“There was a moment a year ago when Obama, with his enormous political capital, might have been able to achieve this ambitious agenda, and, building on these successes, go on to deal with America’s other problems. But anger about the bailout, confusion between the bailout (which didn’t restart lending, as it was supposed to do) and the stimulus (which did what it was supposed to do, but was too small), and disappointment about mounting job losses, has vastly circumscribed his room for maneuver.”

So writes Nobel prize winning economist Joseph Stiglitz in an article that appeared recently in the website “Project Syndicate.”  Stiglitz served as chairman of the Council of Economic Advisors from 1995 to 1997 and his most recent book, “Freefall:  America, Free Markets, and the Sinking of the World’s Economy” is a best seller.

Obama recently called upon another economist, former Fed Chair Paul Volcker, to help shore up his support for financial regulatory reform.  It would probably be a good idea if he pulled out Stiglitz too, and used this well respected economist to both instruct Congress (and the public in turn) about how best to resurrect our economy and the nation’s well being along with it.

The GOP is a captured, bought and paid for, party.  It’s masters are the very oligopolic industries that most need reform and that means Obama will never get any political support from that group no matter what he does.  But he need not go it entirely alone.  He needs to continue bringing into the spotlight respected, non government leadership like that represented by Volcker and Stiglitz.  

Both these men are well spoken.  They can address the issues correctly and in a way that the public at large can understand.  They can frame the issues in ways that will unmask the GOP for who they truly are:  Representatives for large, trans-national corporations. 

Again, thanks to that fount of economic thought, Economist’s View for highlighting Stiglitz’s article.

Among the many mistakes the US made in the past 30 years is the dismantling of its Great Depression financial regulations.

Now, coming off yet another financial markets meltdown, the effort to re-institute strong regulatory regimes has begun again.  And again, despite all the obvious problems caused by poor regulation, the financial industry is fighting hard against the government bridle and tether.

It was clear even before the recent financial collapse that markets aren’t self regulating.  Left to their own devices markets will naturally narrow the number of beneficiaries, and competitors.  At a certain point, the markets will become dominated by companies who do not want competition at all.  If necessary they will subvert the power of government to maintain their dominance. 

Such a situation is called an Oligopoly.  Oligopolies don’t desire competition.  And they favor only government regulation that enhances their dominance.  The health insurance industry, as an example, spent an estimated $260 million to fight health care reform–more than George Bush and John Kerry spent together in the 2000 Presidential campaign.

This is an obvious use of raw power in Washington.  It is also an obvious example of an Oligopoly.

Nobel prize winning economist Joseph Stiglitz considers these issues, and a few others, in a recent article published in the China Daily.  Entitled “Harsh lesson we may need to learn again,” the full article is available here.

Here are some of Stiglitz’s observations.

“The first lesson is that markets are not self-correcting. Indeed, without adequate regulation, they are prone to excess. In 2009, we again saw why Adam Smith’s invisible hand often appeared invisible: it is not there. The bankers’ pursuit of self-interest (greed) did not lead to the well-being of society; it did not even serve their shareholders and bondholders well. It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks…

Under the threat of a collapse of the entire system, the safety net – intended to help unfortunate individuals meet the exigencies of life – was generously extended to commercial banks, then to investment banks, insurance firms, auto companies, even car-loan companies. Never has so much money been transferred from so many to so few.

We are accustomed to thinking of government transferring money from the well off to the poor. Here it was the poor and average transferring money to the rich. Already heavily burdened taxpayers saw their money – intended to help banks lend so that the economy could be revived – go to pay outsized bonuses and dividends. Dividends are supposed to be a share of profits; here it was simply a share of government largesse.

The justification was that bailing out the banks, however messily, would enable a resumption of lending. That has not happened. All that happened was that average taxpayers gave money to the very institutions that had been gouging them for years – through predatory lending, usurious credit-card interest rates, and non-transparent fees.

The bailout exposed deep hypocrisy all around. Those who had preached fiscal restraint when it came to small welfare programs for the poor now clamored for the world’s largest welfare program. Those who had argued for free market’s virtue of “transparency” ended up creating financial systems so opaque that banks could not make sense of their own balance sheets. And then the government, too, was induced to engage in decreasingly transparent forms of bailout to cover up its largesse to the banks. Those who had argued for “accountability” and “responsibility” now sought debt forgiveness for the financial sector….. 

The fifth lesson is that not all innovation leads to a more efficient and productive economy – let alone a better society. Private incentives matter, and if they are not well aligned with social returns, the result can be excessive risk taking, excessively shortsighted behavior, and distorted innovation. For example, while the benefits of many of the financial-engineering innovations of recent years are hard to prove, let alone quantify, the costs associated with them – both economic and social – are apparent and enormous.

Indeed, financial engineering did not create products that would help ordinary citizens manage the simple risk of home ownership – with the consequence that millions have lost their homes, and millions more are likely to do so. Instead, innovation was directed at perfecting the exploitation of those who are less educated, and at circumventing the regulations and accounting standards that were designed to make markets more efficient and stable. As a result, financial markets, which are supposed to manage risk and allocate capital efficiently, created risk and misallocated wildly.”

Beezer again here.  The Obama administration has made its regulatory recommendations through Treasury and the legislation is winding its way through Congress.  As did the Health Insurance oligopoly spend wildly to neuter much of what the administration recommended for health care reform, so too will the Wall Street oligopoly spend and lobby mightily to maintain its dominance.

If the effort to re-install a common sense financial regulatory regime fails, then Stiglitz’s warning that we will all be betrayed yet again will be valid.

Democracy and Capitalism have two characteristics in common:  They both depend upon free choice and free speech.   Unfortunately both free choice and free speech are under attack in today’s world when it comes to information (free speech) and oligopoly industry (too big to fail banks, no choice).

The following is an article written by Nobel winner and economics professor Joseph Stiglitz.  It’s being reprinted in its entirety (it’s not too long, so take heart).  Two things to take away from reading this article: One, it appears in something called the Jakarta Post, and two, it is a clear, rational explanation of our “Too Big To Fail” Wall Street/Washington D.C. conundrum.

As to its appearance in the Jakarta Post, the point is that Stiglitz is pretty much ignored by the major United States media.  He can’t be totally ignored because of his Nobel stature, but he can be shunted to the sidelines of media where the Jakarta Post resides.  By contrast, Larry Kudlow, an unrestrained advocate for hobbled government and goliath banks, is given a front row seat on CNBC everyday. 

The reason you get Kudlow instead of Stiglitz is because big industry, including Wall Street banking giants, are firmly entrenched in the boardrooms of big media as much as they are entrenched in the hallways and backrooms of Congress and the White House.

So what system allows a Stiglitz post to be widely disseminated, outside the control of these entrenched interests?  The Internet.  Right here on Beezernotes, which is tied in to Prof. Mark Thoma’s Economist’s View, which uncovered and provided the link to the Stiglitz article in the Jakarta Post.  

Stiglitz, and many others including Paul Krugman in the New York Times (another Nobel winner and a rare exception in big media) and Prof. Thoma, understand what went wrong and understand what needs to be addressed in order to restore some order. But they recommend reforms that are opposed by corporations who are entrenched and influential in Washington DC, and big media boardrooms.

These relationships are fundamentally not Democratic, in either the political or economic sense.

At any rate, here’s the entire Stiglitz article.

“With all the talk of “green shoots” of economic recovery, America’s banks are pushing back on efforts to regulate them. While politicians talk about their commitment to regulatory reform to prevent a recurrence of the crisis, this is one area where the devil really is in the details – and the banks will muster what muscle they have left to ensure that they have ample room to continue as they have in the past.

The old system worked well for the banks (if not for their shareholders), so why should they embrace change? Indeed, the efforts to rescue them devoted so little thought to the kind of post-crisis financial system we want that we will end up with a banking system that is less competitive, with the large banks that were too big too fail even larger.

It has long been recognized that those America’s banks that are too big to fail are also too big to be managed. That is one reason that the performance of several of them has been so dismal. When they fail, the government engineers a financial restructuring and provides deposit insurance, gaining a stake in their future. Officials know that if they wait too long, zombie or near zombie banks – with little or no net worth, but treated as if they were viable institutions – are likely to “gamble on resurrection.” If they take big bets and win, they walk away with the proceeds, if they fail, the government picks up the tab.

This is not just theory; it is a lesson we learned, at great expense, during the Savings & Loan crisis of the 1980s. When the ATM machine says, “insufficient funds,” the government doesn’t want this to mean that the bank, rather than your account, is out of money, so it intervenes before the till is empty. In a financial restructuring, shareholders typically get wiped out, and bondholders become the new shareholders. Sometimes, the government must provide additional funds, or a new investor must be willing to take over the failed bank.

The Obama administration has, however, introduced a new concept: “too big to be financially restructured”. The administration argues that all hell would break loose if we tried to play by the usual rules with these big banks. Markets would panic. So, not only can’t we touch the bondholders, we can’t even touch the shareholders – even if most of the shares’ existing value merely reflects a bet on a government bailout.

I think this judgment is wrong. I think the Obama administration has succumbed to political pressure and scare-mongering by the big banks. As a result, the administration has confused bailing out the bankers and their shareholders with bailing out the banks.

Restructuring gives banks a chance for a new start: new potential investors (whether holders of equity or debt instruments) will have more confidence, other banks will be more willing to lend to them, and they will be more willing to lend to others. The bondholders will gain from an orderly restructuring, and if the value of the assets is truly greater than the market (and outside analysts) believe, they will eventually reap the gains.

But what is clear is that the Obama strategy’s current and future costs are very high – and so far, it has not achieved its limited objective of restarting lending. The taxpayer has had to pony up billions, and has provided billions more in guarantees – bills that are likely to come due in the future.

Rewriting the rules of the market economy – in a way that has benefited those that have caused so much pain to the entire global economy – is worse than financially costly. Most Americans view it as grossly unjust, especially after they saw the banks divert the billions intended to enable them to revive lending to payments of outsized bonuses and dividends. Tearing up the social contract is something that should not be done lightly.

But this new form of ersatz capitalism, in which losses are socialized and profits privatized, is doomed to failure. Incentives are distorted. There is no market discipline. The too-big-to-be-restructured banks know that they can gamble with impunity – and, with the Federal Reserve making funds available at near-zero interest rates, there are ample funds to do so.

Some have called this new economic regime “socialism with American characteristics.” But socialism is concerned about ordinary individuals. By contrast, the United States has provided little help for the millions of Americans who are losing their homes. Workers who lose their jobs receive only 39 weeks of limited unemployment benefits, and are then left on their own. And, when they lose their jobs, most lose their health insurance, too.

America has expanded its corporate safety net in unprecedented ways, from commercial banks to investment banks, then to insurance, and now to automobiles, with no end in sight. In truth, this is not socialism, but an extension of long standing corporate welfarism. The rich and powerful turn to the government to help them whenever they can, while needy individuals get little social protection.

We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. And, if we don’t break them up, then we have to severely limit what they do. They can’t be allowed to do what they did in the past – gamble at others’ expenses.

This raises another problem with America’s too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts worked well, first to deregulate, and then to have taxpayers pay for the cleanup. Their hope is that it will work once again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.”

Back to Beezer here.   You’re only going to get this point of view through the truly free Internet.  So here it is.  Enjoy.

There’s a growing sense that Washington is in fact captive to Wall Street.  Despite the Obama administrations protestations about “responsibility,” and Secretary Tim Geithner’s remarks that government should act forcefully “and do what government is supposed to do,” the sense increases that this isn’t true when it comes to Wall Street.

“Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.”  This from former International Monetary (IMF) Fund Chief Economist Simon Johnson, now a professor at MIT’s Sloan School of Management.  Johnson, who authors the blog baselinescenario.com, writes this in a terrific article in the Atlantic magazine here.

Later Johnson says what the IMF would do, and has done many times in the past.  “The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.”  Today that would cost taxpayers, Johnson estimates, about $1.5 trillion.

But even that is not enough.  There’s a deeper problem Johnson sees in the US, and one he saw many times in other countries in financial distress when they had to come to the IMF for help.

“This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

“Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

“Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.”

This is basically the same prescription being offered by a number of powerful economic voices, including Nobel prize winners Paul Krugman and Joseph Stiglitz as well as economist Nouriel Roubini, who loudly and accurately predicted our current problems.   And many, many others, including Mark Thoma of economist’s view, have deep misgivings about the Obama’s administration’s clear attachment to preserving Wall Street’s status quo. 

For our part, we still hold some hope that Treasury Secy. Geithner will somehow see the wisdom of dismantling the old Wall Street, and re-making it into a smaller and no doubt less dangerous banking financial system. 

Not doing so, warns Johnson, will only prolong the recession, limit recovery–and still leave the U.S. with an unchanged financial Oligopoly that guarantees further collapses.

Economist’s View has a good post by Professor Mark Thoma about trust and information.  His post also elicited a number of excellent commentaries.  Also at the same site is a post from Professor Joe Stiglitz, actually a commentary by Stiglitz which appeared in the New York Times.  Again a good read which elicited numerous excellent commentaries.

One of our blogroll favorites The Oil Drum has an excellent post on the credit crunch and its deleterious impact on commodity companies, commodity pricing and future availability.

A short answer on how long this recession is likely to last is contained here.  Also at the same site is this overview of the week that was.

Meanwhile, as the credit card industry appears ready to get some taxpayer bailout money, here’s a cautionary article about the industry and the changes that are needed first.  And also at this site is another article about how GM can be saved quickly and efficiently using both the tools of Chapter 11 filing and government assistance.

A suggestion from the voxeu.org that central banks should be buying selected traditional securities that are obviously undervalued right now.  The Hong Kong Monetary Authority did this during the 1997-98 credit crisis and made about $14 billion in profit.   Concentrated buying can, in an oversold market, effectively shake out short selling speculators who make a profit from declining stock prices.  Read the piece here.

Then, an interesting piece from the London Banker.  Here, the author points out that the non-Democratic governments of China and Hong Kong are using their stimulus to support small businesses and to limit credit to financial speculators.  The piece takes the interesting point of view that what we save in crisis is what we value most.  The so-called Democratic countries have rushed to save speculators, Wall Street and bankers–the very people who designed and foisted on everyone else this financial implosion. 

“As (Sherlock) Holmes would have considered a child’s life worth more than jewels, I consider the workers and businesses in the real economy as meriting greater protection than the financial elite. It is not merely that I think the financial elite little better than criminals for their irresponsible excesses of recent years, but that I fear long term harm and political instability will come from neglecting the needs of the real economy,” writes the author.

And if you’re just too tired of all the heady news and policy stuff, visit this website blog about two couples who’ve decided to chuck it all (well, much of it anyway) and take three years off on a cruise in a converted skow, or some such boat.  John Clayton, a professional journalist, is one half of one of the couples and following their travels makes for relaxing reading.