The horizon is not so far as we can see, but as far as we can imagine

JPMorgan Illustrates What Banks Do When They Have Money

And it isn’t lending it out cheap:

JPMorgan will on Thursday unveil a £1bn deal to buy Cazenove, the UK broker with which it has had a joint venture for the past five years.

The bank is to pay about 535p a share in a deal in which David Mayhew, widely recognised as one of the City’s best-connected corporate advisers, will retain the title of chairman of the Cazenove brand.

Last year myself and Stirling both noted that what would be done by banks if they were bailed out is to horde their money, not lend it out cheap, and save it to buy up competitors, make leveraged plays and so on.  That is EXACTLY what has happened.  Exactly.

During a downturn, if you have money, you don’t want to lend it out for low gains when you can buy up competitors, cheap.  You don’t want to lend it out cheap, when you can make leveraged plays off the bottom of a stock and commodity market which is bound to go up because trillions are being poured into it by central banks.  You want to take that money, and buy things while they are cheap, not lend it out for 4 or 5% returns, when you can make many many times that.

Why, exactly, governments expect banks who have better ways to make money to act like retail banks who don’t have any other way to make money but lend out at prime +3 or 4 percent is beyond me.  They think they’ll do it out of gratitude for being bailed out, or some sort of sense of civic duty?  Most politicians may be stupid, venal and corrupt—but it’s that very greed and venality which means they should understand that banks will do no such thing.

Banks will do it only if they are forced to do it.  Remove retail banking from investment banking, insurance and brokerage services, and disallow any risky games on the markets for retail banks.  Remove all special facilities from non retail banks because Goldman Sachs should not be doing highly leveraged plays with free money from the Federal Reserve.  And reinstitute serious leverage limits, not just for retail banks but for everyone.

As for retail banks, if they don’t lend to the public at rates approved of by the Federal Reserve and Congress, they too should lose their access to special facilities.  Banks are given the valuable right to borrow money for almost nothing, and to, in effect, print money by lending out money they don’t have.  Those are privileges which are given to them in the expectation that they will use them to benefit the economy.  If they refuse to do so, they should lose the privileges.

None of this is rocket science.  Those of us who predicted both the crisis and what the bungling of the crisis would cause, however, are precisely the people who are not listened to by those in power.  Obama is having his jobs summit, and forget nobodies like me, he isn’t even inviting somebodies like Stiglitz and Krugman.

If you’ve been right down the line, then you are precisely the sort of person who isn’t “serious” and shouldn’t be listened to when it comes to what it takes to fix the problem.

Why?  Because everyone knows that fixing the problem will end the gravy train for a lot of very rich people.  A lot of very rich people who give a great deal of money to Democrats in general, and gave a lot of money to Obama in particular.  If the cost of keeping that gravy train and the donations it enables going is tens of millions of unemployed people, well, so be it. Because serious people know that real change isn’t going to happen under Obama or under this Democratic Congress, so there’s no point in even talking to people who might suggest it.

Plus ca change. Plus c’est la même chose.


What Would Be Required For Full Employment


Yes there is a solution to California’s budget woes and no there isn’t a solution


  1. Gtash

    Ian, I try to refer folks to your posts all the time. I think this one is direct and to the point as usual. It is frustrating and disheartening that more people don’t hear or don’t want to hear it.

    I was really frustrated with Krugman the other day when, in talking about the economy, he admitted he was simply going to overlook his best arguments about how to improve affairs and jump to his 3rd best argument simply because everyone had just given up on his first two reality-based ones. He was bowing to a reality (and being snarky about it at the same time)—but it was so true!

    Elizabeth Warren, Paul Volcker, Brooksley Born— they are no better off than thoughtful bloggers (it seems to me) when it comes to influencing the policies or the policy-makers.

    President Obama told CBS News the other day that his White House had to “start landing some (air)planes”—i.e., had to get issues settled, get something in the ‘win’ column–or at least the ‘finished’ column. Is that the best we can expect at his late date? That metaphoe struck me as all wrong in view of 9-11. All I could see was Norman Mineta an arm’s-length away from Dick Cheney trying to clear the air-space. But as I thought about more, all I could see in the airplanes were corporate executives and their lobbyists, ready to ‘bail-out’ with golden parachutes. And Air Traffic Control calling in bulldozers to knock down the passenger terminals to make more runway space. Those planes aren’t just any planes. They have been hijacked and fly around with impugnity, looking for a soft landing.

    The President’s metaphor obviously struck me the wrong way.

    Regulating banks is needed, no question. And it is not rocket science, just as you say.

    Why oh why the vast majority of folks don’t “get it” is where we need the rocket science.

  2. I can “excuse” the politicians for their role in this. After all, everyone knows that they are on the take, so what else to expect. They are getting paid to funnel wealth to the top and increase their donations in return. Until we get the money out of politics, end legalized bribery and lock the revolving door, this game is just going to continue no matter who is in power. I suspect they pick the advisors they do on purpose, just to give them “expert” cover. And when they make a mistake like appoint people like Elizabeth Warren, they don’t listen to them.

    But I think that Ben Bernanke was genuinely surprised when the banks punked him. I really don’t think he saw it coming, just like Greenspan didn’t believe that the banksta’s would kill the goose that lays the golden egg. He apparently forgot all about their figuring that the sky was the limit because the government would have to bail them out if things blew up, and then another round of rip-off would start.

    Well, these geniuses in the gub’ment are have now ramped up another giant bubble through the dollar carry trade, which is sure to unwind eventually, with everyone running for the same door when it does. Brilliant.

    I’m about ready to buy a pitchfork and join the teabaggers. They may be crazy, but at least they have the right target. Just kidding.

  3. Good job (again) Ian. Among several things:

    When I close my eyes and listen to Obama, I am starting to imagine he’s Consigliere for the “Gangs of New York”.

    Elizabeth Warren was quite opinionated ths A.M. I think she was on Dylan Ratigan (sp.??). Ms. Warren bluntly opined that she and Turbo Timmie & Layer-eee Summers are not even on the “same page”! The woman has Moral Courage, a virtue that’s almost oxy-moronic in D.C. & NYC!

    Ian, are we starting to smell fear by way of the NY Investment Bankers? By that I mean the (somewhat perfunctory) “apology” from Lloyd “God’s Work” Blankenfein. Is this meant to mollify the American Public before the End-of-Year bonuses? Or, was this utterance forced upon “God’s Work”, by that brute practical mid-Westerner, Warren Buffet??

    Ian, the one wonderful thing is that you no longer hear the likes of Sarkozy or Blair braying about the “American Economic Model”!

  4. Gtash:

    I was really frustrated with Krugman the other day when, in talking about the economy, he admitted he was simply going to overlook his best arguments about how to improve affairs ….

    Exactly the kind of pre-capitulation that got “progressives” in such tr0uble — from the aspect of public policy, at least — on health care.

    Insanity… Doing the same thing while expecting different results….

  5. As it was, so will it ever be: “Why? Because everyone knows that fixing the problem will end the gravy train for a lot of very rich people. ” That’s exactly on target. The fraud task force gets announced with Geithner present while SIGTARP issues a withering report, which, of course, includes a devastating reference to the NY Fed’s former president greasing the skids for AIG.

    During Bush-Cheney, it was clear that we were a lawless nation (not people) and the Department of Justice was the symbol. There’s been a switch and the lawless nature of things now favors The Money Party. We’ve replaced buffoonery with elegance at the top but the score is the same.

    Here’s Geithner’s response to the Special Attorney General’s criticism of his behavior:
    “It’s a great strength of our country, that you’re going to have the chance for a range of people to look back at every decision made in every stage in this crisis, and look at the quality of judgments made and evaluate them with the benefit of hindsight,” Geithner said during a press conference announcing a new financial fraud task force.

    “Now, you’re going to see a lot of conviction in this, a lot of strong views — a lot of it untainted by experience,” he said.

    Excellent post.

  6. S Brennan

    Off Topic, but not unrelated…I copied and posted this to my Facebook. Caps are mine.


    “The current notional value of derivatives on US commercial banks’ balance
    sheets is $203 trillion. 97% of these ($196 trillion) sit on FIVE banks’
    balance sheets, according to a recent report from that very same Office of
    the Comptroller of the Currency.

    It is obvious from this report that Goldman Sachs is by no means a bank, and
    deserves no consideration as such. It is a hedge fund. In general, Wall
    Street is out of control.”


  7. Ian Welsh

    Yes, it’s true.

  8. They should have nationalized the banks, cleaned them up, like lots of people suggested back then. Heck, Alan Greenspan said so.

  9. Either Greenspan and Bernanke didn’t see it coming or they did see it and failed to prevent it. It boils down to the same questions raised about Dubya: if he wasn’t corrupt, is ignorance and incompetence any better? Not for the country. Therefore, they’re so discredited that they should be ignored.

    I’m not an economist, can’t even read a company’s spreadsheet. I’m not a natural pessimist nor a doomsday prophet. But I saw it coming. What part of ‘exponential growth chart’ is so hard to grasp? With the tech bubble collapse, I predicted the peak two months in advance and had it pinpointed exactly. So guys like them should be completely disregarded.

    Guys like Krugman and Galbraith and Reich may feel compelled to hedge their best options after weighing political realities, and that’s okay, so long as they push their first options repeatedly before turning to Option B. That’s how one earns one’s cred.

    What worries me most is seeing a bit of a split developing in the ranks of progressives. As nutty as many teabaggers are, and as many who are contrivances of the GOP planners, the fact remains that there are some with legitimate economic reasons for dismissing the current dominant DC paradigm as too out of touch (though they wrongly blame liberalism when there’s scant evidence of liberalism in any of the Obama economic team.)

    In the 1970s, as the progressive agenda became a collection of single issues competing for attention, the failure to address the economic needs of the blue collar (and below) citizens helped provoke a flight to Reaganism that took a quarter century to overcome.

    Now the Dems seem poised to repeat that mistake with pseudo-reform of healthcare, trillions to bail out the rich, and a weak jobs recovery effort. At best, it sounds like the younger workers will get some job development efforts but older workers – like myself, at 56 – will be told “tough shit, man; somebody’s gotta take it for the team.”

    That sounds like the Dems are already conceding in the struggle for economic justice. Puny vision indeed.

    So it’s up to malcontents like us to recognize we’ve got no backing from major party sources. We have to build a populist movement and be willing to attract some teabaggers with legit economic concerns.

    And I’m convinced we’ll be ignored without serious civil disobedience confrontations that rock the boat directly. One can’t tweet the revolution.

  10. I believe we have consensus that Ian is a severely underappreciated national treasure.

    I maintain my opinion that we must push for campaign finance reform as soon as possible. Every bill in Congress otherwise has to demonstrate how it will serve big money interests in order to survive. And all of our legislators have to sell out to someone simply in order to survive to do ANY of the will of their constituents.

    If we had CFR before trying for health insurance reform, we would already have health insurance reform.

    CFR is the only bill where our legislators could dare vote in defiance of their corporate masters, because CFR would free our legislators. Sure tools like Joe Lieberman will ALWAYS be on the take, but there are plenty of representatives who would love to be free of the humiliating need to beg for cash from corporate interests.

    With campaign finance reform in place, we could re-regulate the banks, and they would be relegated to shrieking on the sidelines rather than buying out the back room.

  11. senecal

    “If the cost of keeping that gravy train and the donations it enables going is tens of millions of unemployed people, well, so be it.”

    Of course, the rich don’t see this as a cost, or even as an unpleasant side-effect. It’s part of their plan, to increase the distance between them and the rest of us. Along with that, the plan includes lowering taxes by reducing services provided to the poor. This is especially viable now, since corporations have severed their ties to domestic labor and markets.

  12. another great post ian

    I remember discussing with you, rather then “give bail outs to banks” the government should simply create a fund for lending, to which banks could broker at the rate we set, they could make a slight markup

    we said this before the bailout and we went nuts the results of obama/bush policy did exactly what we predicted

  13. Of course, the rich don’t see this as a cost, or even as an unpleasant side-effect. It’s part of their plan, to increase the distance between them and the rest of us.

    I don’t think this is even quite true. Very few people, including the rich, likes to believe that they are hurting other people. They instead generally believe the fiction that what is good for them must be definition be good for everyone else—and deeply discount the consequences of class envy.

  14. Penny Powers

    Numerian has an excellent post up regarding the banks and AIG. It’s a must read. I’d appreciate your comments, Ian.

  15. All good points, many of which conclude that the progressive movement needs to present a new vision for America and a grand strategy for achieving it. This would serve many purposes, including a standard for evaluation of politicians, issues, and policy proposals. As KevenHaydn observes the progressive movement is split among issues with little sense of coherence and prioritization. The GOP has been and is still united in its conservative program even while it is internally fractured over leadership. The Dems are tearing themselves apart and progressives are mostly carping or caving instead of leading.

    Leaving discussion of a suitable vision for another time, the outlines of the grand strategy that is needed are pretty clear.

    1. Nothing is going to get done in a permanent way without campaign finance reform and closing the revolving door. Even if battles are won temporarily, there is always the possibility that the direction will be quickly reversed as big money throws its weight into the game on the other side. So this has to be priority number one.

    2. Secondly, everything boils down to economics. The top priority here is correcting the erroneous view of economics that makes “fiscal responsibility” paramount, based on the erroneous analogy that compares government finance with household and firm finance when the government is the currency issuer and households and firms are users of the currency of issue. So-called “fiscal responsibility” no longer applies to the government now that the US is monopoly provider of a non-convertible currency of issue within a flexible rate regime. The government is not revenue constrained and does not need to borrow or tax to “fund” its deficit. As long as the fiscal responsibility meme remains in place, it will be impossible to accomplish a truly progressive agenda for fear of “exploding government indebtedness” and “higher taxes certainly coming” to “pay” for it. This is just not the way government finance works at all. In fact, it is the opposite. There are constraints on government deficits, but not these. The major constraint is that inflation will rise when the output gap is close to zero and there is relatively full employment if government spending increases notional valuation beyond real value, e.g., there is more government spending on goods and services than the economy can produce at full output. At this point, government must either reduce spending or else withdraw financial assets from the economy, e.g., by reducing reserves directly or by raising taxes (which reduces reserves).

    3. The capitalistic economic system favors capital over the other two factors of production, labor and land, because economic prosperity is chiefly dependent on the quantity and quality of capital. It is true that capital formation is extremely important, but it doesn’t have to eclipse labor and land as co-factors. That means that full employment is not just a secondary priority but a top one, along with capital formation. This is a no-brainer, because the biggest drain on national resources is idle capital, which occurs when there is an output gap. Every effort should be made to operate at full capacity, which entails full employment (this includes about 2% “frictional” unemployment of people temporarily unemployed, e.g., transferring between jobs.) This is entirely doable if modern monetary theory (MMT) is implemented in place of the current (erroneous) neoliberal monetarist theory that requires a permanent stock of unemployment of about 6% to “control inflationary pressure.”

    Clearly, this means reorganizing the national mindset. The job may seem daunting, but this is where conservatives were after the ignominious Goldwater route in 1964. They hopped to the task, and the rest is history. The US, UK and world are still operating under the narrative and memes of the Reagan/Thatcher/Hayek/Friedman Chicago School model.

    There are alternatives already available. There is no need to reinvent the wheel. Progressives need to start organizing around a coherent vision with an inspiring narrative and effective memes instead of chiefly reacting to the current narrative and engaging within this loaded universe of discourse that is loaded against them.

    President Obama has demonstrated that he and his administration is not going to do this. So progressive need to find other leadership that will.

  16. Oh, I neglected to say something about the other factor of production, land. This is the subject of the newly emerging field of environmental economics. There is no advantage of accumulating and deploying capital if there is no safe space in which to do it. Thus, all three factors of production need to be treated as co-factors even in a capitalistic system.

  17. On bailoutry, DeLong has written the definitive cri de coeur of the political-economic establishment on the unpopularity of the economic fixes so far:

    Thus the big valid complaints about policy over the past fourteen months are not that it has run up the national debt and not that it has rewarded the princes of Wall Street, but rather that it has, if anything, been on too small a scale–that we ought to have done more.

    Yet these policies appear, somehow, to be political losers in Washington right now: nobody is proposing to do more along the same lines. This is strange: usually when something works the natural impulse is to do it again.

    So what is going on?

    The comments are enlightening even as the discussion is surreal, but after reading this post and thread, it’s a very interesting study-in-contrast of why there is a failure to communicate here.

  18. Ian Welsh

    Thus the big valid complaints about policy over the past fourteen months are not that it has run up the national debt and not that ,it has rewarded the princes of Wall Street, but rather that it has, if anything, been on too small a scale–that we ought to have done more.

    Umm, no.

  19. So just like with health care, there are two “liberal” views on the matter.

    (A) The Homo Economicus view (as it is called in the DeLong comment thread and which I am ironically reversing): that the bankers getting away with a bit more of the money and power is a small price to pay for keeping the system afloat in an uncertain world. In this instance, punishing the financial industry is at worst folly and at best an irrelevant act of emotional retaliation.

    (B) The systemic breakdown view (as I am calling it): the very need for a technical fix that enriches the bankers exposes a hostage situation that requires a hostage solution.

    The deciding factor between those views is the risk level you place on an attempt to shift to another system.

  20. Mandos, there is no real problem in that the financial system is still being run by the oligarchs that hold the country and indeed the world hostage. No one has been held accountable or replaced, even with rising social unrest. Why? Too powerful.

    The same people that fomented the crisis over the years are still in charge even with a change in administrations. The president in exercising leadership in fixing the problem and the the votes are not there in Congress to do much more that paper over the rot. The fact is that without getting the money out of politics and closing the revolving door, this situation is not really fixable.

    Secondly, there is good reason to believe that the derivatives markets have become so big (1.4 quadrillion US) and globally intertwined, there is no safe way to take this monster apart without sparking an implosion that will blow up the world. The financial WMD are proliferating as we speak. Read the following articles from Zero Hedge and weep.

    Here There Be Big Nymbers (Sic)

    Reading Between The Lines Of David Einhorn’s Attack On CDS

    Did The Markit Group, A Black-Box Company Partially Owned By Goldman Sachs and JP Morgan, Devastate Markets?

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