The recent sorry decision by Treasury Secretary Timothy Geithner to continue, in effect, his predecessor’s government bailout of America’s large “zombie” banks—those whose debts exceed their assets—prompted thoughts of a federal bank regulator from an earlier time whose actions more closely reflected democratic aspirations and more fully contributed to the public welfare. Marriner S. Eccles, Federal Reserve Board chairman from 1934 to 1948, was perhaps the most prominent head of the Fed prior to Alan Greenspan. His name still adorns the agency’s headquarters in the nation’s capital.
Eccles was a little-known small-town banker from Utah possessing few academic credentials when his success in halting bank runs at home brought him to the attention of political Washington. His riveting testimony before the Senate Finance Committee in February 1933 on the potential ways out of the Depression, which anticipated what became known as Keynesian economics, led to his appointment to the Federal Reserve by FDR the following year over the objections of the banking establishment. Eccles, whose unorthodox thoughts influenced much New Deal economic policy—he largely designed its regulatory banking reforms—favored deficit financing, stimulative public-works projects, a centralized Federal Reserve system, bank-deposit insurance, and (shades of 2009) low-interest refinancing of farm mortgages, with the Government assuming the delinquent loans.
By 1948, the hostility of large banking interests, particularly California’s politically connected Bank of America, whose expansionary ambitions were threatened by an anti-monopoly Federal Reserve, resulted in the denial of Chairman Eccles’ reappointment. When has something like this happened lately? Modern central bankers toady to the big money; they don’t frustrate its desires to the point of imperiling their careers.
A case in point is Geithner, who though operating from the Treasury and not the Fed, has been charged (along with present Fed Chairman Ben Bernanke, a free-market Republican) with managing the financial crisis. Geithner was appointed, in part, because of the banking industry’s confidence in him, a far cry from its view of Eccles, considered in his time an outsider and an economic radical. Wall Street’s confidence is well placed. Geithner, the consummate insider, has no intention of antagonizing the bankers; he will continue to negotiate with them, not lay down the law. He will avoid nationalizing their institutions, preferring to prop them up with taxpayers’ money. And, it appears, he will set no firm lending targets they must meet to access bailout funds, something many in Congress and the administration would prefer.
It’s not clear how this will solve the banking problem. The same top managements responsible for the current mess will apparently continue in place at Citigroup, Bank of America, and the rest. The stockholders will be kept whole as well, not forced to lose their shirts as they would under nationalization. Geithner’s financial-stability plan would have the Government buy into the too-big-to-fail megabanks as minority shareholder; the latest initiative is for taxpayers to assume a one-third passive ownership of Citigroup, meaning the public’s representatives wouldn’t set policy, only that its bailout investment might be recouped should the teetering financial-services giant eventually regain its footing.
Of course, Citigroup and the other zombie megabanks could just as easily perpetuate their parasitic existence as the living dead. Taxpayers, in other words, may go on pumping money for the foreseeable future into debt-laden and dysfunctional financial-services institutions that will eventually go belly-up anyway. Under nationalization, they could at least be split off into their constituent parts (commercial banking, investment banking, and insurance), with the viable components restructured and sold to healthy firms. Or, conversely, they could be nursed back to health over time by interim federal managers, then re-privatized at a profit; this was done in Sweden and Norway when their banking sectors collapsed in the 1990s.
Geithner, however, appears to see himself as the banks’ savior, maintaining the status quo ante—the same top-heavy companies, the same managements, the same shareholders, and (pending minor regulatory changes) the same business practices—except for recapitalization by taxpayers to help pay off those toxic debts. Ah, the toxic debts! These zombie banks may never pay their debts; no one knows how large their debts are except to say they’re huge, perhaps in the trillions of dollars combined. President Obama has requested a $750 billion standby fund for a down payment in his budget. That’s in addition to the $700 billion already allocated under the TARP. If the Government is laying out that kind of cash, it should at least be outright majority owner and policymaker. The present managements and ownerships gambled recklessly and lost; they should be gone.
Then, there’s the whole question of “too big to fail.” How does anyone know the financial dinosaurs can’t be allowed to expire? It’s never been tried. Again, if broken up into their constituent parts, some parts will thrive. Troubled insurance giant AIG, now under federal conservatorship, was brought to the brink by its small investment-banking division, which leaped headlong into mortgage-backed securities; the insurance end of the business (three-quarters of the operation) was in no jeopardy, but the overall corporation was so large and cumbersome that one sector didn’t know what the other was doing. In a twist if irony, it may be that America’s megabanks have actually become too big to succeed.
Making bold moves at the federal level — nationalizing the banks, or breaking them up, or forcing them to lend their bailout money, or simply allowing them to fail — will require courage and imagination. Government overseers at the moment have neither. Economist Paul Krugman, not one to mince words, calls the tepid approach of the administration’s economic team “a failure of nerve;” they have a mandate for action, but are reluctant to use it for fear of disappointing the financial establishment or “the market.”
It didn’t have to be so. There’s someone out there who, if selected to run Treasury, would not have been loath to crack the regulatory whip. FDIC Chair Sheila Bair, like Marriner Eccles a former small-town banker not enamored of Wall Street’s financial titans, has for months been taking over and running failed banks in her bailiwick and acting to save homeowners from foreclosure through refinanced affordable mortgages (a precedent lately followed by Geithner). There’s a chairmanship opening up at the Federal Reserve in 2010. Are you listening, Mr. President?
Wayne O’Leary is a writer in Orono, Maine, specializing in political economy.
From The Progressive Populist, April 15, 2009
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