A Bank Bailout That Works: Let's save the banks and let the bankers and shareholders go.

[Better Believe It]

A Bank Bailout That Works By Joseph E. Stiglitz
The Nation.
March 4, 2009

The news that even Alan Greenspan and Senator Chris Dodd suggest that bank nationalization may be necessary shows how desperate the situation has become. It has been obvious for some time that a government takeover of our banking system--perhaps along the lines of what Norway and Sweden did in the '90s--is the only solution. It should be done, and done quickly, before even more bailout money is wasted.

The politicians responsible for the bailout keep saying, "We had no choice. We had a gun pointed at our heads. Without the bailout, things would have been even worse." This may or may not be true, but in any case the argument misses a critical distinction between saving the banks and saving the bankers and shareholders. We could have saved the banks but let the bankers and shareholders go. The more we leave in the pockets of the shareholders and the bankers, the more that has to come out of the taxpayers' pockets.

Those who say the government cannot be trusted to allocate capital efficiently sound unconvincing these days. After all, it's not as though the private sector did a very good job. No peacetime government has wasted resources on the scale of America's private financial system. Wall Street's incentives structures were designed to encourage shortsighted and excessively risky behavior. The bankers were supposed to understand risk, but they did not understand the most elementary principles of information asymmetry, risk correlation and fat-tailed distributions. Most of them, while they may have been ethically challenged, were really guided in their behavior by the perverse incentives they championed. The result was that they did not even serve their shareholders well; from 2004 to 2008, net profits of many of the major banks were negative.

There is every reason to believe that a temporarily nationalized bank will behave much better--even if most of the employees are still the same--simply because we will have changed the perverse incentives. Besides, a government-run bank might spend some time and money teaching its employees about risk management, good lending practices, social responsibility and ethics. The experience elsewhere, including in the Scandinavian countries, shows that the whole process can be done well--and when the economy is eventually restored to prosperity, the profitable banks can be returned to the private sector. What is required is not rocket science. Banks simply need to get back to what they were supposed to do: lending money, on a prudent basis, to businesses and households, based not just on collateral but on a good assessment of the use to which borrowers will put the money and their ability to repay it.

Every downturn comes to an end. Eventually we will be able to sell the restructured banks at a good price--though, one hopes, not one based on the irrational exuberant expectation of another financial bubble. The notion that we will make a profit from the bailouts--which the financial sector tried to convince us were "investments"--seems to have dropped from public discourse. But at least we can use the proceeds of the eventual sale of the restructured banks to pay down the huge deficit that this financial debacle will have brought onto our nation.

Please read the complete article at:

http://www.thenation.com/doc/20090323/stiglitz?rel=hp_picks

[TonyZ]

1. Immoral Bailouts & The Ongoing International Banking Collapse

The recklessness and ruthless greed that led to the current
ongoing banking collapse is just the culmination of iniquity
that the parasitic banking system has been inflicting on the
real economy over centuries, not just the last 20 years or so.


Here are some facts that you will not find in our corporate
media because only a few people know them due to general
public incredulity as well as centuries old vested interests
in the status quo:

1. In the private bankers debt-based money system that we are
made to use, 97% of money circulating was originally created
as computer ledger entries by private commercial banks &
building societies when we take out loans and mortgages. It
has no tangible existence outside the banks interacting
computer systems because we withdraw hardly any of it in the
form of Government created cash. This system is replicated in
very similar forms in virtually every developed country, the
world over. 

2. No borrowing in this system means no money. When the
commercial banks lend “money” its NEW Number Money (existing
as data only) they created the moment the amount appeared in
the “borrower’s” account. No depositor is ever sent a letter
saying their money is temporarily unavailable because its been
lent to someone else. No-one else’s account was touched,
reduced or affected. Meanwhile not one person in a hundred
grasps the fact that our governments have all permitted
private banks to create over 95 percent of our money supply
bringing huge profits to them and endless debt to us.
Obviously there will not be enough money to pay the interest
as the interest has to come from the same source, (further
money creation by private financial institutions with even
more interest attached). So national and personal debt
accelerates and the overall interest due also rises with time.
This is the real reason why we are told the economy always has
to grow. Present UK government debt mostly to the private
banks is £0.5 Trillion, up from £90 Bn in 1980 and £26 Bn in
1960. 

3. For government, taxing the people helps pay the interest
bill and that is why overall taxation is always rising. Much
of our taxes go straight into the pockets of the super-rich
international bankers to pay the interest on the
"money" (data) they have "lent" and
created out of thin air. 

4. Banks are allowed to create money OUT OF NOTHING at
virtually NIL cost to them and charge all borrowing
individuals, businesses and governments interest on it. This
is because it only circulates as data between banks' computers
and not as cash which they would have to pay the government
for. This freely created intangible data "money"
circulates when you get paid your salary by bank computer
transfer or when you use your cards, direct debits, cheques,
CHAPS payments etc. Look into "fractional reserve
banking". Read the UK & US books "Grip of Death-
A study of Modern Money, Debt Slavery & Destructive
Economics" by Michael Rowbotham, (UK) OR "Web of
debt- The Shocking Truth about our Money System & How We
Can Break Free", by Ellen Brown (US).

Google "electronic money creation",
"webofdebt", monetary Reform”,
"prosperityUK.com" (eg the excellent article there
"The Case for Monetary Reform" (by Bill Clarke),
especialy the bit under the subheading "5 Ways The Man in
the Street is Bamboozled".

I know its hard to get your mind round when none of our
corporate media talks about it, hardly any MPs know about it
and it goes against everything you've assumed or been taught.
99.99% of people assume that banks & building societies
lend out money that their other customers have deposited, or
that they've got it from the money markets or the Central
Bank, (BoE in UK). We demand of our governments fair money
systems. Money creation must be taken out of the hands of the
money masters and into the hands of the people, "where it
properly belongs." (Abraham Lincoln). 

[u]If you don't believe me & you don't want to bother
researching the sources I have quoted[/u] then: 

[u]For a succinct explanation[/u] visit
http://www.basicincome.com/basic_banks.htm

AND [u]To watch an impressive & very clear explanatory
FILM[/u], (needs headphones): 
visit http://www.youtube.com/watch?v=vVkFb26u9g8 

OR Google "The Money Masters" to watch a longer
film.

[b]Then Act.[/b]

[MindMatter]

2. I like that idea, and there are other very smart ideas being ignored

For example, in the auto business, there are car rental companies with the capacity to buy at least 500,000 vehicles almost immediately. Why aren't they? 2 reasons:

1) Some of them have run into the same credit problems that are plaguing the housing sector.

2) But the main reason is that the US auto companies made the brilliant strategic decision 24 months ago to vastly reduce the volume of vehicles they sold into the rental fleets. During the last two model years, they systematically eliminated practically all the incentives to these huge fleet operators. Today John Q Public can get almost as good a deal as a fleet operator that is buying 100,000 vehicles.

It is way beyond foolishness. It is insanity. These guys made a horrendous decision (as comes very naturally for them). And even though they could probably save their companies if they would have reversed that decision soon enough, they are now watching their companies go into bankruptcy instead of cutting a deal that would be good for everybody.

At this point, the government should not put another penny into these companies. Instead, they should create a fund to support the credit of the car rental companies and force the manufacturers to sell to them. There is actually a move afoot to do exactly that. Sometimes the answers are so obvious, nobody can see them.

Just to put this in perspective, Enterprise is the biggest rent-a-car company by far, with the potential to buy over 1,000,000 cars this year. (Hertz might be able to buy 350,000.) But right now, Enterprise isn't planning to buy a single vehicle from GM going forward because GM's executives would rather keep laying off workers and hope for a government handout than meet their biggest customer halfway.

It is too late for Chrysler. Nobody in the car rental business trusts them now, so they are all bailing out of their Chrysler deals. But there is still time for Ford and GM to save themselves.

[MindMatter]

3. The other thing we must insist on

is that if a company is "too big to fail", then it must accept a major break-up as a condition of getting bailed out. It is unconscionable that we gave money to these "too big to fail" operations and some of that money was used to ACQUIRE OTHER COMPANIES.

There are many divisions of Bank of America, for example, that are in decent shape. These should be sold off. There is no benefit to our society to have all of that lumped together into a vast too-big-to-fail enterprise.

Break them up.