It is Thanksgiving Day in the U.S. – a day inaugurated by some of the earliest English settlers in America, the Pilgrims. The Pilgrims were a small group of Puritans seeking the freedom to practice their own brand of religion. I’ll have more to say about them, because, in a way, they are more connected to our lives today than most of us imagine. However, that will be another time. Today I wanted to write about our banking system and Thanksgiving; the question being should we give thanks that we have our banking system, or should we give thanks that we seem to have barely survived our banking system – at least temporarily.
I am inclined to choose the latter because our banking system was in a dire predicament and the people who run the banks had no clue how to get out of it. Only truly massive intervention by the U.S. government has been able, for the time being, to save us from an imminent and devastating meltdown of our entire economy, and perhaps the world’s as well. There are several reasons why this happened but the principle ones are stupidity and greed on the part of the banks. This has been very well explained by Thomas Friedman in a recent article in the New York Times. I would like to go a bit further than Tom did, however, because this line of thought should be followed to its logical conclusion.
The principal point I would like to state, which is obvious from the recent financial events in the world, is that the people who ran the investment banks and the other major U.S. banks were incompetent. As a group they utterly failed to realize the enormously dangerous situation they had created by giving high interest rate loans to people who could not possibly repay them. They failed to realize that markets go down as well as up. They failed to realize that real estate was just another bubble much like the tulip bubble in Holland in 1637. There have been many economic bubbles since the tulip bubble. The U.S. banks failed to recognize the danger in the 1929 bubble too.
However, there is more to this story than incompetence. In many cases, the U.S. banks that were making the toxic mortgage loans knew that these were really high risk loans. However, they went ahead and got very high, AAA, ratings for them. Then they packaged them as securities and sold them worldwide. Of course some of the foreign banks that purchased them were a bit leery of the AAA ratings and they went out and purchased insurance, i.e. credit default swaps, on the loans they had purchased. Of course the insurance companies, like AIG, never have enough resources to cover the losses when everything tanks at once. They just play a numbers game of probabilities. I guess AIG missed on that one.
The important thing to note, as Friedman points out, is that this meltdown occurred, not only because of plain stupidity, but also because of a failure of “financial ethics”. In other words these banking people were a bunch of crooks.
So I have a couple of questions. 1) How is the FBI’s investigation coming along? Any suspects yet? Are there any other government investigations still going on? You know, maybe by the Securities and Exchange Commission? Have we caught anyone yet who was misrepresenting toxic mortgages as AAA rated securities? My guess is that there were hundreds, maybe thousands, of people who were participating in this monumental fraud. So how many have we caught so far? 2) Are we sure we want to pour trillions of dollars back into these banks and just “let ‘er rip” again? Isn’t there some other alternative, or is Treasury Secretary Paulson right saying that we have to do this right away, and we can’t think about it anymore, because we are on the brink of destruction?
Here’s something to think about: the lending of money at interest is not work. The person who lends the money creates nothing. This person doesn’t do anything to advance society, he simply rakes in a profit on the back of someone else’s productive work. Very, very wealthy people like to own banks, either outright or via shares, because they can increase their wealth and not do any productive work at all in the process. Very, very wealthy people also have an inordinate amount of control in our government, and they use their influence to create favorable tax laws for themselves and favorable banking regulations for their banks – or the lack of regulations for them.
There is an alternative – let the government run the banks. Suppose we change our outlook and consider that banks should be government run utilities, whose sole role is to provide financial services to the working public at cost, i.e. without making a profit. I know there are probably a lot of people who would call this un-American or Socialist or Communist or something else. The simple fact is that these greedy, stupid, immoral people have had their way too long. It is these dishonest bankers who are un-American. These crooks nearly destroyed our country in 1929 and they have done it again in 2008. The time has come to do a major rethinking of the concept of banks – what their purpose is, how they should operate, and who should run them.
Meanwhile, I suppose we have little choice but to go ahead with the bailouts of Citi and the others. For practical reasons there is little else we can do immediately – these are the only banks we’ve got. However, it doesn’t have to be permanent. We could create a suitable plan and then embark on a phased shutdown of the private banks and the creation of a government operated banking system that would be well-regulated and operate under a strict code of ethics “for the good of the country”. Somehow I can’t imagine any one of today’s major banks ever operating with that goal in mind, can you?