 1929 and 1930. In other words, we were surely headed for something that looked like a Great Depression.

[Davis_X_Machina]

1. He's right. No one here will listen, of course...

...fixated as they are on side issues like CEO compensation, but he's right.

[TomCADem]

2. History Has Forgotten The Words Of Former (Tea Party?) Republican Treasury Secretary Andrew Mellon

Doesn't he sound like an early Tea Party Republican:

http://en.wikipedia.org/wiki/Andrew_W._Mellon

Mellon became unpopular with the onset of the Great Depression. He advised Herbert Hoover to "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."<7> Additionally, he advocated weeding out "weak" banks as a harsh but necessary prerequisite to the recovery of the banking system. This "weeding out" was accomplished through refusing to lend cash to banks (taking loans and other investments as collateral), and by refusing to put more cash in circulation. He advocated spending cuts to keep the Federal budget balanced, and opposed fiscal stimulus measures. In 1929-31, he spent much of the time overseas, negotiating for repayment of European war debts from World War I. In February 1932, Mellon left the Treasury Department and accepted the post of U.S. Ambassador to the United Kingdom. He served for one year and then retired to private life.

[girl gone mad]

14. But Herbert Hoover didn't let the banks fail. He TARPed them.

Domestically, Hoover tried to get direct job creation going unsuccessfully and instituted the Reconstruction Finance Corporation (RFC) which was a government institution designed to assist individuals in refinancing their loans to prevent major bankruptcies. The conservative approach wanted the banks to fail as part of a “creative destruction” notion – good rises from bad. But the RFC lent the banks money in a similar way to the current TARP is doing so.

The RFC also “performed with TARP-like langour, secrecy, and nepotism … a record of its operations revealed that most of its money had … gone to a very few of the country’s biggest financial institutions”.

The allegations of bucks for buddies that now haunt the TARP are well documented in the operations of the RFC. Dean Baker says:

In … 1932, the RFC’s president Charles G. Dawes … resigned his post, took a new job as head of the Central Republic Bank in Chicago, and promptly procured for his employer an RFC loan that nearly equaled the bank’s total deposits. Dawes’s successor … then lent another $12 million to a Cleveland bank of which he remained a director.

The problem then is the same problem that we have now. The money was being distributed by those who prior to the crash were major forces in the structural decay that led to the crash. Baker quotes a writer from the day who said that the “immense sums they dispensed were given to borrowers, many of whom, to put it mildly, have forfeited, justly or unjustly, the confidence of the people”.

The idea that the top-end-of-town would get bailed out while unemployment rose resonates again today. The RFC handed millions of public $s to the rich but did very little to help the plight of the real economy. Just as the TARP is doing very little now other than to redistribute billions of public funds to the rich, which could have been used to employ the poor in employment guarantee schemes.

http://bilbo.economicoutlook.net/blog/?p=3130

[Hannah Bell]

15. the mellons owned a big bank. they were happy if *little* banks failed -- more assets for them to

pick up cheaply.


Mellon was founded in 1869 by Thomas Mellon and his sons Andrew W. Mellon and Richard B. Mellon, as T. Mellon & Sons' Bank. In 1902, the institution became Mellon National Bank.

Mellon Bank was the driving force behind the vast majority of the mass production revolution, especially in the Midwestern United States. The Mellon family using the bank as a proxy had direct involvement with founding the modern aluminium, oil, consumer electronics and financial industries. Alcoa, Gulf Oil (now Chevron-Texaco), Westinghouse (now CBS Corporation and Siemens) and Rockwell, all were directly founded and managed by the bank. U.S. Steel (the world's first billion dollar corporation), Heinz, General Motors, Koppers and ExxonMobil (as Rockefeller's Standard Oil) were born and nurtured by Mellon.

In 1920 Andrew left his leadership post of the bank to become the longest serving U.S. Treasury Secretary in history (serving under three separate administrations).

July 1, 2007, merged with Bank of New York to become The Bank of New York Mellon. Headquarters of the new company are located in New York. It is the world's largest securities servicing firm and one of the world's top ten asset managing firms.

http://en.wikipedia.org/wiki/Mellon_Bank


family of richard mellon scaife, e.g.

[spanone]

3. k&r

[Kurt_and_Hunter]

4. yup

[RandomThoughts]

5. They worked to save a system that continues to throw people out of homes

And thinks taxes on the wealthiest is wrong? How is that working?

LOL,

Depends what you define that as.


What was the flaw they said 9/11 was, a failure of imagination?

Going back to status quo systems that are shown to be needing correcting, is also a failure of imagination.

Be bold, think and believe things can be different, same systems only stagnate.

[The Northerner]

6. Huh? Is he implying that billions of corporate welfare giveaways worked?

[Skittles]

7. aren't you better off, Northerner?

it, uh, TRICKLES DOWN you know :o

[Greyhound]

8. Letting the banks fail was only half the equation.

The deposits were insured so taking back control of the issuance of currency was the other half. It only "worked" because they define what working is.

:kick: & R anyway.

[sendero]

9. If you call..

... "delaying the inevitable", then yes the bailouts worked. For a few years.

[girl gone mad]

10. Complete and utter BULLSHIT.

Our economy is now in more peril than ever, in large part as a direct result of this massive theft of the public purse.

I would encourage you to look back at the discussions we had here on DU at the time. Every one of my worst fears about the bailouts has come to pass.

As predicted, the banks did not increase lending. Instead, they went straight back to looting and speculating (particularly in emerging foreign economies where we now see some dangerous bubbles forming).

As predicted, most of the money did not make its way into the real economy (M3 has failed, and Bernanke doesn't have the first clue wtf he's doing). Banks don't lend based on reserves, they seek reserves based on lending demand. Banks create money out of thin air, something the government is quite capable of doing on its own. Thus, we never needed to save these banks, it was a con designed to keep wealthy bondholders from suffering any well-deserved losses.

As predicted, unemployment has remained high and there is no political will for public investment in American labor and production, in large part because the bailouts failed to bring even insignificant improvement to the lives of most Americans, leading to misguided mistrust, anger and skepticism of all government spending. The rise of the Tea Party is one very real and dangerous outgrowth of this foolish mentality.

We have now committed somewhere between $13 and $24 Trillion dollars to propping up the zombie parasitic banking system.

As predicted, the bailouts shifted less dangerous private default risks to more dangerous sovereign default risks (of course, in America, this default would be by choice, but the risk is still real).

As predicted, the bailouts and the subsequent deficit expansion have directly led to calls for public sector austerity and strengthened demands for cuts to the social programs which ordinary Americans depend on.

The bailouts were unnecessary, horribly structured and outright criminal. The banks sucked more blood out of middle America so that they could return to the economically destructive behavior they've been engaging in for the last 3 decades. We had our chance to weaken these institutions and return big finance to its rightful place, as a functionary of business and industry rather than an enormous and unwieldy obstacle which stands directly in the path of real economic growth, but we failed.

[TomCADem]

11. Businessweek - "Wall Street Banking on Republicans to Push Legislative Goals"

I know many folks are invested in the narrative that the Obama administration has been friendly to Wall Street. Heck, even the mad as hell at Wall Street teabaggers suddenly disappeared when it came to push for financial reform. I think the truth of the matter is that the Obama administration was successful in adverting the second coming of the Great Depression. I think they did the very best they could under the circumstances, which includes a Republican party that is willing repeat the mistakes of Andrew Mellon for political gain. The final proof in the pudding are the incredible efforts of Big Business to spear head a GOP takeover of Congress in 2010:

http://www.businessweek.com/news/2010-09-14/wall-street-banking-on-republicans-to-push-legislative-goals.html

Sept. 14 (Bloomberg) -- Wall Street is preparing for a Republican surge in Congress that could help it block proposed taxes on banks and investments, blunt new financial regulations and regain some of the lobbying firepower it lost during the financial crisis.

What bankers won’t be looking for, lobbyists said, is a repeal -- or any major changes -- to the Dodd-Frank bill, the most sweeping rewrite of financial regulation since the 1930s. While the law is widely criticized by the industry, Republican gains in the November election won’t be large enough to override a veto by President Barack Obama.

Financial firms, which for most of this year have been shifting political contributions to Republicans, say they’ll push Congress to restrain federal agencies that are filling in the details of the law, writing rules in areas including capital standards and a ban on proprietary trading. Banks would prefer to have Republicans overseeing the regulators, lobbyists said.

A Republican takeover would mean the banking industry “will have an active voice on the Hill, trying to influence the direction of regulatory agencies,” said Travis Plunkett, legislative director at the Consumer Federation of America, noting that only three House Republicans voted for Dodd-Frank. “The oversight process, grilling agency officials, that’s a big deal that shouldn’t be underestimated.”

[girl gone mad]

12. Hoover did bail out the banks, by the way.

It resulted in failure, which led to a backlash against government economic intervention - just like what we see happening today.

http://onlinejournal.com/artman/publish/printer_4407.shtml

And handing $13,000,000,000,000++ to the banks, almost entirely unfettered, is more than a little bit "friendly". It's an outright fiscal orgy, made more despicable by the simultaneous assemblage of the "cat food commission", which is tasked with the theft of Americans' Social Security savings under the ridiculous guise of deficit reduction.

[Hannah Bell]

16. i don't think that's quite accurate re the rfc.

http://en.wikipedia.org/wiki/Reconstruction_Finance_Corporation

[girl gone mad]

19. Despite Hoover's RFC..

having spent $2 Billion, banks were still failing and the economy remained weak. Hoover's advisers did have a tentative outline of the New Deal drawn up, but Hoover rejected these plans as anti-business and collectivist. It took FDR to come in and completely reorganize the RFC, creating subsidiaries such as Fannie Mae, and finally forcing working capital to flow into the economy.

For Hoover, the RFC was used to "restore investor confidence." Before FDR reformed it, the RFC lent money to banks and, to a much lesser extent, railroads. These private institutions did not use the money to invest in new plant and equipment or put the unemployed to work. This money was used to shore up balance sheets and prevent the further deterioration in the value of stocks and bonds already issued, and loans already made, by these institutions. Thus, if the RFC served any purpose at all it essentially bailed out investors. Its lending was essentially sterile; no new assets were created and nobody was put back to work.

During FDR's famous "hundred days", the RFC's authorization for borrowing from the Treasury was increased dramatically, and it was given vast new powers. Under Roosevelt, the RFC quickly became the nerve center for the most creative aspects of the New Deal. Led by banker Jesse H. Jones and lawyer, Thomas G. "Tommy the Cork" Corcoran (a protégé of Felix Frankfurter), the RFC helped finance a major infrastructure program, capitalizing the Tennessee Valley Authority, funding dam and waterway projects in the West, and underwriting the building of government assets through the Works Progress Administration and the Public Works Administration. It funded the government's de-monetization of gold (an important plank in the New Deal's effort to combat deflation) and served as the chief means of reorganizing the banks. It provided crucial financial support for rural electrification efforts. The RFC founded Fannie Mae as the centerpiece of its policy of spreading home ownership through government-insured mortgages. In the 1940's, the RFC played a central role in financing the industrial expansion necessary to support the war effort.

http://www.pjvoice.com/v11/11002budget.html

[Hannah Bell]

20. Hoover's RFC started up 9 months before the election, and --

The original legislation authorized the RFC to make loans to banks and other financial institutions, to railroads, and for crop loans...

Through legislation approved on July 21, 1932, the RFC was authorized to make loans for self-liquidating public works project, and to states to provide relief and work relief to needy and unemployed people. This legislation also required that the RFC report to Congress, on a monthly basis, the identity of all new borrowers of RFC funds.

RFC Undercut by Requirement That It Publish Names of Banks Receiving Loans

From its inception through Franklin Roosevelt's inauguration on March 4, 1933, the RFC primarily made loans to financial institutions. During the first months following the establishment of the RFC, bank failures and currency holdings outside of banks both declined.

However, several loans aroused political and public controversy, which was the reason the July 21, 1932 legislation included the provision that the identity of banks receiving RFC loans from this date forward be reported to Congress. The Speaker of the House of Representatives, John Nance Garner, ordered that the identity of the borrowing banks be made public.

The publication of the identity of banks receiving RFC loans, which began in August 1932, reduced the effectiveness of RFC lending. Bankers became reluctant to borrow from the RFC, fearing that public revelation of a RFC loan would cause depositors to fear the bank was in danger of failing, and possibly start a panic. Legislation passed in January 1933 required that the RFC publish a list of all loans made from its inception through July 21, 1932, the effective date for the publication of new loan recipients.

In mid-February 1933, banking difficulties developed in Detroit, Michigan. The RFC was willing to make a loan to the troubled bank, the Union Guardian Trust, to avoid a crisis. The bank was one of Henry Ford's banks, and Ford had deposits of $7 million in this particular bank. Michigan Senator James Couzens demanded that Henry Ford subordinate his deposits in the troubled bank as a condition of the loan. If Ford agreed, he would risk losing all of his deposits before any other depositor lost a penny. Ford and Couzens had once been partners in the automotive business, but had become bitter rivals. Ford refused to agree to Couzens' demand, even though failure to save the bank might start a panic in Detroit. When the negotiations failed, the governor of Michigan declared a statewide bank holiday. In spite of the RFC's willingness to assist the Union Guardian Trust, the crisis could not be averted.

The crisis in Michigan resulted in a spread of panic, first to adjacent states, but ultimately throughout the nation. By the day of Roosevelt's inauguration, March 4, all states had declared bank holidays or had restricted the withdrawal of bank deposits for cash. As one of his first acts as president, on March 5 President Roosevelt announced to the nation that he was declaring a nationwide bank holiday. Almost all financial institutions in the nation were closed for business during the following week. The RFC lending program failed to prevent the worst financial crisis in American history.

The effectiveness of RFC lending to March 1933 was limited in several respects. The RFC required banks to pledge assets as collateral for RFC loans. A criticism of the RFC was that it often took a bank's best loan assets as collateral. Thus, the liquidity provided came at a steep price to banks. Also, the publicity of new loan recipients beginning in August 1932, and general controversy surrounding RFC lending probably discouraged banks from borrowing. In September and November 1932, the amount of outstanding RFC loans to banks and trust companies decreased, as repayments exceeded new lending.

http://eh.net/encyclopedia/article/butkiewicz.finance.corp.reconstruction


Bank suspensions:

1930: 1350
1931: 2293
1932: 1453
1933: 4000
1934: 57

[TomCADem]

21. So, Your Point That Is That Roosevelt, Unlike Hoover, Liberalized Lending To Banks?

I think that proves my point, doesn't it?

[sendero]

17. And then we get "financial reform"..

.. that is a crazy quilt of picayune nonsense that will do little and we don't get the one ONE THING that is needed to PREVENT THE BANKS FROM GAMBLING WITH TAXPAYER-BACKED MONEY (otherwise known as Glass-Stegall)

And the dumbasses around here just don't understand why we are pissed.

We're pissed because we know what the F is going on here, and if every American did there would be torches and pitchforks immediately.

[EFerrari]

13. It worked for Wall Street. n/t

[Blue_Tires]

18. that's why its to funny to me to read the willful ignorance in the WSJ every day

as if Obama never did anything for them...

He's the reason those assclowns still have their door open...


But then again I had predicted this from the beginning: Wall Street would grovel to Washington hat in hand, tell everyone the future of the economies in the free world depended on congress giving them a blank check, and that they learned their lessons about playing with fire... And of course a year or two would go by, and once the Dow was back up the bankers would get VERY selective collective memories of WHO saved their asses, demonize Obama in the press as some kind of over-taxing, freedom-hating anti-capitalist, not hire or lend to anybody, and continue dumping cash into extremist GOP candidates...