/>Created 06/10/2009 - 9:51am
I stopped reading The Wall Street Journal editorial page when it soared off into wingnuttery, writing tomes on the imaginary conspiracy to off Vince Foster and other fantasies. The news pages remain useful; the editorial page hasn't improved much.
But as they say, even a monkey at a typewriter eventually will write something interesting. And on Tuesday, the lead editorial [1] of the Journal, "Making Failure an Option," made a strong argument.
The big banks are lining up to pay back the money Treasury gave them under TARP, the Troubled Asset Relief Program, after passing the Treasury's softball [2] "stress test." Eager to avoid any restrictions on pay, bonuses or activities, they are rushing to declare their health and independence.
The Wall Street Journal would allow them to get out from under the Federal thumb and go free, so long as they give up all the other guarantees and subsidies provided by the government (with the exception of deposit insurance).
PODCAST
Economist Simon Johnson explains why banks should get the same treatment as nuclear power plants and spells out the goals of a Capitol Hill meeting he will be speaking at Thursday sponsored by a coalition that aims to "break up the banks." Learn more. [3]
But this raises the fundamental question of what economists call "moral hazard," only multiplied many times over. These banks have been deemed officially as "too big to fail." When they operate, it is with the implicit backing of the U.S. Treasury. They will be able to borrow money more cheaply as a result, and will be tempted, big time, to take greater risks. Risk and leverage create the potential of bigger bonuses for bankers. But they can gamble with their losses implicitly covered by taxpayers. This is a recipe for renewed catastrophe.
There are different ways out of this box. Some, like Federal Reserve Governor Daniel Tarullo, suggest [4] that "too big to fail" should mean too big to exist, and that the Congress should break up the big banks into smaller, simpler, more transparent entities. Others, like Nobel Prize winner Joe Stiglitz suggest [5] treating banks like public utilities, regulating their activities and fees strictly. Isolate the venture capital function to operate separately, but turn banks back into a version of the savings and loans of the old days. Others, like Paul Krugman and Robert Kuttner, suggest that the big banks should be treated like we treat any banks that are insolvent: take them over, strip away the bad assets, fire the management, reorganize them, merge them or sell the sound bank off at the end of the process.
The Treasury Departments under both Bush and Obama decided against taking over and reorganizing the big banks. Instead both chose to subsidize them and nurse them back to health. Congress and the administration are turning their attention to new regulations for finance, but congressional action won't take place for a while--and initial proposals don't include either a lid on size or turning the big banks into public utilities.
Just telling them they are on their own won't work, the Journal rightly concludes. The markets won't believe it. So the Journal suggests, why not let one of them fail? And then it nominates Citigroup to be thrown under the bus.
"Resolving Citi--by either forcing it into a strategic partnership, if anyone will have it, or selling off its assets and breaking it up--wouldn't be cheap," the WSJ editorialist writes. But it would eliminate one of the leading "zombie" banks, end the "slow bleeding of taxpayer money into the bank," and send the banks a message: You are on your own and we really do mean it.
Citibank is essentially already owned by the Federal Government. As the paper notes, it has received insurance on $300 billion in deposits, some $63 billion in FDIC-guaranteed debt, and another $300 billion or so in taxpayer guarantees of its toxic assets, $45 billion in direct capital injections, and more. It is, along with Bank of America, the weakest of the major banks. And Citibank has a checkered history of needing bailouts from huge bad bets--from the time it speculated on Russian bonds on the eve of the Russian revolution to betting on loans to Latin American governments in the 1980s, to needing bailouts twice in the most recent crisis.
Treasury has joined with the banks in peddling confidence, so it is unlikely that the editorial writer's advice will be taken. But that leaves the question: If the banks are free of the TARP but officially too big to fail, what is to keep them from taking larger and larger gambles with other people's money, knowing that they pocket the profits and taxpayers will cover their losses? You don't have to believe in Vince Foster conspiracies to think this is a question that deserves a straight answer.
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Authors Bio:
Robert L. Borosage is the president of the Institute for America's Future and co-director of its sister organization, the Campaign for America's Future. The organizations were launched by 100 prominent Americans to challenge the rightward drift in U.S. politics, and to develop the policies, message and issue campaigns to help forge an enduring majority for progressive change in America. Most recently, Borosage spearheaded the Campaign's 2006 issues book, StraightTalk 2006, providing activists and candidates with distilled messages on kitchen table concerns, from jobs to affordable health care. Borosage also helped to found and chairs the Progressive Majority Political Action Committee, developing a national base of small donors and skilled activists. Progressive Majority recruits, staffs, and funds progressive candidates for political office.
Mr. Borosage writes widely on political, economic and national security issues for a range of publications including The Washington Post, the Los Angeles Times, and the Philadelphia Inquirer. He is a Contributing Editor at The Nation magazine, and a regular contributor to The American Prospect magazine. He is a frequent commentator on television and radio, including Fox Morning News, RadioNation, National Public Radio, C-SPAN and Pacifica Radio. He teaches on presidential power and national security as an adjunct professor at American University's Washington School of Law.
A graduate of Yale Law School, with a graduate degree in International Affairs from George Washington University, Borosage left the practice of law to found the Center for National Security Studies in 1974. The Center focused on the tension between civil rights and the national security powers and prerogatives of the executive branch. It played a leading role in the efforts to investigate the intelligence agencies in the 1970s, curb their abuses, and hold them accountable in the future. At the Center, he helped to write and edit two books, The CIA File and The Lawless State.
In 1979, Borosage became Director of the Institute for Policy Studies, a research institute that drew its inspiration and fellowship from the major democratic movements of our time -- anti-war, women's, environmental and civil rights movements. Borosage helped to found and guide Countdown 88, which succeeded in winning the congressional ban on covert action against Nicaragua. Under Borosage's direction, the Institute expanded its fellowship, launched a successful publications program, and developed a new Washington School for congressional aides and public interest advocates.
In 1988, Borosage left the Institute to serve as senior issues advisor to the presidential campaign of the Reverend Jesse Jackson. He traveled the country with Jackson, writing speeches, framing policy responses, and providing debate preparation and assistance. He went on to advise a range of progressive political campaigns, including those of Senator Carol Moseley-Braun, Barbara Boxer and Paul Wellstone. "