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60% of the Financial System Now Has a Bailout Guarantee by Jeffrey A. Miron

More than Half of Private Liabilities Are Backed By the Government.

According to many politicians and pundits, new financial regulation adopted since 2008 means that financial crises are now less likely than before. President Barack Obama, for example, has suggested,

Wall Street Reform now allows us to crack down on some of the worst types of recklessness that brought our economy to its knees, from big banks making huge, risky bets using borrowed money, to paying executives in a way that rewarded irresponsible behavior.

Similarly, Paul Krugman writes,

financial reform is working a lot better than anyone listening to the news media would imagine. … Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more. But Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut the law, if it weren’t an important step in the right direction. For all its limitations, financial reform is a success story.

Krugman is right that, other things equal, forcing banks to issue more capital should reduce the risk of of crises.

But other things have not remained equal. According to Liz Marshall, Sabrina Pellerin, and John Walter of the Richmond Federal Reserve Bank, the federal government is now protecting a much higher share of private financial sector liabilities than before the crisis:

If more private liabilities are explicitly or implicitly guaranteed, private parties will at some point take even greater risks than in earlier periods. And experience from 2008 suggests that government will always bailout major financial intermediaries if risky bets turn south.

So, some of the new regulation may have reduced the risk of financial crises; but other government actions have done the opposite. Time will tell which effect dominates.

This post first appeared at Cato.org.

Jeffrey A. MironJeffrey A. Miron

Jeffrey Miron is a Senior Lecturer and Director of Undergraduate Studies in the Department of Economics at Harvard University, as well as a senior fellow at the Cato Institute.

Europe Needs Regime Change in Greece: They Won’t Get It by Stephen Davies

It seems the saga of negotiations between the Greek Government and its creditors has arrived at a denouement but almost certainly not a final conclusion, and we may expect this show to return to the stage at some point, probably in the near future. The reason for this is the real nature of the ultimate problem facing both parties, something of which the creditors are still unaware.

The negotiations over the last few months have been marked by a remarkable degree of acrimony. Most of the other eurozone governments have become increasingly (and publicly) exasperated with the Greeks, and the expressions of hostility towards the Greek government from members of national parliaments have grown ever more outspoken.

Some of the reasons for this are well known — above all, the lack of a true European demos: there simply is not the kind of solidarity or shared interest in Europe that one finds in, for example, the United States.

However, there is another reason for the acrimony that has not received much attention. The creditors misunderstand what it is they are asking the Greek government and society to do. This lack of understanding is why any deal made now is likely to prove a disappointment.

The impression given by media reports is that this is all about debt, specifically the debts run up by the Greek state before 2009. Certainly there is a problem, but it is one that is soluble and does not require the kind of fraught negotiations we have seen.

The difficulty is that the fiscal state of Greece before the first bailout in 2010, and the underlying state of the Greek economy, are symptoms of a much more serious underlying problem. This is one not of debt but of competitiveness.

Quite simply the Greek economy is not productive enough to support the levels of income and public spending that it now has, without significant capital inflows from outside Greece. Before 2008 these came in the form of private loans, since then by government bailouts (even if much of this has been recycled back to private creditors).

Greek firms and labour are simply not competitive with their counterparts elsewhere in Europe, above all in Germany. Being in the euro means that they cannot adopt the traditional way of regaining at least some competitiveness by devaluing their currency. Instead, they have to deflate internally, and the attempt to do this has devastated economic life in Greece.

This is all well known. It is the reason why the creditors are demanding that, in return for a third bailout, the Greek government introduce a series of reforms to public spending, the tax system, and the machinery of the Greek state, particularly it’s tax collecting apparatus. Successive Greek government have either refused to do this or promised to do it and then failed. This is why the rest of the eurozone is becoming ever more exasperated. It here however that the misunderstanding comes in to play.

What the creditors think they are asking for is a major shift in public policy. They recognise that the shift they are asking for is radical, and many also realise that what would be involved would be a shift in the general ideological basis of Greek politics, towards a more market liberal direction. However, they are actually, without realising it, asking for something much more fundamental and drastic.

One question that should be asked is why Greece got into a position that was so much worse than that of other “peripheral” economies. Also, why has the performance of the Greek economy been so much worse than that of other countries that have had bailouts and austerity, such as Spain, Portugal, and Ireland? The answer lies in the fundamental nature of the Greek state and the political economy of Greece.

Greek political culture is dominated by practices and institutions that certainly exist elsewhere in Europe but are not as dominant. The state has a narrow tax base, with powerful interests such as the Orthodox Church effectively exempt. The revenue collection apparatus is completely ineffective so that tax evasion is endemic at every level of income.

This means that simply raising or extending VAT for instance is not enough because so many transactions are off the books. At the same time, the Greek state provides generous pensions and other benefits, which it cannot fund.

The political system appears to be a modern democracy but is in fact a much older model. The key institution is clientelism, in which political actors give out rewards to their clients in the shape of handouts and sinecures in the very large public sector. This is done much more directly than with the kind of interest group politics that we find in most democratic countries, and it is central to the whole way that politics works.

The extent of patronage means that the Greek government (whoever they are) does not have a modern, Weberian, bureaucracy to call on. Instead, most of the people in the public service owe their positions to networks of patronage and these command their loyalty.

The economy is highly regulated in ways that entrench settled interests and inhibit innovation. In particular, a very wide range of occupations are subject to rules that make it very difficult for new entrants into those sectors. Because of the inefficiency and the existence of a plethora of rules that are irksome but ultimately unenforceable, corruption is endemic and widespread throughout Greek society.

This system cannot maintain anything like the standard of living to which most Greeks aspire and as such it means that, via membership of the euro, we have seen the development of an economy that depends upon inward transfers — to a much greater degree than is the case in countries such as Spain and Ireland.

Given all this, it becomes clear that what the creditors are asking for is much more than a shift in policy, no matter how sharp and dramatic. Policy shifts of that kind are part of the normal or regular political process that take place infrequently, but still regularly, in most polities. The shift brought about by Margaret Thatcher’s election in 1979 is an example.

What is needed in Greece, and what the creditors are asking for without realising it, is something more fundamental, a change in the very nature of the political system and in the entire nature of politics and government, rather than a change of policy within a system. This is a regime change in the original and correct use of that term.

The point of course is that changes of this kind are extremely difficult and only happen extremely rarely. Sometimes it requires a revolution, as in France; on other occasions, it takes place in the context of a fundamental crisis such as defeat in a major war. Very rarely it can happen when there is a near consensus in a society over what to do, as in Japan in the 1870s.

The current Greek government is almost certainly aware of this, but, apart from ideological objections to part of the list of reforms, they are quite simply unable, rather than unwilling, to do what is asked because a change in the political order is simply very, very hard.

So the creditors are likely to be disappointed and will then become even more enraged. Moreover, being in the euro makes any attempt at systemic change in Greece even more difficult than it would be already, because if removes a range of policy options that could alleviate some of the transition costs.

As most economists of all persuasions now think, the best option is a managed Greek exit from the euro. If this does not happen (as seems likely) then this farce is a production that will run for some time.


Stephen Davies

Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.

GM is alive.Drivers are dead. Any questions?

Remember the arrogant 2012 bumper sticker based on Joe Biden’s boast at the DNC? “GM is alive. Bin Laden is dead. Any questions?”

GM_Alive_Dead_Sticker.jpg

Actually, I do have a question. Was Bin Laden driving GM’s Chevy Cobalt when he died?

It now appears that many American civilians with absolutely no connection to al-Qaeda have also become dead or injured while driving one of those small, fuel-efficient Chevrolet Cobalt, Pontiac G5, or Saturn Ion.

The Washington Post reports:

“An investigation into General Motors’ failure to recall millions of small cars containing a deadly ignition switch defect found a corporate culture in which employees failed to take responsibility for the problem, which has been linked to at least 13 deaths, said GM chief executive Mary T. Barra.”

This raises even more questions.

Notice the part about “a corporate culture in which employees failed to take responsibility for the problem.” Was it because the employees knew that they were too big to fail?

How many of them were members of the United Auto Workers? Obama had rewarded this labor union’s political shenanigans and donations to his campaign with 39 percent of General Motors. That alone should have taught the GM employees a lesson that real money comes, not from actual labor but from shady political dealings, and that honest work is for suckers.

General Motors waited more than a decade to recall their 2.6 million defective small cars worldwide. Obviously, the problem started long before the Obama administration decided to bail them out, thus rewarding bad behavior and costing Treasury a loss of roughly $10 billion.

That was yet another real-life lesson from which the GM employees could learn that withholding information is better than honest work, and that those who actually do honest work wind up paying for those who don’t. Now GM is going to establish a compensation program for the victims and their families. How much of that cost will be covered by a taxpayer-funded bailout?

And now for the final question. Using GM chief executive’s own language, who built that “corporate culture in which employees failed to take responsibility for the problem”?

According to her boss, the nation’s chief executive, no one in particular. In president Obama’s mind, businesses just happen to grow and develop their own cultures, like fungus. No one takes credit for a fungus culture; why should anyone take credit for a business culture? Whether you succeed or fail, the administration’s credo is, “You didn’t build that!”

GM officially confirms up to 13 deaths; trial lawyers are likely to raise the number to 60. Is that a fair cost of keeping GM alive? If so, how many lives and billions of taxpayer dollars will it take before the cost of this administration’s meddling with the economy becomes prohibitive? At what point will it stop being fair and become criminal?

Ayn Rand’s prophetic novel Atlas Shrugs has a chapter in which hundreds of people on a crowded train lose their lives because railroad employees have stopped taking responsibility for their actions. Their failure to take responsibility was a consequence of the nation’s new culture of “fairness” and “equality” that was being promoted by an intrusive “progressive” government. In a twist of dark irony, all the participants in the story were fully supportive of that “fair” culture – from the corrupt government officials to the cowardly railroad executives to the clueless passengers who never figured out what had doomed them to die in a smoke-filled tunnel.

It seems that today the Obama administration, the “progressive” politicians, the unions, and all their low-information supporters, many of whom are driving GM’s small, fuel-efficient cars, are writing an updated, real-life version of Atlas Shrugged, in which the story of General Motors is the latest contribution to this man-made dystopia.

RELATED ARTICLE: Documents Show General Motors Kept Silent on Fatal Crashes – NYTimes.com

Are US banks enabling manipulation on a vast scale?

Geo Intelligence states, “Top economists, financial experts and bankers say that the big banks are too large … and their very size is threatening the [US] economy.”

On June 27, 2013 Representatives Alan Grayson (D-FL), Raul Grijalva (D-AZ), John Conyers (D-MI) and Keith Ellison (D-MN) sent a letter to Federal Reserve Chairman Ben Bernanke. The letter states, “We write in regards to the expansion of large banks into what had traditionally been non-financial commercial spheres. Specifically, we are concerned about how large banks have recently expanded their businesses into such fields as electric power production, oil refining and distribution, owning and operating of public assets such as ports and airports, and even uranium mining. [Isn’t that a national security issue?]”

Grayson, et. al. note, “Here are a few examples. Morgan Stanley imported 4 million barrels of oil and petroleum products into the United States in June, 2012. Goldman Sachs stores aluminum in vast warehouses in Detroit as well as serving as a commodities derivatives dealer. This ‘bank’ is also expanding into the ownership and operation of airports, toll roads, and ports. JP Morgan markets electricity in California.”

Grayson, et. al write, “According to legal scholar Saule Omarova, over the past five years, there has been a ‘quiet transformation of U.S. financial holding companies.’ These financial services companies have become global merchants that seek to extract rent from any commercial or financial business activity within their reach.  They have used legal authority in Graham-Leach-Bliley to subvert the ‘foundational principle of separation of banking from commerce’. This shift has many consequences for our economy, and for bank regulators. We wonder how the Federal Reserve is responding to this shift.” Read more.

ProPublica is tracking where taxpayer money has gone in the ongoing bailout of the financial system. The ProPublica database accounts for both the broader $700 billion stimulus bill and the separate bailout of Fannie Mae and Freddie Mac. According to their data: 927 banks received  $606B of which $366B has been returned. The banks revenues are $116B showing a total net to date of a minus $124B.

Following is the ProPublica list of Florida banks/mortgage servicers that were bailed out (those in RED failed to repay the government and resulted in a loss):

1st United Bancorp  
Alarion Financial Services  
Allstate Mortgage Loans & Investments, Inc.  
Bank United  
Bayview Loan Servicing, LLC  
Biscayne Bancshares, Inc.  
Capital International Financial, Inc.  
CenterState Banks of Florida, Inc.  
Central Florida Educators Federal Credit Union  
Coastal Banking Company  
Community Bancshares Of Mississippi, Inc. (Community Holding Company Of Florida, Inc.)  
Community Credit Union of Florida  
First Community Bank Corp of America  
First Federal Bank of Florida  
First Southern Bancorp  
Florida Bank Group, Inc.  
Florida Business BancGroup  
Florida Housing Finance Corporation  
FPB Bancorp  
GulfSouth Private Bank  
Gulfstream Bancshares  
Highlands Independent Bancshares  
Iberiabank  
IBM Southeast Employees’ Federal Credit Union  
Marine Bank & Trust Company  
Naples Bancorp  
Ocwen Financial Corporation, Inc.  
Pinnacle Bank Holding Company  
Premier Bank Holding Company  
Q Lending, Inc.  
Quantum Servicing Corporation  
Regent Bancorp  
Seacoast Banking Corp  
Seaside National Bank & Trust  
TIB Financial Corp  
U.S. Century Bank

 

For the full list of banking institution in the United States that received taxpayer bailouts click here.