For the past few months at Occupy we’ve been focusing more and more on having a single message and goal. That has been to break up the big banks.
What’s great about this goal is that it’s a non-partisan issue; there is growing consensus (among non-bankers) from the left and the right that the current situation is outrageous and untenable. What’s not great, of course, is that the situation is so easy to spot because it’s so heinous.
Yesterday another voice joined the Break-Up-The-Big-Banks chorus in the form of an editorial at Bloomberg (hat tip Hannah Appel). They wrote a persuasive piece on breaking up the big banks based on simple arithmetic involving bank profits and taxpayer subsidy. Even the title fits that description: “Why Should Taxpayers Give Big Banks $83 Billion a Year?”....Occupy Wall Street Alternative Banking Committee
Break up the megabanks already
Cathy O’Neil | mathbabe.org
Not only is Occupy not dead or dead in the water, either, "occupy" as a strategy is going to happen. I don't have any idea when or under what circumstances but it is pretty obvious the present course in not sustainable and when enough people are hurt badly enough by it to get off their butts, then places are going to be occupied. But putting a clock on it is not possible now.
The reasoning in that piece seems very iffy to me. If TBTF banks get in hot water, they will probably be bailed out with Fed money, not "taxpayer money". In effect the TBTF banks have been rolled into the federal system. They are quasi-public institutions, because they are implicitly backstopped by the central bank.
ReplyDeleteWhy not finish the job. An alternative to breaking them up, that Occupy ought to explore, is to nationalize them. Then fire the money-gluttons who run them and euthanize the rentiers who use them to suck the lives of working people.
If we were all doing our banking at public sector banks, then we too would have lower borrowing costs. I don't see that as a bad thing exactly.
The Occupy folks are so close. But they continue to think small, and are stuck in their Ron Paul view of the financial sector.
Dan, the alternative banking committee has some pretty sophisticated input, e.g., Yves Smith (Susan Webber in real life). Cathy states that this piece is her own opinion, not that of the committee. She's a mathematician not a financial type.
ReplyDeleteI don't necessarily think that the way to go is full nationalize of risk management. Too much temptation toward corruption. Plain vanilla banking with lots of small local banks is pretty safe, especially if banks are required to be organized on the partnership model instead limited liability corporate model.
I think that the best way to go is nationalized retail banking. Charter private commercial banks with limitation on bank size in terms of assets and no govt back up and close govt supervision.
I would also limit banking to risk management and separate banking from activities that involve risk taking rather than risk management.
Tom, I think one problem is that there is a natural tendency, and even need, for financial institutions that can finance projects on the largest scale. It sounds nice to have a world of easy-to-regulate mom and pop banks. But the world isn't going to go small and local just because the banks in one country like the US go small. If US banks can't assemble the capital needed for the world's biggest projects, other financial powerhouses will fill that vacuum.
ReplyDeleteThe Occupy folks need to think bigger, and more clearly, about the global picture and their future. Who will rule the future? Will it be participatory democratic governments? Pseudo-democratic governments holding media-choreographed plebiscites like we have now? Unaccountable corporations? Autocratic governments?
Whether they want to be in the fight or not, Occupy and the rest of us are in a global struggle for power and control of the world's vast capital resources. There will be large and powerful institutions controlling the next generation of global infrastructure, energy systems, transportation systems, security systems, food systems and the rest. This is the course of history. The world is not suddenly going to break up into a million peaceable and autonomous hamlets.
If people believe in democracy, equality, justice and sustainable freedom then they need to face up to what is mounting and assembling its forces against them: a neofeudal, plutocratic order of large and undemocratic corporations and corporate statelets. It's either rule or be ruled. Fight for control or be contolled.
That's not to say that breaking up big private corporate banks isn't a good idea. But the nation itself then needs to stand ready to finance the projects that the new, broken-up, smaller banks can't.
ReplyDeleteThe assumption that smaller banks present less risk individually or systemically than the big banks is questionable. Small banks go bad in droves during recessions. If you check the enforcement action press releases it is amazing what crazy things small banks do. During the 20s it was the cascades of small bank failures that caused instability.
ReplyDeleteI'd rather see the FDIC, Comptroller, NCUA, FED and all the other regulators beef up their operations and become coordinated in procedures so they could pull everyone from all the agencies to work together to take over a larger bank like JP Morgan's retail Chase bank on a friday and sell off the branches and accounts to fifty regional banks by Monday. They do this stuff all the time for smaller and regional banks, now they need to get their act together to be able to do it on a slightly larger scale.
They should practice and train with a bit of publicity so Moynihan and Dimon and friends understand that we have few thousand deputized 'reserve force' regulators ready to shut them down and seize their assets at any moment. When they miscalculate or do something politically inconvenient, they don't get a second chance, just like a small bank.
Creating a trained and ready force ready to dismantle a branch network would send a chill over the big banks and would clarify for Execs the importance of real risk management. It wouldn't cost a heck of alot to do and any cost could be passed back to the banks.
I'm talking about the doable in the short run. In my view, Occupy will lose it by taking the big picture. Political change is incremental until it isn't and, I agree, a vision needs to be on the table in that event.
ReplyDeleteMarx's view was that capitalism is an advance economically that corresponds to the political ascendence of the bourgeoisie, and capitalism will spread throughout world and dominate the global economy. At that point, the internal contradictions of capitalism will result in its implosion and the ascendence of workers, who predominate numerically.
As an activist Marx wants to speed the process up by political activism leading to revolutions. But as a theorist he realized that this was part of a natural process that would run its course, which contradicted his activism. He though that this could be avoided by the re-education of workers.
I think that history is bearing out the theory. The level of collective consciousness of workers was not sufficiently high to retain power once gained. In the communist revolutions, socialism replaced by a corrupt elite that commandeered power and resources for its own ends.
My view is that we still have a good way to go before collective consciousness is high enough to move beyond capitalism, and as long as we have capitalism, we will have its evils as well, because that is the way the game works.
The antidote is gradual decrease of capitalism and increase of socialism through the mixed economy, with government taking over all of the functions most suited to it and moderating the influence of capitalism by taxing away economic rent and severely curtailing accumulation of private wealth and power. But that alone is insufficient. The level of collective conscious has to be raised globally, or there will be a relapse eventually.
That's not to say that breaking up big private corporate banks isn't a good idea. But the nation itself then needs to stand ready to finance the projects that the new, broken-up, smaller banks can't.
ReplyDeleteIn the event that financing exceeds the ability of the reduced financial system to provide, it falls to the state as part of public purpose, like the highway system was justified by Ike based on national security, i.e., logistics. A strong and competitive economy is necessary for national security, so the state should provide for capital needs where the private sector is unable or unwilling.
Small banks go bad in droves during recessions.
ReplyDeleteYes, but they are not to big to fail due to knock on effects and systemic risk. They can be put into resolution easily and operated by govt until put under new ownership and management, as in the S&L crisis.
I'd rather see the FDIC, Comptroller, NCUA, FED and all the other regulators beef up their operations and become coordinated in procedures so they could pull everyone from all the agencies to work together to take over a larger bank like JP Morgan's retail Chase bank on a friday and sell off the branches and accounts to fifty regional banks by Monday. They do this stuff all the time for smaller and regional banks, now they need to get their act together to be able to do it on a slightly larger scale.
ReplyDeleteBill Black says that this could have been done as soon as it was determined that a bank was insolvent, not matter how big, and the story about it being to big to handle with available resources was smokescreen for no following the law, really breaking the law, due to cronyism.
I don't like the idea of thinking of the state as providing capital, since there is no financial return to the state, no actual cost of capital to the currency issuer, and no financial risk exposure. What is at risk is efficient use of real resources. The idea behind capitalism is to fund projects that will be successful in the sense of providing an adequate return to justify the risk of venturing financial capital on real capital. Why can't the state do as well? After all, 90% of ventures fail. That is not a great record.
ReplyDeleteRather the state is providing the liquidity needed for the project once the project as been assessed and approved. That is to say, the state will clear the checks in payment of costs.
Tom, I think the concepts of capital, risk and profit are logically and institutionally separable. A capital good is some good or piece of equipment used in the production of other goods or services. It can be owned by a private enterprise; but it can also be owned by the public or a government. A robot used to manufacture cars is capital; so is a bulldozer used to manufacture roads.
ReplyDeleteWhen capital is owned by a private firm, and is used as part of a production process that adds value to some inputs, then some share of the return from the value that was added becomes the property of the owner of the capital, to do with as he pleases. We think of that as private "profit". But if the enterprise that produced the value is owned and run by the public, then the full return it generates can delivered to the public as a public good.
It's like a Starbucks (Private Enterprise) across the street from the Kennedy Space Center (Public Enterprise)....
ReplyDeleteWe can let the Private Enterprises handle the coffee and sandwiches...
Rsp
When the state provides liquidity for public purpose in the public interest to furnish public goods, this can be cast in the terms of capitalistic enterprise but it is not in fact capitalistic enterprise and to construe it as such is misleading at best.
ReplyDeleteFor example, there is criticism presently of describing the Fed as "making a profit" since this is intra-govt and the proceeds go to the Treasury. The govt doesn't operate to make a profit but rather it operates in the public interest. In this it does not "take a loss" either.
What do you have in place of "Enterprise" then Tom?
ReplyDelete"Operations"... "Activities" .. "Actions".. "Purpose" ... ??
You are implying that the word "Enterprise" already carries with it an associated context ? Which may not be helpful or may be misleading?
rsp,
I would keep the terms of capitalism (private enterprise ased on risk assumption) and socialism (public works) separate. One deals with creating private goods and the other with public goods. Mixing the terms makes it seem that govt (public sector) is competing with private firms (private sector), whereas the truth is that they play complementary roles.
ReplyDeleteThey should be designed to operate in tandem, with govt doing that which is needed socio-economically that the private sector is either unwilling or unable to do, or that govt can do more efficiently and effectively. I
n other words there has to be clear separation of roles and clear standards for determining this. "Privatization" is based on blurring these critical distinctions.
Liz Warren is trying to bring order and fairness back to our fallen financial system, but the pigmen and their lobbyists will eventually win out. We should abolish the Fed, and have the US Treasury issue currency at no cost to the US citizens, Please explain why we should pay a handfull of elite people interest on a currency, and than make it an exponential currency that resets and wipes everyone out except the issuers of the currency who control when the fall is to happen or at least know ahead of everyone else when it is going to happen. If the value system of currency is changed from a debt model to an asset model: IE the us treasury sells bonds in the open market to build a real asset. If the asset doesnt get built due to greed and corruption public outrage will exact a toll of the evil doers. Good deeds, that is UST issues a bond to build a real asset with real consequences if you dont perform if the way to go. Ban the derivtives market, JPM has more derivitives exposure than the entire GDP of all world governments combined, this is bullshit and needs to be stopped, and it will stop when it all comes crashing down again.
ReplyDeleteBob, govt is just as susceptible to cronyism and corruption as private sector execs. In fact, this problem would not exist if the private sector had not effectively captured the state.
ReplyDeleteCentralized power > privilege > economic rent > distorted economic and financial distribution.
ReplyDeleteThe underlying problem is that power is too centralized in both govt and the private sector, so that a few people can hijack it.
The way the selection process works favors megalomaniacs.
ReplyDeleteI always thought "enterprise" just meant something like "undertaking", "project", "effort" or "work". The term has a history that predates the question of which enterprises should be "free" or "private", and which should be organized by governments.
ReplyDeleteWe can't let the capitalists steal all the good words.
And if people don't understand that the public possesses and employs capital they are failing to grasp the unity of the elements of production. The fundamental concept of capital in economic is not related to "liquidity". It is something of value that is used in the production of a good, rather than a final good that is consumed in some way.
"Enterprise" has key meaning in capitalism, such that to free marketers "government enterprise" or "public enterprise" is an oxymoron. Their view is that all "enterprise" is private and any government "enterprise" is intrusion into the free market, which creates distortions due to lack of necessity for price discovery in markets.
ReplyDeleteI would use something like "public works" instead.
What is public works?
Sorry Tom, I will not take your advice. If some capitalists think that all enterprise is private, then they are just stupid and wrong. They don't get to dictate the terms of English.
ReplyDeleteSome capitalists also say that the government doesn't invest. No informed economist agrees with them.
The laizzes faire camp gets a tremendous amount of mileage out of propagating the stereotype that all the government sector does is give transfer payments to the needy. People need to understand that governments throughout the modern period have carried out massive productive undertakings that contributed heavily to the creation much of our economic prosperity.
Also, if you think that progressives assign a negative connotation to the word "enterprise" I think you are wrong. "Public works" conveys some of the right message, but it misses something. Most people think of public works as infrastructure, parks, etc. But a public school is not that kind thing. A public school and a private school do exactly the same thing. One is run by the public and one is run by private ownership. Some governments operate airlines, or ports, or energy companies.
I honestly don't know why you get so bent out of shape about this. We need more public sector involvement in the economy. The private sector can't carry the full load.
A public school and a private school do exactly the same thing.
ReplyDeleteThat's the argument for privatization. They do exactly the same thing and the private sector can it more efficiently, e.g., it has control over hiring and firing teachers instead of having to deal with teachers' unions.
Voters looking to save money on taxes buy into this.
I fail to see how that is an argument for the private sector Tom. How is the private sector doing the job more efficiently if part of the resources that are used privately have to be siphoned off to deliver profits to the capitalist owners?
ReplyDeleteWhat people do understand is that if you are rich you will probably prefer private schooling for your own children because those schools will exclude the children of the less-rich. And they also understand that means that the more resources will be taken out of the public schools as the wealthy flee. They need to work to preserve education as a public enterprise.
"We need more public sector involvement in the economy. The private sector can't carry the full load."
ReplyDeleteRight... right now we have PLENTY of surplus capacity and labor... what is holding the almighty "job creators" back now?
Go knock yourselves out "job creator" people...
there is plenty of capacity and labor for them to exploit... and yet they can do nothing... hmmm, what's wrong with these people?
rsp,
I fail to see how that is an argument for the private sector Tom. How is the private sector doing the job more efficiently if part of the resources that are used privately have to be siphoned off to deliver profits to the capitalist owners?
ReplyDeleteWhat people do understand is that if you are rich you will probably prefer private schooling for your own children because those schools will exclude the children of the less-rich. And they also understand that means that the more resources will be taken out of the public schools as the wealthy flee. They need to work to preserve education as a public enterprise.
That may be true where you live, Dan, but it is not true in the Heartland. I live in Iowa, a purple state that leans red. It look like Steve King is going to seek the Senate seat being vacated by Harkin and he will have a very good chance of winning it because he will attract a lot of outside money and pitch how much better free market business is over socialism. The governor nixed Obamacare and he is hell-bent on lowering state and local taxes "to bring in business". Companies that set up in Iowa receive big subsidies. The governor is popular. People believe this BS.
People buy into the argument that the private sector is more efficient going toe to toe with government. They are programed to believe that govt wastes money and is corruptible (which of course it is).
I would therefore never frame as govt and private business doing the same thing. There has to be a compelling reason why public purpose is involved instead of saving money. I don't think most Americans will buy into that given the current state of propaganda.
Iowans are very concerned about education and always have been, however. While they are sensitive to taxes, they are more concerned with having a top notch educational system. They would have to be convinced that public education is more effective at producing better output than private, not just that business can run schools more efficiently, and I think that argument is a slam dunk.