The Choices Government Makes, And The Courage To Make Them

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I’m fairly sure that the theoretical “free market” Adam Smith describes in his book “Wealth of Nations” never actually existed, but I’m 100 percent, absolutely positive it doesn’t exist today. The worldwide economy — and the essentially country-less multinational corporate conglomerates — have become too big and complicated to have anything resembling the kind of fair competition with informed self-interested consumers that Smith was so excited about in his theories.

In the country and world we live in today, companies have become so big and powerful that they can manipulate and badly distort markets, and they can wield such outsize influence over governments that it wreaks havoc with countries as a whole — and sometimes the worldwide economy, per the economic crisis of the last three years. So while markets still work pretty well for some things in some contexts (the best new technologies will win a lot of new converts quickly, the best restaurants in a given metro area will get a lot of customers, etc.), the free market for the economy and society as a whole doesn't really work very well in this era. Take banking, for example. When six stunningly big banks control assets equal to 64 percent of our entire country's GDP, it distorts the financial markets in all kinds of ways. There's the Too Big to Fail problem, a bitter example of market distortion that will weaken our entire economy for as long as these big banks are so dominant: knowing that our government will not let them fail has given them all kinds of competitive advantages in the marketplace, and made their corporate cultures far more likely to make big risky bets in pursuit of short term profits. Banks with that kind of market share have a huge edge in knowledge of the marketplace, and make other businesses feel compelled to do business with them or risk being left out of the big moves that can come with all that insider knowledge. Banks that size can quite literally manipulate stock prices and commodity prices and real estate prices at will to reap big profits. Banks with that kind of market power can dominate whole sectors of finance — such as credit and debit cards — and force smaller businesses to pay whatever fees they demand. And banks that wealthy have the political, legal, and public relations juice to rewrite laws and regulations to their advantage.

Banks, of course, are not the only industry where a few companies have too much market share for the public or economic good. A small number of huge health insurance and drug companies have driven up health care costs dramatically because of lack of competition. A small number of big oil and coal companies have had the power to manipulate prices and escape environmental regulations. Companies the size of Walmart have driven millions of small businesses out of business. A relatively small number of insider contractors get the vast majority of government contracts. And the list goes on. Whenever too few companies get too big and powerful (economically and politically), the free market gets distorted and way too many small businesses are stomped into the ground.

Here's the other thing: companies this big are pretty much all multinational in scope. They have almost no loyalty to the country they happened to be incorporated or based in. Their employees and executives, their factories and offices and outlets, their markets, their profits, and their shareholders are scattered all over the world. For these kinds of companies, if America's middle class falls apart, there are always consumers elsewhere. If our schools are terrible, there are always employees they can bring in from other places. If our trade surplus is terrible, it doesn't matter much to them. On the other hand, smaller community-based businesses are far more bound to the communities they are based in, because they know that if their communities — their schools, their labor force, their customers, their environment — start to fall apart, it hurts their business as well.

The idealized free market that conservative politicians and ideologues love to worship is a myth in the modern economy. And in this kind of uncompetitive economic environment, governments have to make choices about whose side to be on. Every decision on taxes, every decision on which contractors to choose, every decision on trade, every decision on regulation and anti-trust: there is nothing idealized about it, it is quite simply a choice of who you want to benefit and who you want to penalize. And every one of these choices is a matter of values: does government side with the most powerful of the special interests or those with less power? Does the government help poor and middle class folks or the wealthy? Does government help hard-pressed small businesspeople creating jobs here, or big multinationals shipping jobs overseas? Does government side with workers trying to organize a union, or employers who want to crush unionization? On government contracting, does our government sign contracts with innovative up and coming small businesses who have never had a chance at a contract before, or just reward contracts to the same old insider companies who have always gotten the deals in the past because of their connections (even if they have been guilty of cost overruns, labor and environmental violations, and sloppy work in the past)?

Let's take a couple of specific examples from the world of banking. The first is one I have been working on and have written about a lot before, the swipe fee issue. Sen. Durbin succeeded in passing an amendment to the financial reform bill that for the first time would regulate debit card swipe fees, and the Federal Reserve — which generally has been extremely pro-banker in past regulatory issues — wrote a reasonably balanced regulation that would cost the big banks (who control 80 percent of the market on this) about $12 billion. The big banks and their allies in Congress are now screaming and whining and gnashing their teeth about the great injustice done to them. But this is a simple matter of values that the government has to decide: either the big banks get the $12 billion, or Main Street retailers, restaurant owners, cabbies, and their customers do. My values say that the big banks already have too much money and power, and that the economy — along with basic fairness — would be better served if the retailers and all those other small businesspeople got to keep the money. Government has a clear choice to make, and going with the Main Street economy over the banks seems pretty clear.

Then there's the housing mess. Faced with a little bit of pressure from the state AGs to write down underwater mortgages, the big bankers have gone into high-pitched bouts of chutzpah not seen since the proverbial son killed both of his parents and threw himself on the mercy of the court as an orphan. Bank of America executive Terry Laughlin said that "It's not that we don't want to help troubled borrowers. It's a moral hazard issue." Ah, yes, the moral hazard issue. Someone from a Too Big to Fail bank which got rescued by taxpayers after they helped blow up the economy worrying about the moral hazard of writing down a mortgage for someone who bought a $150,000 house now worth less than 100K is precious.

Then there is Bank of America CEO Brian Moynihan fretting about the good-hearted, working class guys who have managed to keep up their bank payments in spite of having been screwed by Bank of America: "There's a core problem that if you start to help certain people and don't help other people, it's going to be very hard to explain the difference. Our duty is to have a fair modification process." I feel for these Wall Street folks when they have to wrestle with moral issues — clearly they aren't used to it and get easily confused. But you know what? I am willing to give Brian a break, and go so far as to agree with him on something: their duty is to have a fair modification process. My suggestion is pretty simple: write down every underwater mortgage holder's mortgage to current market prices. That solves your moral hazard issue, stabilizes the housing market, and gives middle and working class homeowners some economic security, boosting the economy as a whole. As I wrote on this issue a while back:

Willie Sutton famously said that the reason he robbed banks was because that was where the money was, and if we are looking to get our economy moving again, we should be looking to get the money to do it where the money is. Right now, more than ever, the big banks are where the money is concentrated. The most important fact by far in Big Banks Bonus Bonanza is this one: right now, 11 million American homeowners owe $766 billion more on their mortgages than their homes are worth, but if the banks were to write down those mortgage principals to market value and refinance them into 30 year fixed rate loans, you would get $73 billion pumped directly back into the economy- every year for the next 30 years.

Now unlike extending tax cuts for the rich or reducing the estate tax, which tends to be saved and invested in long term bonds, this money would go directly into stimulating the economy and creating jobs. Think about who those 11,000,000 underwater homeowners are: they are almost entirely middle and working class families who have spent the last couple of years sweating bullets to save their main life investment after its value plummeted by 20%, 30%, or more. They haven't been spending money on new products, they haven't been taking any vacation trips with their families, if they own a little mom and pop business they sure haven't been taking any risks to expand it: they have just been desperately scrimping and saving and trying to hang on by the skin of their teeth. But if their mortgage is reduced to what their house is actually worth in today's market, that means their overall financial situation is far more stabilized, and it means their monthly mortgage payment will go down as well.

With a stabilized debt and lower monthly mortgage payments, with the psychological weight of probable foreclosure off their shoulders, these middle class homeowners (at least the ones with jobs, which is most of the folks who still have homes) are exactly the kind of people who will be likely to start spending a little money in this economy. Maybe they will finally buy the car they have been holding off on now for years. Maybe they will do a little home improvement now that they know they will be able to stay in their home. Maybe they will feel able to finally make the investment in their small business they have been wanting to make, and hire a few extra folks as a result. The economic multiplier effect of this $73 billion would be as good as any money injected into the economy right now.

You want to know what the second most important fact in this report is? The 73 billion dollars it would cost to write down those mortgages would be only half what the top 6 banks alone are getting ready to write in bonuses and compensation for 2010. If forced to write down these mortgages, the banks will scream bloody murder, even claiming it would endanger them and the entire economy. But all they have to do is cut their bonus and compensation packages, the vast majority of which go to top executives and traders, by 50%. Given all the cash these banks are sitting on, all the profits made and bonuses distributed in recent years, I have no doubt they can afford the hit. The ironic thing is that if they wrote down these mortgages, they would be getting monthly mortgage checks from all these homeowners, plus avoid the costs of all those foreclosure proceedings, but they don't want to write down the property because of their own phony accounting that claims the properties are worth far more than they actually are.

So here's the other little nugget the report alludes to: if you injected 73 billion dollars into the economy through these write downs, the multiplier effects I was referencing earlier- homeowners being able to free up cash to buy things and invest in small businesses and do home improvements- would mean 1.8 million new jobs.

So this plan would cost Brian and Terry and other Bank of America execs a chunk of their bonus money this year, and perhaps would mean that Bank of America shareholders bailed out by us taxpayers wouldn’t get as big a dividend in coming years. But I can live with that if it clears up the moral hazard dilemma that Brian and Terry have weighing so much on their consciences.

Again, this is a choice government has to make: side with middle-class homeowners, or side with the big Wall Street banks. The former is the correct moral choice, and better for the economy by far. The latter is easier politically because of the banks' enormous power and money. Now Tim Geithner might tell you (as he has been telling progressive members of Congress and advocacy groups fighting for bank writedowns) that the government has no power to make the bankers do anything in this situation, but the government — both the feds and the state AGs — has enormous power to lean on bankers to do the right thing. It would take courage to do the right thing here, but these are the kinds of choices government officials have to make every day. With the big banks and the other major special interests with a vise grip on our government today, it just takes some courage.


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