Rahm’s Doctrine and Breaking Up the Banks 23 comments
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By Simon Johnson
According to David Leonhardt, writing in Sunday’s New York Times magazine,
TWO WEEKS AFTER THE ELECTION, Rahm Emanuel, Obama’s chief of staff, appeared before an audience of business executives and laid out an idea that Lawrence H. Summers, Obama’s top economic adviser, later described to me as Rahm’s Doctrine. “You never want a serious crisis to go to waste,” Emanuel said. “What I mean by that is that it’s an opportunity to do things you could not do before.” (Links in the quote are from the on-line original.)
Leonhardt explains how this Doctrine can be applied to issues ranging from health care costs to education, and some of this is already apparent in the fiscal stimulus details currently before Congress.
Can the same approach also guide actions regarding our deeply broken and broke financial system? There are three possible answers:
1. No. If you support this view, you presumably think (a) there are no powerful vested interests on Wall Street, (b) these vested interests are not a first order reason why we are in so much trouble, (c) these same interests are doing a good job leading us towards economic recovery. My guess is that this is currently the view of only a small minority; perhaps it is limited just to people who received large TARP-funded bonuses.
2. Yes in principle, but the situation is now so dire that we really don’t have the opportunity. In this view, the Wall Street interests are a problem, but we need to get credit flowing again as fast as possible, and this requires being nice to banks and bankers. If you think that maintaining or increasing the amount of nominal credit in the economy is the number one issue (e.g., for February), then this view may have some validity. But if credit is falling in part because creditworthy people don’t want to borrow as much as before and because desired savings are increasing almost everywhere in the world, then the case is weaker. Most likely, we have some time to sort out the banking system properly.
3. Yes, but how? Members of the incoming Administration have spent years thinking ahead about controlling health care costs and reforming education; no one really anticipated there would be an opportunity - let alone a potential need - to restructure the financial industry. Perhaps we should leave this to G20 reregulation, meshing with the Dodd-Frank legislative agenda at the national level? This might be part of the answer, but it doesn’t seem to match other proactive uses of Rahm’s Doctrine or the scale of the financial catastrophe.
Recent prominent actions on Wall Street - excessive risk taking, pervasive mismanagement, failure to take responsibility, mind-boggling bonus behavior - all point to a deeper underlying problem: no real owners. Large banks operate on the fundamental principle that it is all, “other people’s money.”
So it has been and so it is - except now it is very much taxpayer money, from the Treasury and from the Fed, that keeps large banks alive. In essence, the government is already the primary provider of capital to this part of the banking industry, i.e., we are in some fundamental sense already the owners, and if we provide more capital or insure/purchase more bad assets then we really own the store. (If anyone from a large bank would like to do without taxpayer support at this stage, please step forward.)
What should we do with our ownership rights? We will, no doubt, attempt to exercise greater control over executive compensation and bonuses - and the industry, no doubt, will evade the spirit of these controls quite effectively. We might impose some other symbolic restraints over corporate jets and the like, but none of this will be meaningful.
The only real way to apply Rahm’s Doctrine is to break the overly powerful vested interests in this part of the economy, and that means to break up the banks. The government needs to sell its effective control rights over large banks to private investors - providing them with at least temporary permission to become concentrated owners. Antitrust provisions must ensure that the large banks are dismantled in this process. Whether the executives stay or go is a matter for the new owners to decide. (For an example of how to organize the technical details of acquiring and disposing of government ownership, see our previous suggestions; there are other ways to do this that would also be quite straightforward.)
One pushback response to this proposal is: it’s too different, too risky, and there’s a good reason we’ve never been able to do this before. Fortunately, we have a serious crisis and Rahm’s Doctrine is in effect. And, really, it’s just an application to the US context of what other well-run countries have done when faced by a collective breakdown of bank executive competence.
Progress on the healthcare and education fronts will take many years, and the right way to measure success may well prove controversial. Progress on banking can be swift and the relevant metrics are straightforward - are the big banks broken up and placed under new, more effective ownership? And does the taxpayer finally get some upside?
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On Feb 02 09:15 AM User64738 wrote:
> Too bad you didn't put Sweden a bit further up as an example of a
> well run country so I can stop wasting my time reading the rest of
> your article.
> The only thing government should have done is stay out of banks and
> let them fail. But, just as you mentioned for banks, they're fine
> spending other peoples money (taxpayers) even though they clearly
> don't know what the heck they're doing.
> And the stimulus bill. We're yet to see how that's going to create
> any jobs other than government jobs. In other words, it's more wasted
> money.
>
> Also, when business realizes that government is going to add more
> restrictions and cap their executives earnings, they will move out,
> as some already have and what some recently announced in Europe.
>
>
> Asia will thank Obama.
Rahm's doctrine holds that "You never want a serious crisis to go to waste, YOU WANT TO USE IT TO GROW THE SIZE OF GOVERNMENT."
So you see, I'm afraid your suggestion to break up the "too bigs" into smaller components and sell them to private investors is just not going to be acceptable to Rahm.
What an embarrassment this man is to our country. People are suffering the ill effects of a disastrous Federal Reserve policy -- and this slimey politician wants to use the crisis to expand his political power.
Clearly, the existing system of financial concentration and interdependent risk has failed miserably. If we bail out the banks and go back to way things have been, we'll get a similar crisis down the road.
Breaking up the banks is only a temporary fix, at best. Our experience in breaking up AT&T is that the new, smaller companies end up buying each other out and concentrating into new mega-corporations.
The problems with all solutions I've heard is that they miss the point. The banking sector itself is too important to be left to its own unattended market forces.
We need a new banking model, one that allows for a free-market allocation of capital while protecting us from the fallout of these massive failures.
I would propose that stock ownership in banks be abolished, and that banks be reincorporated as depositor-owned mutual banks. This is the current structure of credit unions, and was formerly the dominant structure of thrift institutions. It should work better because the management works for the depositor, not for speculators seeking to profit from stock appreciation. This is also a private-sector solution which keeps the government out of the business of mandating where resources should go.
The S&Ls failed spectacularly in the late 1980s after being deregulated and converted to stock ownership. The large money-center banks have suffered huge losses on occasion, as in 1982 with the Latin American defaults, and, of course, now.
I find it hard to see how we could do worse.
Guns, ammo, & canned goods.
Too bad Rahm is gets his paycheck from the whole country
-deregulation is good, our economy will do even better with no rule of law.
-banks should be allowed to become monopolies that can hold the entire economy hostage. The SEC and Justice Dept. should be neutered.
-The Glass-Steagal Act of 1933 should be repealed, we'll never have another deflationary bank-induced credit crisis, and imagine what big bank conglomerates could do to, I mean for, our economy.
-The more a bank pays its executives, the better decisions those executives will make for the shareholders.
-Short-term stock options will encourage short-term executives to make the best long-term decisions for their companies.
-If we start wars in the middle east, our gas prices will go down and the resulting war orphans will turn away from terrorism.
-It's OK to generate massive intergenerational debt, if hedge funds, investment bankers, and oil speculators get a tax cut out of it.
-If the other party proposes spending a billion dollars on healthcare for children or some other morally wrong, pinko cause, a communist revolution must be imminent!
-You can double the size of government and triple the national debt in 8 years and still convince some people that you stand for small government and fiscal responsibility.
OK, so maybe that last statement is still true.
Those whining like infants about the "failed ideology of the past 10 years" seem to forget that Bush didn't do anything by himself. Democrats controlled part of congress most of the time, and both legislative houses part of the time.
CDS were legalized by Clinton, not by Bush.
FNMA/FHLMC were turned into hedge funds by Barney Franks and his puppet Franklin Raines.
Sandy Weill (former Citigroup CEO) wanted Glass-Steagal repealed -- and a Democrat controlled Congress gave it to him
And it was the central economic planners at the Fed -- not the "free markets" that screwed up interest rates
Bush was mostly busy screwing up foreign policy, especially in Iraq. The people most responsible for screwing up the economy were just re-elected
The Republicans controlled the House from Bush's inauguration until January 2007. The Republicans also controlled the Senate during this time except for a year and a half from mid-2001 through January 2003.
While there is plenty of blame to spread around, it remains a fact that the economic collapse happened in the eighth year of George W. Bush's presidency, not the sixteenth year of Bill Clinton's.
On Feb 02 02:28 PM sabre_jenn wrote:
> Those whining like infants about the "failed ideology of the past
> 10 years" seem to forget that Bush didn't do anything by himself.
> Democrats controlled part of congress most of the time, and both
> legislative houses part of the time.
>
You are saying that the economic collapse occurred once Democrats controlled both houses of Congress and once Bush entered his lameduck year?
I don't know that the 2007-2008 democrats were responsible -- but by your logic they were in control and Bush was packing to leave
More likely, it was a totally mismanaged FNMA/FHLMC (thinks to Franklin Raines and Barney Franks).
More likely, it was efforts by Barney Franks and Henry Waxman to force banks to lend to borrowers that could not pay their loans back
More likely, it was the last minute deal from the Clinton administration to legalize CDS
More likely, it was Clinton's right hand man Bob Rubin, the $15 million per year "strategist", who helped a lawyer (Chuck Prince was not a banker) run Citigroup into bankruptcy.
And more likely, it was the inept monetary policies of Alan Greenspan -- who USED TO BE an libertarian Ayn Rand disciple, and somehow ended up the world's worst central economic planner. Sorry folks, but if free market thinking had actually prevailed, the markets wouldn't be hanging on the every word of the Fed.
And many finance scams -- notably Madoff -- had been going on for decades. How do you figure Bush was any more responsible than all the other presidents? Why didn't Clinton catch Madoff? The SEC was told about Madoff problems under both Clinton and Bush and did nothing
Bush was busy screwing up foreign policy, not wrecking the economy. If there is one person in Washington who most effected this crisis, it would have to be Barney Frank
"Those whining like infants about the "failed ideology of the past 10 years" seem to forget that Bush didn't do anything by himself. Democrats controlled part of congress most of the time, and both legislative houses part of the time."
"Sandy Weill (former Citigroup CEO) wanted Glass-Steagal repealed -- and a Democrat controlled Congress gave it to him"
----------------------...
That is factually incorrect. Congress had Republican majorities from 1994 until 2006. Democrats were referred to during those years, as being "in the wilderness." During that time, the Glass-Steagal Act of 1933 was repealed (1999) and the Bush administration considered deregulation and the neutering of the SEC to be a good thing for the economy. Yes, Democrats in the congressional minority voted for many of these policy failures and "centrist" Clinton failed to veto some of them, which is why I refer to it as an ideology, not a party.
The narrative that the 8-year Bush administration and the 12-year Republican majority in congress sat around and let the minority party screw up the economy is amusing (How exactly did the Dems talk them into voting for - indeed sponsoring - whatever legislation screwed up the economy?). The explanations get pretty convoluted don't they?
My disagreement is with your original statement "Democrats controlled part of Congress most of the time" while Bush was in office. This is false. In fact, in the last 16 years, Democrats have controlled the House for 2 and the Senate for 3 and a half.
On Feb 02 02:56 PM sabre_jenn wrote:
> Larrysr-
>
> You are saying that the economic collapse occurred once Democrats
> controlled both houses of Congress and once Bush entered his lameduck
> year?
>
> I don't know that the 2007-2008 democrats were responsible -- but
> by your logic they were in control and Bush was packing to leave
>
>
You like to rant in many of your comments about how wrong it was to repeal Glass-Stegal in 1999. I am quite certain that a bill becomes a law only when the President signs it, and I am equally certain that Bill Clinton, not George Bush was President in 1999. Clinton's good buddy and Treasury Secretary, Bob Rubin, was instrumental in getting Glass Stegal repealed -- both in Congress and in the White House. Rubin went on to strategize Citi into bankruptcy. Glass Stegal was clearly repealed for the benefit of Sandy Weill, not George Bush.
Clinton was also the President who signed legislation legalizing CDS.
Clinton appointed Franklin Raines to run FNMA (at Barney Franks insistence).
Bush was a disaster in his handling of Iraq, but it is quite ridiculous to claim he wrecked the economy single handedly. He was (sort of) in office when the music stopped -- albeit a bit of a lame duck by then. The catalysts for the economic disaster were mostly in place before he took office (except for Bernanke).
Bush might be guilty of economic neglect -- failing to undo Clinton's economic policies before it was too late. But he was hardly proactive in doing anything, good or bad, about the economy. Blame him for Iraq. Blame him for torturing prisoners. Blame him for illegal wiretaps and destroying liberty. But the economy wasn't him.
The economy was screwed up by Greenspan, Barney Franks, Henry Waxman, Bob Rubin, and Franklin Raines -- with a later assist by Bernanke.
You can't blame deregulation without blaming Clinton for at least half. And you can't say this was a market failure when the Fed was deciding almost everything and the mortgage market was overwhelmingly dominated by two corrupt government sponsored entities -- at least one of which (FNMA) was transformed by a democrat appointee from a sleepy insurer to a heavily leveraged hedge fund
On Feb 02 09:15 AM User64738 wrote:
> Too bad you didn't put Sweden a bit further up as an example of a
> well run country so I can stop wasting my time reading the rest of
> your article.
> The only thing government should have done is stay out of banks and
> let them fail. But, just as you mentioned for banks, they're fine
> spending other peoples money (taxpayers) even though they clearly
> don't know what the heck they're doing.
> And the stimulus bill. We're yet to see how that's going to create
> any jobs other than government jobs. In other words, it's more wasted
> money.
>
> Also, when business realizes that government is going to add more
> restrictions and cap their executives earnings, they will move out,
> as some already have and what some recently announced in Europe.
>
>
> Asia will thank Obama.
The Bush Administration failed to take action to correct these mistakes for 8 years. The Bush Administration also ran huge deficits which will make recovery from this economic situation far more difficult than it could have been.
A President gets judged by results, and the Bush results are in.
Sorry.
On Feb 02 04:57 PM sabre_jenn wrote:
> Chris B-
>
> You like to rant in many of your comments about how wrong it was
> to repeal Glass-Stegal in 1999. I am quite certain that a bill
> becomes a law only when the President signs it, and I am equally
> certain that Bill Clinton, not George Bush was President in 1999.
> Clinton's good buddy and Treasury Secretary, Bob Rubin, was instrumental
> in getting Glass Stegal repealed -- both in Congress and in the White
> House. Rubin went on to strategize Citi into bankruptcy. Glass
> Stegal was clearly repealed for the benefit of Sandy Weill, not George
> Bush.
>
> Clinton was also the President who signed legislation legalizing
> CDS.
>
........
>
> You can't blame deregulation without blaming Clinton for at least
> half. And you can't say this was a market failure when the Fed
> was deciding almost everything and the mortgage market was overwhelmingly
> dominated by two corrupt government sponsored entities -- at least
> one of which (seekingalpha.com/symbo...) was transformed
> by a democrat appointee from a sleepy insurer to a heavily leveraged
> hedge fund