Effect of BAC and C getting restructured by the FDIC

[Packer16]

I agree.  Most of the banking issued have to with making levered bets on assets that don't belong in commercial banks (leveraged mortgage securities, CDOs etc.) with other people's money (depositors).  Volker has the right idea separate the investment banks from the commercial banks.  The investment banks can make bets with their own money but the problems come in when you tie their risky assets and commercial banks liabilities (deposits) that are backstopped by the gov't.  Also ensure that these new investment banks don't become too big to fail by requiring larger equity committments for larger deals/size and the more derivatives they hold or if you think they are too large break them up.

 

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[Guest Broxburnboy]

"This outcome is the result of a change in economic philosophy from an assistance role in letting the market determine the outcome (Bush philosophy) to a manipulate the market to your ends approach (Obama philosophy). "

 

This really is too much.. the roots of this credit crisis go all the way back to at least the Reagan administration, who were the first to put forward "supply side" economics... the belief that if subsidies were given to corporate America, and regulations and taxes on corporate and private income eased, tax revenues would actually eventually increase through growth of the whole pie. This theory of course, although wildly popular with the corporate class, is  B**sh*t, as has been subsequently demonstrated. This period also marks the break point when Republicans (fiscal conservatives) abandoned their belief (although to this day they still pay lip service) in the wisdom of  balanced budgets and made borrow and spend their modus operandi.

 

By relaxing enforcement of the existing regulatory framework, outspending even the most profligate of the Democrats, cutting taxes for the wealthy at the same time they invented a wealth destroying foreign war(s) as well as  throwing money at every corporate blunder, the W. Bush administration took "voodoo economics" to new and disastrous heights. Under Bush and Greenspan  the federal reserve has responded to every asset bubble by trying to reinflate it with newly printed money, a policy which started under Bush and continues under Obama. Unfortunately, there is now no difference in the actions of either party, although I personally think that Obama understands the problems, which may or may not effect the eventual outcome.

 

The fact remains that the economies of most western nations is best described as monopoly capitalism, where the economic decision making is undertaken by a symbiotic government-corporate class of technocrats. Right now the major thrust of this braintrust is to "save the banks" by the simple expedient of transferring wealth from the masses to the privileged.... the ultimate supply side stimulus.

 

[Packer16]

I believe the issue here is the difference as you state between crony capitalism - shielded from competition (which would have made these practices gone long ago as on an unlevered basis their profitability doesn't make sense) and aided by leverage with no regulation (which can make marginal business appear profitable in the short term) and real capitalism (who is trying to satisfy customer needs and generates a profit doing so).  The idea behind the tax cuts was to provide the generators of wealth through real capitalism the ability to invest in their businesses and others.  In addition, the system had become a joke as marginal rates were so high that those who could hire the lawyers paid little or no tax.  Unfortunately we are headed in the same direction with higher taxes. 

 

You seem to think these folks who are the real capitalists are in the minority and the crony capitalists are in majority.  I disagree.  The cronies get more press.  The crony capitalist problem has to be dealt with but taking money from the real capitalist that create wealth through products and services customers want and give it to the government (who is a less efficient allocator of capital than the real capitalists) has not been a very good solution and doesn't deal with the crony problem look at Europe as an example.  They tax more but still have the same crony issues.  So the level of tax has little to do with the crony problem.  As for regulation, you need regulation in crony situation but in most other markets it becomes counterproductive.  I think we should break-up the crony systems as Teddy Roosevelt did and have it so firms are never in a position of being too big to fail.  If they want to take risks let them do it but also let them fail with their own money not depositors money with a gov't guarantee.

 

All I was stating is the "supply side" idea of reducing taxes on the real capitalists is a good idea but the idea of providing subsidies to crony capitalists is not.  My take on the W admin was their goal was the former but the results included the later.  The alternative I see in other parts of the world is higher taxes and potentially more cronyism (as the central gov't has more money to crony).

 

I disagree that the new administration gets the idea that crony capitalism is bad because of their actions & who they have appointed to Treasury and there economic teams.  These folks have a vested interest in the crony system.  The only independent person is Volcker and we haven't heard or seen much of him since his appointment to one of the economic boards (not having to do with the banks).  If Obama & Co were serious about this problem they would have Volcker and Bair replace Summner and Geitner to trust bust the crony bankers and have unlevered competition make the customer king rather the crony.

 

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[Guest Broxburnboy]

Actually where the real problem lies is in the contradictions inherent in laissez faire capitalism. Where truly free markets rule, supply and demand is king.

Those on the supply side are kept in check by competitors and a healthy process of creative destruction, whereby a company through poor management, inefficiency

or other yields to a competitor. This process creates the level playing field for new entries in the game and puts the "free" in free enterprise.

Unfortunately, as Adam Smith, the father of modern economic theory pointed out, there exists a natural tendency for businessmen in any particular industry to

meet in private for the express purpose of fixing prices in order to suppress the competition that so inconveniently keeps prices low and impairs their profits.

Monopolies and cartels are born, others try to corner various markets and  manipulate demand through psychological warfare (modern advertising techniques).

The seeds of price inflation are in this tendency. The ultimate monopoly is the exclusive right to control the

printing and distribution of money. Capital (and political power) flow to the monopolists, creative destruction is no longer allowed to function.. sound familiar?

 

In the modern world, democratic governments arose in part to spread the benefits of economic organization throughout the economic pyramid. The aforementioned tendency

for free enterprise to destroy itself was kept in check by the existence of trade unions (labour cartels) and regulation through governments who are representative of the masses (demand side concerns). Monopolists have responded by investing in the careers of politicians who represent their interests. Politicians can not get elected without this sponsorship. This loose cartel of  modern corporations now dictates economicpolicy.

 

The imbalance of economic power in favour of the supply side has resulted in economic policies that are meant to maximize profits and suppress "expenses" .. ie taxes on capital and profit, and expenditures on social neccesities (pensions, medicare, education). The cry of "lower taxes for corporations" is now economic dogma even though it begs the question "who should pay then?", for it is clear that government in response to the supply side, aims to keep borrowing and spending on supply side "stimulus". We are caught in a downward spiral of accumulating debt and malinvestment that can only be broken by the forces of creative destruction and government enforcement of existing regulations.