Robert Reich: Citigroup Versus General Motors

[marmar]

from TPM Cafe:



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

By Robert Reich - November 22, 2008, 1:29PM


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.

....(snip)....

Because the public doesn't understand the intricacies of finance, it's easily persuaded that this is definition of "soundness" is the same as keeping savings flowing to the banks so that the banks can lend to them to Main Street. That's why the public and its representatives have committed $700 billion of taxpayer money to Wall Street and another $500 to $600 billion of subsidized loans to the Street from the Fed -- bailing out the investors and creditors of every major bank, including , any moment, Citi -- only to discover, at the end of this frantic and unbelievably expensive exercise, that American jobs and communities are more endangered than they were at the start. ......(more)

The complete piece is at: http://tpmcafe.talkingpointsmemo.com/2008/11/22/why_were_rescuing_wall_street/

[Horse with no Name]

1. IF this is the case

and we listen to their "reasoning"...and the money was given to loosen the credit markets, then WHY can't Citigroup turn around and loan money to GM?
That's all the wanted. A loan. Not a handout.
Why couldn't that ONE string be attached to that gift from Congress?

[Tansy_Gold]

2. Because it's not the case.

You answered your own question.

[Skink]

3. I think his numbers are probaly realistic.

In the papers it's trillions. Can't be right.

[stillcool]

4. I don't think there is anything..

that I have less understanding of than banking and finance. I need a really good, easy to read, accurate book about what the fuck these institutions do. Although I have read all of Stephen Frey's books.

[marmar]

5. Kevin Phillips' "Bad Money" is another good one to read.....

.... and it won't leave you feeling very good about our current situation either.

[stillcool]

7. thank you!!

I'm an avid reader, but not always a good judge of authors.

[FarCenter]

6. Reich seems completely out of touch

"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 it is completely irrelevant today. What is feared now is that the roughly $500 trillion edifice of unregulated derivatives that's grown up in the last decade will come crashing down.