Why We're Rescuing Wall Street and Not the Auto Industry: Citigroup Versus General Motors

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By Robert Reich
more at link
http://tpmcafe.talkingpointsmemo.com/2008/11/22/why_were_rescuing_wall_street/

Citigroup was once the biggest U.S. bank. General Motors was once the biggest automaker in the world. Now, both are on the brink. Yet Citigroup is likely to be rescued within days. General Motors may not be rescued at all. Why the difference?

Viewed from Wall Street, Citi is too big and important to be allowed to fail while GM is simply a big, clunky old manufacturing company that can go into chapter 11 and reorganize itself. The newly conventional wisdom on the Street is that the failure of the Treasury and the Fed to save Lehman Brothers was a grave mistake because Lehman's demise caused creditors and investors to panic, which turned the sub-prime loan mess into a financial catastrophe -- a mistake that must not occur again. So, by this view, the government must do everything and anything to keep Citi alive. But GM? GM is just ... jobs and communities.

The Street's view of the world is fundamentally flawed. Banks are important to the economy because they're financial "intermediaries." They connect savers with investors and borrowers. This is a vital function, but there's nothing magical about it. At any given time the world contains a vast pool of money that can be put to all sorts of uses. Financial intermediaries simply link the pool to the uses.

To be sure, savers need to believe that intermediaries are trustworthy; otherwise, savers will prefer the underside of their mattresses. That's why governments regulate intermediaries, insure deposits, and do whatever else needs to be done to make savers feel safe. What governments and societies fear most are "runs" on banks -- panicked efforts by depositors to pull their money out all at once, before banks can possibly collect the money from all those who have used it to borrow or invest. That's what happened in the 1930s.

But the current panic on Wall Street is not a "run" in this sense. It has almost nothing to do with banks' roles as financial intermediaries. It's a run on the shares of Wall Street banks, not a run on the pool of savings they oversee. The mutual funds, pension funds, and deposits they hold are perfectly safe.

[BrklynLiberal]

1. White collar vs Blue collar?

[sandnsea]

2. The beloved "investor class"

The rest of us are just the peons who serve them. Union jobs confuses us about our proper place.

[chelsea0011]

3. Nobody really understands banking practices but you can point

to a shitty car.

[Demeter]

7. Oh, You Can Point to Shitty Banks, Too

In fact, they get all the headlines.

[Jackpine Radical]

4. My view, FWIW, is that both the investors and the industrialists made their own messes

by rampant, short-sighted greed. I say nationalize the banks and turn the auto companies over to the workers. I got no problem with small businesses, but anything that's too big to fail is too big to be left in the hands of high-functioning psychopaths.

[liberal N proud]

5. It allows business to destroy the UAW

That is a big reason the auto companies are not going to get help

[DemReadingDU]

6. Agreed, n/t

[sarcasmo]

8. One word.

Unions.

[IndianaGreen]

9. Bankers and financiers are more important than auto workers

Isn't that the essence of capitalism?

It's not just the auto assembly workers that will lose their jobs, but all those that depend on the well being of autoworkers, even to the service sector!

[ksimons]

10. the 20th of January cannot come soon enough nt