In his Inaugural Address, President Obama declared: “Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America.” The President was paraphrasing Fred Astaire from the 1936 movie Swingtime. Fred and Ginger sang Jerome Kern’s song “Pick Yourself Up,” which begins, “Nothing’s impossible I have found, / For when my chin is on the ground, / I pick myself up, dust myself off, / and start all over again.”
Barack Obama should follow that advice when dealing with the so-called financial crisis. He should let the busted banks go, let the losses fall where they will, and start all over with new banks. Our big banks are so deeply insolvent—the figure four trillion dollars has been mentioned—that, practically speaking, they cannot be “stabilized” or bailed out. The sheer scale of the losses is too great; in the fourth quarter of 2008, Citigroup lost $100 million per day. Bank of America is not doing much better.
We have already spent half of the bailout money, and the banks are in worse shape than they were six months ago. The Federal Reserve has probably created as much new money as it can. The federal borrowing necessary to continue bailing out is probably well beyond what the rest of the world is willing to lend us. Most of the losses come from derivatives, the Doomsday Machine the banks invented in the 1990’s with the encouragement of the Clinton administration. Derivatives are gambling contracts. Do you want to bet that Leh-man Brothers will fail? Buy a derivative. For this reason, in 1999, Larry Summers, then Clinton’s treasury secretary, immunized derivatives from state antigaming laws. Derivatives prospered; $684 trillion is now outstanding.
President Obama’s economic advisors are the same group that, back in the Clinton days, put the country on the wrong track. At the Clinton Treasury, Larry Summers was the boss of Tim Geithner, Barack Obama’s new treasury secretary. Summers, now the White House economic advisor, gives President Obama a daily economic-intelligence report. On January 25’s Meet the Press, he refused to rule out the possibility that the White House would seek more money to save the banking system.
Treasury Secretary Geithner praised Congress for last September’s $700 billion bailout bill: “[Y]our action helped prevent an economic crisis from becoming a catastrophe.” At his confirmation hearing, he told the Senate that much more was needed: “Senators, the ultimate cost of this crisis will be greater if we do not act with sufficient strength now. In a crisis of this magnitude, the most prudent course is the most forceful course.” Or maybe it isn’t. Perhaps it’s time to recognize that the bailout policy has failed.
The government, in any event, has no interest in seeing that gamblers are paid. On an insanity scale of 1 to 10, that is a 10. So, why not, as the song says, let the losses fall on those who earned them, dust ourselves off, and start all over again with new banks unencumbered by huge past liabilities?
Treasury Secretary Geithner has a character flaw on top of his consistently bad policy decisions: He tends to blame others for his errors. Did he fail to pay his taxes? No, his accountants did it. Did his rescue crew (including Paulson, Bernanke, and himself) make a huge mistake in letting Lehman Brothers go bankrupt? No, the rescue crew did not have the legal tools—it was Congress’s fault: “[N]either the Department of Treasury, the executive branch nor the Federal Reserve had been given the authority by the Congress that would—may have made it possible for the government to put in capital on a scale necessary to avoid default. . . . That was a critical and tragic set of constraints. And this country should have never been in a position where we entered a crisis of this severity without an adequate set of tools to address failure by an institution that large and that consequential and that systematic.”
This was major news since there had been no mention of any lack of legal tools at the time. Of course, two days before letting Lehman go, the rescuers had found the tools necessary to bail out Bear Stearns, and two days after, they found the tools necessary to bail out AIG. The AIG bailout was particularly galling since its only function was to allow AIG—a derivative seller—to pay off its losing bets in full. The rescue crew was always clear that they would do what they thought was financially necessary—whether it was legal or not.
The taxpayer doesn’t need to pick up the banks’ liabilities. President Obama should follow Fred and Ginger, not Larry and Tim.