Bail Out Average Americans, Not Bankers

by James Parks, Jun 2, 2009

Behind all the hype and technical jargon surrounding the nation’s banking and mortgage crises, the bottom line comes down to answering this question: Does the nation want to spend its resources on rich bank stockholders or on roads, bridges, schools and other necessary projects?

Speaking during a workshop at the America’s Future Now conference this morning, several members of a panel on the banking crisis said the financial system is broken and that the Obama administration’s plan to fix it doesn’t address the scope of the problem. The three-day conference is sponsored by the Campaign for America’s Future.

(Click here to read more news and views from the America’s Future Now conference. You also can listen to the conference sessions live on BlogTalk Radio here.)

The administration is holding its breath, hoping big banks will recover the value of some of their assets over time if taxpayers bail them out over the short haul, said Damon Silvers, vice chairman of the Congressional Oversight Panel.

It is dangerous to be underwater and holding your breath and not being able to reach the surface. 

The money we already have spent to bail out banks could have been used for other projects that would have helped communities by stopping foreclosures, rebuilding our infrastructure and putting people back to work, Silvers said. Instead, he said, the money has gone to the banks’ stock holders, most of whom are in the top 5 percent of the nation’s wealthiest people.  

There are multiple problems with the current approach of bailouts, panelists said. One big problem is that money that was supposed to go to providing credit to homeowners facing foreclosure or small businesses that create jobs and buy supplies in local communities is not going to them.

Matt Stoller, an aide to Rep. Alan Grayson (D-Fla.), described the experience of a woman in Orlando who paid $200,000 for her home, only to see it drop in value to $60,000. Rather than let her refinance the house and pay the $60,000 mortgage, which she can afford, the bank is selling the house and forcing her out. Stoller says:

Ordinary people are not seeing the benefits of the billions of dollars [given to bail out banks]. That money is not coming into the credit markets.

Nomi Pins, a former managing director of Goldman Sachs, said part of the problem is the inability to tell how deep the trouble in the banking system runs because the same people who created the mess are still running the banks.

As Silvers put it, it’s like asking a child how big a mess he made when he spilled the milk and cookies. The child will answer “not big.” But the reality is different.

Propping up the securities of the nation’s largest banks is bad policy, Pins said, because taxpayers have no way of knowing how much those securities are worth. She explained how bankers don’t know the value of the securities until someone makes an offer for them on the open market. So we can’t definitively determine the value of many of the banks’ assets. 

 If someone wants to pay 50 cents on the dollar, then it’s worth 50 cents.

Pins, now a fellow at the public policy institute Demos and author of It Takes A Pillage, said the real culprit is the idea that the banking system should continue to exist as it is. The reality is that having banks big enough to take down the economy if they fail is not good for the country. We need to break up the banks into manageable parts and toughen oversight and regulation, she said.

Silvers, who also is associate general counsel for the AFL-CIO, said the global financial system must be overhauled with comprehensive regulation, hewed to the theme he hit on in March at the Wall Street Journal’s Future of Finance Initiative: 

All forms of money management in global markets ought to be under a regulatory scheme. Not just systematically significant ones, all of them. Otherwise, we ought to just basically admit that we don’t have regulated markets.

Economist Robert Johnson says real change in the banking system will only come from public pressure.

When we have bankers saying we can’t afford roads, bridges and schools, but we can afford to bail them out, we have a problem.

He likened the bankers to be-bop jazz musicians who played a very complicated music form to prevent other artists from copying and stealing their work. While the musicians created artistic masterpieces that enriched the world, the bankers are creating complex financial packages to protect their money at the public’s expense, he said.

Economist Robert Kuttner agreed, saying real change in the system will not come from the politicians; it will come from the demands of the American people for fairness and accountability.

Kuttner pointed out that Congress and the Obama administration are beginning to hear the public’s complaints and are making some moves in the right directions. He praised the passage and signing of the Fraud Enforcement and Recovery Act of 2009, which among other things, creates an investigative commission, the Financial Markets Commission. The panel has a sweeping mandate, including subpoena powers, to investigate all the causes of the collapse.

But in the end, Kuttner said, it will be the American people who force the necessary changes in the banking system by creating political pressure that will force the White House and Congress to make real reforms in the financial system.

Politics is just as important as economics in this battle.

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