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Saving the financial system without a national industrial policy is worse than useless

Sorry, President Obama, there simply is no time for a honeymoon. As you said in your Inaugural Address yesterday, "The ways we use energy strengthen our adversaries and threaten our planet." Unfortunately, it seems that this idea has not yet filtered into your administration’s thinking and planning regarding what to do about the financial collapse.

Without a national industrial policy, saving the financial system really makes no difference. The underlying problem is that the financial, economic, and monetary arrangements of the past half century – creating financial paper which is traded for oil, which is then used to build suburban and exurban sprawl, the value of which underpins the creation of the financial paper and the dollar – has, since summer 2007, collapsed into smoldering ruins. We need to return to a production-based economy, not try to resuscitate the speculation based sprawlconomy. The key is to move the U.S. economy off of its base of burning fossil fuels, and into the future. That requires a national industrial policy - whatever you want to call it to calm the demons of free market ideologues doesn't matter. But in his letter to Congress on January 15 regarding the approval of the second $350 billion of the Wall Street bailout, Larry Summers, Obama’s top economic advisor, sought to assure congressional leaders that “our actions will reflect the act’s original purpose of preventing systematic consequences in the financial and housing markets,” and the new Oabam administration, “has no intention of using any funds to implement an industrial policy.”

Whatever we end up doing with the financial system will only succeed if we tailor what we do to this objective of moving the U.S. economy away from burning fossil fuels and into the future. The financial system should be serving that great national purpose. But for the past three decades, it has been obstructing it, by channeling credit into the building of suburban sprawl, and by financing speculation on the trend of peak oil - which just a few months ago delivered us gasoline at nearly five bucks a gallon.

So, we must fuse together these two questions: how to save the financial system, and how to get the U.S. economy going again. It makes no sense to try and keep alive utterly failed the financial, economic, and monetary arrangements of the past.

Two days ago, Kevin Drum threw down the gauntlet and challenged anyone to present a good case for the nationalization of the banks. This, of course, echoes the interesting brawl between Bonddad (Why TARP Was -- And Is -- Still Necessary) and Jerome a Paris (Oh boy - TARP was not necessary and it's a trillion dollar robbery) on Dailykos the same day.

 

Keeping in mind the need to adopt and pursue a national industrial policy, I bring to you this from the editors of investment website Seeking Alpha.

When a bank is nationalized, shareholder equity should be written to zero, and existing management should be handled as roughly as the law allows. If we have a bit of courage, we should impose haircuts or debt-to-equity conversions on unsecured creditors, but I don't think we have that kind of courage. "Toxic" assets should be revalued at pennies-on-the-dollar market bids or else written to zero and hived into "bad banks". Once we have a conservative valuation of the assets and know exactly what is owed, we'll know how much public money would be required to cobble a robustly funded bank from the wreckage. However, if we recapitalize "too big to fail" banks without restructuring them, we will quite deserve our next mugging. We had better cut these monsters into little, itty, bitty pieces. We should embed strict size and leverage limits into their itty, bitty charters, restrict their ability to recombine, and then hire management to run the little things on strictly commercial terms. Hopefully we will change what it means for a bank to run on commercial terms — we should create a tax and regulatory structure that penalizes scale and leverage across the board. Better yet we should decouple the payment system from risk investment by reorganizing banking functions into "narrow banks" and credibly not-guaranteed investment vehicles.

At the end, they provide an extremely extensive and useful list of links - all within the past few days - on the issue of nationalizing the banks.

Some nationalization links

 

 

I also want to point to Stirling Newberry’s latest two pieces, which ably crucify President’s Obama economic policies. Here's the short version, from today.

And here's the long version, from yesterday. It is not for the feint of heart, nor for those with limited attention spans.

Comments

No Avatar
roxy on January 21, 2009 - 14:20

Thanks for the heads-up on Stirling's excellent piece.  The long version is well worth the read.

After listening to the inaugural address I came away with one word ... sacrifice.  We the people need to be prepared to sacrifice in order to save the failed instiutions and policies of the past.  If a house had as much rot as our economic system, it would dozed and rebuilt.  

No Avatar
Chris White on January 21, 2009 - 14:49

I supported the bail out, as you know, and I still do. I have a number of reasons for doing so. The number varies depending on the circumstances, and the way I rank them also varies depending on who I'm talking to, and whether I'm feeling cheerful or cantankerous. Today, considering those circumstances, I would probably weight the list like this:

1) Because the people who opposed it had nothing viable to put in its place, nor the means to do that, and I thought, unlike some, that what happened really did happen, and that something needed to be done then.

2) I thought it wasn't a local US financial issue that could be solved that way. The foundations of the United States international position as a whole were threatened in perhaps the most profound way ever. I could not begin to take on the idea of thinking about what the world would look like if the US between the summer of 2008 and the winter of 2010 went through the same kind of process the former Soviet Union did.

3) I thought time was needed to get a new team in place so things can be done with deliberate haste, within constitutionally defined boundaries of responsibility of the different branches of government as a legal process not adminstrative fiat based on infantile fear mongering. At other times I've thought administrative measures were preferable I admit.

So that's three right there. Otherwise you must know money comes out of computers, printing machines and photcopiers and we're going to be making a lot of it, unless we digitize everything, issue cards with money chips and put everyone on bill pay so no one has to worry about being caught short without money. It could be run through the Treasury Direct program interfacing with Social Security and would by-pass banks completely. The Post Office should be refederalized and empowered to take deposits, issue payments aganst electronic deposits, and take savings deposits. This is adminstrative trusteeship stuff not money management. It doesn't require special skills. This is standard practice across Europe.The banks couldn't look after peoples' money. Let's make another arrangement that works for us. Take care of the people, not the banks.

Meanwhile, I still think the solution is global, not local. It involves the restoration of parity in relations with Iraq, restoring commercial and investment deals abroagated contrary to law by the invasion to secure cooperation for our withdrawl from neighboring and other powers. It requires and equitable settlement of the debt claims the victors imposed on Iraq as unjust reparations. It requires reparations for Iraq and its population. It requires international agreements, long term treaty type agreements, not commercial agreements, over oil and gas production and distribution. This own't work without a parallel set of discussions on new technologies for power sources. We can't go on burning the globe and what lives here with us. Such cooperation will replace military resource seizures as US policy. It requires agreements on the dollar and the ending of the post-Rambouillet II floating exchange rate regime based on the tie between the dollar and oil. It requires separating the overseas dollar from the domestic dollar. It requires ending speculation, by law as well as regulation, from the top of the pyramid to the bottom from private derivatives deals to public ones to index and and option index contracts and specualtive future and option trades. It requires a serious security agreement with the Russians over nuclear disarmament which the rest of the world will take seriously.

These are all separate areas for negotiation and resolution, and each involves different partners or counter-parties, but most of the issues that need to be settled are covered there, and it is really a single package.

To establish bona fides on any part of this, the US does have to stop the war crimes, illegal detentions and renditions, torture and reaffirm the international treaties and domestic laws Bush abrogated. There have to be trials for crimes committed and appropriate punishment for those found guilty.

In my view, doing that is a precondition for serious negotiation on the other matters. But both can go on together. The other matters create the circumstance in which the US can secure the help of others in restoring itself through some kind of equitable and peaceful approaches to the many problems Bush created or made worse.

So you see I don't think there are any quick fixes. And I do think that sometimes it is better to take a time out than to let things just run out of control. I think there would have been many hundreds of millions of people whose lives would have been seriously impacted far beyond the ways we already are far to ready to ignore.

You may still  not agree with any of this, but I'm sure you will be happy to concede that none of these, presented in this way, is a financial reason, or a committment to defend the financial system.

 

No Avatar
Tony Wikrent on January 22, 2009 - 01:43

and he alerted me to the editorials in the London Financial Times the past two days.

The Earth's Axis Shifts as City of London peers into Hell