For a while, the Federal Reserve played hopscotch down Wall Street: it saved Bear Stearns, then Fannie Mae and Freddie Mac, then allowed Lehman Brothers to fail and announced that it would no longer bail out collapsing companies regardless of their size. Two days later Reserve Chairman Ben Bernanke nationalized American International Group (AIG).
The Dow Jones spent seven-thousand points trying to find the chalk that regulated the hopscotch game, but the lines were painted in invisible ink. When the Federal Reserve finally decided that inconsistency wasn’t a viable public policy model, Mr Bernanke introduced the Supervisory Capital Assessment Program, otherwise known as the bank stress tests.
Stock markets began a two-month rally.
President Obama has pledged that the Federal Reserve will provide the capital necessary to guarantee the survival of all nineteen banks surveyed in the stress tests. Although this promise comes with a moral hazard—that government-backing encourages banks to take excessive risks—a defined federal policy allows investors to better assess banks’ worth, thereby decreasing the instability of financial stocks. A fifteen percent decrease in the Market Volatility Index (VIX) since the stress tests started shows the new policy is working.
The problem is that insuring the survival of the nation’s largest banks because they’re large, transfers risk to the federal government, an entity certainly too big to fail. And even though the Federal Reserve socializes the largest private sector losses, the private sector keeps its own profits; it’s called lemon socialism, and it leaves a sour taste in every taxpayer’s mouth.
If government loans work, taxpayers can benefit from the high interest rates written into bank and auto industry loans in the Troubled Asset Relief Program (TARP). However, the fact that TARP loans were given to companies that no banker was willing to lend to, makes it unlikely many are good investments. If Congress is committed to making them good and getting its money back, it will be committed to hiding information about which banks are closest to failure. After all, banks can only succeed if businesses are willing to deal with them.
In other words, taxpayers’ best chance of repayment lies in a consistent message that companies will be bailed out, a nationwide confidence-boost, and no transparency that will show the confidence-boost to be unwarranted . Sound like the stress tests?
Economists are saying “yes” as they recognize that the tests’ more adverse scenario is more likely to happen than its so-called “baseline scenario.” Still, many of these concerns only become real once economists vent them: when economists sneeze, the nation catches a cold. When the media reports that the nation has a cold, the nation catches swine flu.
We’ve been infected, and denial is the best cure. If Mr Obama wants repayment for TARP loans from Wall Street firms, he needs come through with his promise of giving all necessary aid to any of the nineteen largest domestic banks. Then he needs to convince businesses that the results of the stress tests aren’t dismal without actually releasing the results and that the Federal Reserve’s investments in companies like Chrysler and Citiroup don’t carry significant risk.
America doesn’t need transparency; America needs a placebo. Under normal circumstances, Mr Obama might object to misrepresenting the health of Wall Street banks to other Wall Street businesses, but these aren’t normal circumstances and Wall Street businesses aren’t as innocent as they pretend to be. When in Rome, do as the Romans do.
-David Lamb
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America! You are Broke! You can cover it with marketing language, bury it in legalese, swamp it in techno-talk, but it still stinks, and America, You Are Broke! The Chinese minister of finance has warned Obama and his regime, the great American one that is, against future large loans! This simple, softly spoken concern for America’s ability to pay back, by a little yellow 5′2″ Chinaman, a communist to the core, and rice-burner to be sure, has turned the whole Obama issue into smoke on the water - no money to proceed, the Obama-dream is gone! Beijing’s University students, snickered, and even laughed out loud in disbelief at Geitner’s statements and notions! America’s financial wizard - and even they new better! What folly! The sawbuck, no longer used in international trade for a large group of nations, Asian mostly, no longer has sway in the world, and manipulating it to our favor back home will no longer work! The Euro, a stable currency is rapidly becoming ‘Yuan” backed! not “dollar -backed!” and the American illusion of power is over! We will drive Chinese built cars by the end of next year, and slowly drift to “Third-Worldship” nation wide and mimic Detroit City, the Johannesburg of the Americas! The only resource we have left is coal and human ingenuity! The Fission-fires have been lighted and we will by one human error, or the pile-up of their waste products, be diminished in the world to a glowing ember like Chernobyl, a product of human stupidity and senseless perseverance towards certain death! when solar, wind, wave, hydro, tidal and geothermal were our safe options all along, but deemed ineffective against our enormous hunger for the esotericals to survival. The SUV’s may be dead, but the assholes that ordered them up are not! Be prepared for the next wave of folly, be prepared for the end of America as we know it! The final holocaust is at hand, a sick hand, suffering from affluenza!