Unfinished Business…

Unfinished Business…

"And I sincerely believe with you, that banking establishments are more dangerous than standing armies; & that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."

– Thomas Jefferson

“When we saw what happened in Parkland, we were so disturbed and upset.  We love these kids and their rallying cry, ‘Enough is enough.’ It got to us.” 

- Edward Stack, CEO Dick’s Sporting Goods

By J.M. Hamilton (3-4-2018)

This coming September 15, 2018 will mark the 10th anniversary of the Lehman event (to this day, the largest bankruptcy ever recorded).  

An event that many Americans will remember contributed to the largest bank bailout in the nation's history, the financial crisis, and the Great Recession.  The financial contagion was not confined to the U.S. but many countries throughout the West suffered from TBTF banks that were leveraged to the hilt, and gambling w/ depositor - and ultimately, taxpayer - money.  Economies have since healed to varying degrees, but not all have recovered (e.g. Greece and Italy), and arguably, none have fully recovered.

In fact, the bailouts continue to this very day... see the ECB and Federal Reserve's hyper accommodative monetary policies, where real yields over the last decade - adjusted for inflation - have often been negative or below 1%.  Basically providing banks a handout w/ free money, and transferring wealth from depositors to banks, shadow banking, and private equity.

Economist Paul Romer once famously said, "A crisis is a terrible thing to waste."  And the 2008 crisis was truly wasted.  Instead of taking time to analyze TBTF (too big to fail) banks, the casino atmosphere on Wall Street - backstopped by the American taxpayer, and the structural defects w/in our economy that have led to explosive wage & wealth inequality ... the entire crisis was papered over by Republican - and succeeding Democratic - administrations.  Congress - both parties - owned by the Wall Street banking oligopoly quickly fell into line, and voted for the bailout (but there was no such relief for 99%, especially on the scale banks received, and many people lost their homes and jobs).

Of course bank lobbyist today, w/ the crisis in the rearview mirror & banks making record profits, want to see most of the post-crisis reforms & regulations undone, particularly the Volcker Rule. The Volcker Rule, in lieu of the simple reinstatement of Glass-Steagall, sets limits on banks gambling w/ depositor money (as well as taxpayer money, as many bank deposits are federally insured).  And many of the pirates that ran these TBTF banks are still in charge of their respective institutions to this very day (see Messrs. Blankfein and Dimon).

Perhaps what was most remarkable about the bailout, however, was the argument put forth that these institutions were TBTF, and so critical to the American economy that there was no other recourse but to adopt the emergency measures that were passed.  Trillions - in an alphabet soup of programs (remember TARP?) and free Fed money - were thrown at these institutions.  And yet, no strings were attached to the bailout money.  The banks were so arrogant about both the crisis and the subsequent bailout that one CEO was reported to have said that the banks, leading up to the crisis, were merely: "... doing god's work."

Banks may not only be key to the American economy, but they are also central to the transmission of monetary policy, which given the sorry state of U.S. fiscal policy (now at record debt levels) is the only game in town.  And yet, these all important Wall Street banks are operated by a men's only club, who are restricted in their actions by: their bonus plan, the value of their respective bank’s stock, activist investors, and stock analyst buy & sell recommendations.  The CEOs of these major banks are highly political men, and certainly play no small role in the dispersion of campaign, PAC, lobbying, and dark money contributions. 

And given their awesome power, they can even make or break an economy - and an administration in power - by their collective action or inaction.

All of which begs the question:  Should institutions - w/ virtually no checks upon their power - have this degree of control over the economy, the government, and the political process?  Much has been made about the Russian hacking of the 2016 election, but how about the daily money-hack Wall Street lobbyist engage in w/ our elected politicians?  Does the House of Representatives dance for Putin, or do they dance for Wall Street bank executives?

Beyond breaking up TBTF institutions and - under the most optimistic scenario - reenacting Glass-Steagall, should such powerful institutions be allowed to exist in their present structure?  

To cut to the chase, should commercial lending institutions - given that they are the cornerstone of the economy & possess awesome power over the government - be operated as not-for-profit institutions?  If we drill down and are honest w/ ourselves, it was the fact that these institutions are - so concentrated, under tremendous pressure to make profits, and absolutely key, bank executive compensation incentives drives decision making that is often not in the best interests of the country - that directly led to the 2008 crisis.

Do we want the crooks in Congress running Wall Street commercial lending... absolutely NOT.  Does the private sector do many wonderful things?  

Answer: Absolutely, particularly in a functioning free market, w/ many competing entrants w/in a given market place or economic sector.  

But would the American economy - as well as the health of our democracy/republic - be better served by a Wall Street commercial lending group that was run as not-for-profits?    

JMH believes that case could easily be made for this manner of economic structural reform ...  Sure allow investment banks to continue to be operated by the profit motive (albeit no longer backstopped by the taxpayer, that is to say, federally insured).  Take away the profit motive, excessive Wall Street pay packages & incentives, the continual grind to push the stock price ever higher, and instead, incentivize not-for-profit, commercial lending banks to increase loan to deposit ratios, responsibly, at the lowest possible interest rate, w/out bankrupting the institution or shafting depositors. 

What U.S. citizens are likely to end up w/ is a much safer banking industry, a stronger economy, a better monetary policy conduit, and the end of future financial crisis (at least the end of financial crisis initiated by commercial lending institutions, as presently operated).

Then again, perhaps, the shifting of commercial lending from a for profit to a nonprofit model isn't necessary.  To hear BOE's Governor, Mr. Mark Carney, tell it last week, on Bloomberg Surveillance, cryptocurrency may ultimately eliminate banking intermediaries (aka the bankster middleman), altogether.  Hence, the rush to regulate cyber currency, and for banks to begin co-opting many cryptocurrency attributes.

JMH isn't the only person thinking not-for-profits are an excellent hedge against a corrupt U.S. government, or private sector excess.  Messrs. Bezos, Buffett, & Dimon have been talking about setting up not-for-profit healthcare for their employees, as a means to mitigate and possibly control ever spiraling healthcare costs. 

The not-for-profit model argues for maximum efficiency, while eliminating - or mitigating - cutthroat profit taking and government corruption.

It's as if many corporations - most recently - have taken Mr. Fink's (of BlackRock fame) advice to heart, and have opted not only to make money, but to act in a more socially responsible manner.  In some instances, CEOs are demonstrating leadership, where owned politicians fear tread.

Against the backdrop of the latest mass shooting, several corporations have stepped forward to either disassociate, if not outright cut ties with - the extremist & terrorist group - The NRA (the lobbying arm for the gun industry). 

These socially conscious businesses are to be commended, and further encouraged to take responsible action, and support politicians, who will - in turn - advance the same agenda. 

There are too many stories like the ones that ran on Disney last week. Namely, that while Disney is minting billions, many of its employees are living in cars. 

Might corporations and multinationals, given exceptional profits and low tax rates, begin to support a living wage and gender pay parity?  Some estimate that gender pay parity would add trillions to the global economy.

The bottom line is a company can enhance their bottom line by doing the right and socially responsible thing.  Just as there are boycotts, there are also buycotts, where consumers reward socially responsible companies by purchasing more of their product.

Isn’t that the way it should be?  Some might call this consumers voting w/ their purses and wallets.

Selah.

Copyright JM Hamilton Publishing 2018