Robert Kuttner - Obama's Banking Rescue: O for Opaque

[Political Heretic]

Obama's Banking Rescue: O for Opaque
Robert Kuttner
Co-Founder and Co-Editor of The American Prospect
Posted March 29, 2009 | 07:25 PM (EST)

I fear that these columns have been too polite. They have directed criticisms at Treasury Secretary Tim Geithner and national economic policy chief Larry Summers. Lord knows, they richly deserve the criticism. But let's not kid ourselves. The man they work for is named Barack Obama.

President Obama has promised to run an administration of unprecedented openness. And in some respects, such as the ground rules for spending stimulus funds, he has. But in the most important area of all, the financial rescue, the administration is making trillion dollar decisions relying on the Federal Reserve and a small Wall Street club of advisors, with no transparency or public accountability.

In normal policy-making, an administration comes before Congress to request a law; one or more Congressional committees hold hearings; a broad range of witnesses are called; and then the legislation is drafted, enacted, and funds are appropriated. Criteria for spending the public's money are explicitly legislated; and Congress gets to conduct oversight hearings after the fact to see whether the money has been well spent.

(snip)

Then in January, Obama succeeded Bush--and if anything the closed-door operation became even more secretive. In devising their horribly convoluted and risky approach to the next phase of the banking bailout, chief economic strategist Summers and Treasury Secretary Geithner did not consult closely with Congress. The new rescue package was not legislated. There were no hearings. Rather, they met extensively with key Wall Street banking barons, to design government guarantees so lucrative that speculative hedge funds and private equity companies would bid for toxic securities clogging bank balance sheets. They would make a financial killing, but maybe banks would be recapitalized and start lending again.

(more)
http://www.huffingtonpost.com/robert-kuttner/obamas-banking-rescue-o-f_b_180529.html


Kuttner really nails it I think. The entire article is really worth the read - wish I could quote more of it.

[ArchieStone1]

1. Kuttner should understand that we are in the midst of an economic meltdown

Therefore, he should go on vacation and save his criticisms for the day after the recession ends.

Or something.

:sarcasm:

[Political Heretic]

2. Wow, that was brilliant.

How about... we are in the middle of a financial meltdown, therefore we should do things that are most efficiently focused on fixing the problem, and not plans that are filtered through wall street elite robber baron's approval mechanism first. How about we address the cracks in the foundation that brought us this mess rather than slap a new roof on the top?

How about, economists and political economy experts continue to let their voices be heard instead of capitulating to the rather bizarre and frankly unamerican claims for the suppression of expression such as yours.

What is everyone so afraid of? My god... people are acting like idiot conservatives around here. Since when were we scared of a free exchange of ideas, and even disagreement.

Does it ever occur to your that our own President doesn't have the attitude you do? He has said regularly that he welcomes and NEEDS critical voices, and that he wants to listen to all ideas.....

So where does your "shutup" notion fit into that?

[ArchieStone1]

3. It was sarcasm

I noted it.

[girl gone mad]

4. It's become almost impossible to tell the difference lately.

[Political Heretic]

5. Sorry :(

Dammit. :hug:

[slipslidingaway]

6. A few more snips...

"...Even more alarmingly, the administration is now using the Federal Reserve as an unlegislated, all-purpose slush fund. Because the Fed's operations are largely beyond the reach of Congressional appropriations or scrutiny, the Fed can do whatever it wishes with its money. The Geithner plan was negotiated behind closed doors, the main players being the Fed, the FDIC, the Treasury, and power-brokers on Wall Street.

What we have is something perilously close to a dictatorship of the Fed and the Treasury, acting in the interests of Wall Street. The contrasts with the first hundred days of the Roosevelt administration are striking. Like Roosevelt, Obama faces an economic emergency. Like Roosevelt, he faces an angry public, which has been bilked by excesses on Wall Street. And like Roosevelt, Obama has a supportive Democratic Congress that is willing to substantially defer to the White House on an emergency recovery plan.

But unlike Roosevelt, who used the public's indignation and Congress's support to constrain the barons of private finance, Obama's economic team is using government funds to put the most abusive players on Wall Street back in the saddle. And Geithner and Summers, working with the Fed, are assembling their plan with no public scrutiny..."

[slipslidingaway]

7. Worth the time IMO....

from your article, thanks for posting.

Edit....This was supposed to be a reply to the OP.


"...Under the present arrangement, the Fed provides nearly all of the funds, an approach that carries no transparency and huge risks of its own. Until last September, the Fed bought and sold mainly Treasury bonds, the safest securities there are. And it did so for one purpose only--to conduct monetary policy. Now, the Fed is buying trillions of dollars of junk assets, and it will be under tremendous pressure to keep these on its own books, compromising its capacity to run the nation's monetary policy..."


http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=385&topic_id=290540&mesg_id=290540

Direct link, shows how the banks could unload their toxic assets to the Fed.

Geithner Plan II
http://www.youtube.com/watch?v=n-arbfLTCtI

[MarjorieG]

8. What we do know is horriffic, most yet unknown. I think after assets bought, stress tests, we'll

know more, and be told more.

[Political Heretic]

9. This plan basically makes the idea of a "stress test" meaningless

They essentially abandoned that idea.

Artificially propped up asset buys don't exactly make for useful "stress tests"

[Thrill]

10. How does he know there will be no transparency?

[Political Heretic]

12. He refers (if you read) to decisions already made and the lack of transparancy in them.

And he is correct.

[high density]

13. If we don't rely on the Federal Reserve, who do we rely on?

I'm confused about our options here. The FDIC is going to price the assets for auction. The Federal Reserve is going to belly up to the table with money from the Treasury to lower the risk of the transactions. This makes it more attractive for the banks to participate in this market. What government entities would this guy prefer to have perform these functions? How do we set up a system like this without involving the bankers and the bond experts like Bill Gross?

Money will be made but it will be made with the taxpayers sharing in the profits and the private investors risking their own capital.

Also, Obama has made it very clear that he is aware of and wants to get away from the "Wall St Bubble Machine." Kuttner is assuming Obama's a fool. And I don't see him giving any sort of ideas for his own plan. After reading the article I still don't understand what has supposedly been so secretive. So far the Treasury has showed us the plan, and I fail to see what else there is to be shared at this point.

[Political Heretic]

15. We DONT set up a system like this

We set up a system like this:

http://www.prospect.org/cs/articles?article=ten_radical_remedies_america_needs

[high density]

17. OK, where does the money for that come from?

First off, a lot of that stuff is peripheral. We're talking about Geithner's plan for toxic assets.

Kuttner's plan is to nationalize insolvent financial institutions. We do that already with a thing called the FDIC. Given that, I'll have to assume he means taking over Citigroup, Bank of America, and etc. Receivership puts 100% of the risk on us and 100% of the cost on us. That makes the cost of Geithner's plan look thrifty in comparison. I find it amazing that all of these people who sound alarm bells about the risk and cost of Geithner's plan then propose alternatives which shift even more risk and costs onto the US government.

[Political Heretic]

18. It's not peripheral at all.

Kuttner's plan is not to "nationalize insolvent financial institutions." Calling it such is a dishonest compression of what he actually says. Kuttern's 10 points are about addressing the crisis through comprehensive and long term reform as well as immediate actions. Obama's plan is to take some immediate actions that hopefully return everything to the way it was. The trouble is, the way it was wasn't that great - on top of the trouble that I don't think the plan is likely to work at all.

What I find amazing is all the people who don't have any problem with a plan written by wall street for wall street that wall street flipping loves to death which includes huge potential finanical middle people to funnel out millions or billions in the process - and few seem to even be questioning whether or not this is really the only or best approach, or whether there might just be a little bit of inappropriate pressure from Wall Street to carry out its own agenda that is not congruent with the broader best interest of the American taxpayer.

As far as your subject line, if you read instead of just skimming to return and quickly make a few points, you'll see that Kuttner suggest that its not paying for it that's the problem per se, its the unaccountability of the Fed - he suggests nationalizing the Federal Reserve, and I couldn't agree more. He also lists several other revenue generating elements, including a Tobin tax which I absolutely full heartedly support. Wall Street should be financing its own bailout. This was suggested as an part of an alternative proposal to the Paulson bailout I plan by patriots such as Rep. Pete DeFozio, but it was of course laughed out of the Corporate-Congress.

Finally, I personally believe we SHOULD be shifting more responsibility (or "risk") onto the US Government. The damage is already done. What's left now is to gut this irresponsible bloated financial behemoths and break them up, fire corrupt wall street jackasses, instate a new wall street rule book of regulation, and sell off parts of the dead monsters to small regional banks with a proven record of ethics and fiscal responsibility.

The real debate is between those who want to restore he "old" corrupt unsustainable system for the short term until we hit another cycle of economic misery or whether or not we want to use this opportunity to build a more sustainable market foundation.

[Political Heretic]

19. PS - I'm going to have to stop here because I HAVE to get some sleep.

Sorry, but nice debating with you. I'll leave you with the last word!

[high density]

11. If they make a killing, we will share in that killing

We share in the upside of these assets. And yes, we also take a lot of risk, but less risk than if we went with a full on nationalization.

The problem is that according to Lord God, Maker of Heaven and Earth, Paul Krugman, these assets being discussed here are 100% worthless. So what is it, are they going to make a killing or are they worthless? I have a feeling the answer is somewhere in between. The FDIC is competent and they have good reason to price these assets properly for auction.

[ProSense]

14. Unless I'm misunderstanding this, how is this a fact

In normal policy-making, an administration comes before Congress to request a law; one or more Congressional committees hold hearings; a broad range of witnesses are called; and then the legislation is drafted, enacted, and funds are appropriated. Criteria for spending the public's money are explicitly legislated; and Congress gets to conduct oversight hearings after the fact to see whether the money has been well spent.

<...>

Then in January, Obama succeeded Bush--and if anything the closed-door operation became even more secretive. In devising their horribly convoluted and risky approach to the next phase of the banking bailout, chief economic strategist Summers and Treasury Secretary Geithner did not consult closely with Congress. The new rescue package was not legislated. There were no hearings. Rather, they met extensively with key Wall Street banking barons, to design government guarantees so lucrative that speculative hedge funds and private equity companies would bid for toxic securities clogging bank balance sheets. They would make a financial killing, but maybe banks would be recapitalized and start lending again.

Congress was completely involved in the passing the bailout. I seem to remember debate followed by passage of the bill. Once the bill is approved by Congress, it's up to the executive branch to implement and manage the bailout.

The bailout agreements are posted online.

The one area that's still unclear is how the administration is going to treat the results of the stress test. Will those results be made public?

[indimuse]

16. knr!

Good article.Read this over @ Huff eaarlier. Thx for posting here! :)