Executive Summary

• Bail outs are gifts to banks from governments that prevent them from ever having to adjust their behavior.

Introduction

Bail outs are necessary because private banks and related institutions lower standards for short-term profits. This leads to asset bubbles. When the bubbles pop, private banks can end up with losses. A bailout is how a private bank receives a subsidy from the taxpayers. When the bubble is high, private banks take the profits, when the bubble pops, they dump losses on the taxpayers. Bailouts would be unnecessary if there was both no private central bank and no private banking. Private banking places the emphasis on the health of the banks, not on the borrowers. However, if there is no private banking, there are not private banks to bail out and no health to be concerned with. Under a public banking system, the emphasis can be placed on the health of the borrowers. Again, it is the government’s money, not the money of private banks.

The Lies Told to Gain Popular Support for Bail Outs

One of the lies told to bail out elite banking interests is that “we are all in this together.” This sentiment is only used when there is a necessity for a transfer of value from the public to private entities.

This is explained in the following quotation.

Two weeks later, then-presidential candidate Barack Obama sounded the same theme: “All of us—all of us—have a responsibility to solve this crisis because it affects the financial well-being of every single American.… In other words, this is not just a Wall Street crisis, it is an American crisis.… I understand completely why people would be skeptical when this President asked for a blank check to solve this problem.… We are all in this together.… We will rise or fall on that journey as one Nation and as one people.” In other words, the banks and the people were one—if the banks fell, so too, would we. We must lend to banks so that they can lend to us. This codependency of the government-banking system is not always clear, but the justifications given for the bailouts brought this crucial relationship into sharp focus: we need them and they need us. Many describe modern banks as private enterprises, but this is illusory—half-revealing and half-concealing their true nature. To be sure, individual banks are private companies, but each of these private banks sits atop a foundation of state support. In discussing the bailout of 2008, Bank of America CEO Ken Lewis made this key point well: “We are so intertwined with the U.S. that it’s hard to separate what’s good for the United States and what’s good for Bank of America … they’re almost one and the same.” Yet this depiction of unity between the banks and the people could not be further from the truth. If “we’re all in this together,” why must such a large segment of the public be left to modern-day loan sharks? The Wall Street Crisis cannot be “an American crisis” if its remedy means that unprecedented federal support goes to a banking system that has effectively shut out much of the population. We do not “rise and fall as one people” if two banking systems exist in America: government-supported banks that serve the well off, and a Wild West of fringe lenders and check-cashing joints that answer the needs of everyone else—at a hefty price.

Source: How the Other Half Banks

https://www.amazon.com/How-Other-Half-Banks-Exploitation/dp/0674286065

The Scam of the Bailout Being For the People

Another example is found in this quotation for the bailout in 2008.

Secretary Geithner asserts that “there would have been Shantytowns again” or “another Great Depression.”30 If the largest firms at the center of the financial system had been allowed to fail as spectacularly as predicted, it is possible that it would have taken years, perhaps decades, for investors to trust the financial markets again. It certainly could have been a blow to the entire economy—and not just the largest banks.The purpose of restoring confidence, of course, is to assure the availability of credit. If the system works properly, banks can lend.31 Therefore, saving them from collapse became necessary so that we as a society may benefit from the increased credit flow that they would enable—allowing individuals and businesses to put the economy back in motion. Consider how the two presidents and their officials explained the purpose of the bailout: George W. Bush: “This rescue effort is not aimed at preserving any individual company or industry. It is aimed at preserving America’s overall economy. It will help American consumers and businesses get credit to meet their daily needs and create jobs.” Henry Paulson (secretary of the Treasury for the Bush administration): “I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks … ensuring the financial system has sufficient capital is essential to get credit flowing to consumers and businesses and that is where the bulk of the remaining TARP funds should be deployed.” Barack Obama: “We are in a very dangerous situation where financial institutions across this country are afraid to lend money. If all that meant was the failure of a few banks in New York, that would be one thing. But that is not what it means. What it means is if we don’t act, it will be harder for Americans to get a mortgage for their home or the loans they need to buy a car or send their children to college.” Timothy Geithner (secretary of the Treasury for the Obama administration): “The credit markets that are essential for small businesses and consumers are not working.

After Geithner and Paulson got their bailouts, they went about using them in a way that maximally benefitted elite banking interests and against the overall US population.

Source: How the Other Half Banks

https://www.amazon.com/How-Other-Half-Banks-Exploitation/dp/0674286065

No Verification on the Lending Outcome of Bailout

This is explained in the following quotation.

In the end, the government relied on the banks to disseminate the bailout funds to the public without actually making sure they would do so. The very banks that had caused the crisis through their recklessness were entrusted with taxpayer funds and just a mere hope that they would act in the public interest.

Source: How the Other Half Banks

Paulson’s Lie: The Bait and Switch

Paulson was able to easily trick Congress by lying to them.

Paulson promised Congress that he would find ways to stem the tide of impending mortgage foreclosures. But after examining direct-relief plans, including a mortgage modification protocol developed by FDIC chairman Sheila Bair, Paulson concluded that these programs would “require substantial government subsidies” and “direct spending” that he ultimately felt were unjustified. This led one congressman to call the TARP “the second largest bait and switch scheme that history has ever seen, second only to the reasons given to us to vote for the invasion of Iraq.” Barney Frank also angrily cut off Henry Paulson during congressional testimony, saying that “the bill couldn’t have been clearer” in being aimed at reducing foreclosures.

Source: How the Other Half Banks

The Promises Versus the Reality of TARP

After many promises that bailouts were meant to help the struggling public and rhetoric linking bailouts to lending, only one program was geared at direct relief. In March 2009, the Treasury proposed and Congress passed the Home Affordable Modification Program (HAMP), a $50 million TARP carve-out (out of the almost trillion dollars in total funds) intended to create guidelines for banks to modify mortgages and, in turn, decrease foreclosures. The funds were intended to go through the banks to provide direct relief to struggling homeowners, thereby fulfilling the TARP’s original purpose. Incredibly, these funds also ended up going directly to banks. In fact, the HAMP’s faulty design caused many problems for mortgage borrowers across the country. When Treasury secretary Timothy Geithner was asked about the HAMP’s failure to help mortgage borrowers, his response, as reported by Elizabeth Warren and TARP Inspector General Neil Barofsky, provided one of the most telling exchanges of the financial crisis: “We estimate that [the banks] can handle ten million foreclosures, over time.… This program will help foam the runway for them.” In other words, when asked about the one program specifically targeted to help the public, the Treasury secretary responded that it would return banks to profitability quickly. This comment reveals the nature of the modern relationship between banks and the state. The Treasury secretary assumed that the government’s paramount objective in a crisis is to assure bank profitability.50 And to be fair, if banks are the central engine of the economy, their profitability is necessary for a thriving economy. Foaming the runway makes sense when we are talking about an engine that we want to move fast and often. But the engine analogy only works if the engine actually moves the machine.

Source: How the Other Half Banks

The only concern of banking representatives like Paulson and Geithner was to the banks. Naturally, after they left office, Paulson and Geithner returned to banking.

Bail Out Money Used to Pay Bonuses

Right after the banks and their representatives talked about how “we were all in this together,” the banks turned around and used some of the government’s bail out money to pay bonuses, as is explained in the following quotation.

Even after the bailouts, the financial sector returned to its precrisis disregard for serving the public interest. Taxpayer bailouts in hand, tone-deaf Wall Street firms turned around and paid hefty bonuses to the very same employees who had led the country off a cliff and spent decades abusing their clients, the taxpayers. The public outcry over bonuses was met with policymakers claiming that their hands were tied and bankers unable to comprehend the public reaction. Defending the huge bonuses while at St. Paul’s Cathedral in London in October 2009, a Goldman Sachs executive said: “The injunction of Jesus to love others as ourselves is a recognition of self-interest .… We have to tolerate the inequality as a way of achieving greater prosperity and opportunity for all.” The statement accurately summed up the state of public-mindedness on Wall Street: “If it’s good for us, it must be good for everyone.”Fears of concentrated bank power evaporated. Regulators encouraged bank mergers and nationwide branching to make banks more efficient and competitive. “Between 1980 and 2000, the assets held by commercial banks, securities firms, and the securitization they created grew from 55 percent of GDP to 95 percent.”113 The result of a series of mergers and expansions was predictable—today, a handful of behemoth banks control most of the country’s assets. For example, Bank of America makes one-third of all business loans, Wells Fargo provides one-fourth of all mortgages, and Chase holds 12 percent of all of our collective cash. The six largest banks hold 67 percent of all the assets in the financial system, up from 37 percent just five years ago. Just four of the largest banks (Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo) control almost 50 percent of all bank assets. JPMorgan holds $2.4 trillion in assets—the size of England’s economy. And they are just getting bigger. Five years after the crisis, the top banks were bigger and more profitable by every measure. This expansion and growth changed not only the size but the nature of the industry. These megabanks became more profitable, took on more risks, and expanded into more markets.Wall Street’s economic dominance quickly spilled over into the political realm. The deregulatory ideology of the new financial oligarchy infiltrated the “Wall Street-Washington corridor” by means of campaign money and ideological capture. In the last two decades, no industry has contributed more to campaigns than the financial industry. Its campaign contributions went from 73 million in 1990 to 332 million in 2006. This money flowed into the campaign coffers of those who would be influential in deregulating the industry. Phil Gramm, for example, of the Gramm-Leach-Bliley Act, raised more than twice his entire campaign budget from the securities industry. Banks were arguing on the one hand that they were too big to fail while simultaneously leveraging their size and political power to fight off any government regulations aimed at lowering their chances of failure. As Barney Frank put it: “All these years of deregulation … as these new financial instruments have grown have allowed them to take a large chunk of the economy hostage. And we have to pay ransom, like it or not.”119 The government paid ransom, and Wall Street was up and running in no time, returning to precrisis profits. This is not a new or surprising development. This is exactly the scenario that most worried the early leaders of the Republic and the framers of the Constitution, specifically, James Madison and Thomas Jefferson—a powerful political oligarchy with outsized influence in politics, to the detriment of the population. In 2009, Senator Richard Durbin said, “The banks—hard to believe in a time when we’re facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place.” Senator Elizabeth Warren has also repeatedly voiced outrage at the coziness between Washington and Wall Street, repeating the phrase, “The game is rigged.” Demands are rising across the political spectrum, including from Joseph Stiglitz, Simon Johnson, Paul Krugman, Richard Fisher, and even the king of deregulation, Alan Greenspan, for breaking up the banks.123 We cannot have a banking system that is so large and powerful that it relies on government bailouts. Their size leads to bailouts, and the promise of bailouts in turn leads to more risk-taking, a cycle some have called a “doom loop.” If the deep-seated fears of concentrated bank power had not been pacified over the last several decades, they would surely have intensified during the recent government bailout of the banking industry. As it turned out, the banks and bankers had become so powerful that many efforts to regulate the industry after the bailouts were thwarted.

Source: How the Other Half Banks

The Logic for Why Are Banks to be Saved in the First Place?

But we must not lose sight of the reason we support and even save banks. The purpose of bank bailouts is not to enhance bank profits, it is to enhance credit markets to the people. Government support enables bank customers to benefit from this socially useful credit. But banks can choose their customers, and those they reject do not get to take part in this abundance. When banks categorically exclude half the population from the credit they are entrusted to provide, leaving that unprotected group to the wolves, it creates a glaring disparity and a grotesque irony.It is important, at this point, to revisit the reason the government is so invested in the banking system. As the history of U.S. banking makes clear, and as both the Bush and Obama administrations’ bailouts have underscored, the state relies on the banking system to efficiently allocate credit and capital in the economy. The banking system is supported, protected, and even saved from its own malfeasance because the state needs it—both to effect the state’s own monetary policy as well as to lend to the people. If banks fail, it is reasoned, so will the American people.But many people are failing. They are failing even as the banks are succeeding, and they are failing because the banks are no longer involved in providing them credit. The government has outsourced the provision of credit to the banking system, and it provides this system with state support and cheap credit—cheap credit that is not flowing out to reach those who need it most. In fact, while the government has provided interest rates to banks at 0 percent, it has allowed interest rates to the poor to skyrocket to triple digits. If the intended result is to help the public with credit, why continue to use banks as a medium when they are clearly leaving out a significant portion of the population? Why not provide credit directly to those who need it in order to be certain they get it?

Source: How the Other Half Banks

Who Gets Saved The Banks or the Poor?

When banks are drowning, the government throws them a lifesaver, through cheap credit, so that they can live another day. When the poor are drowning, payday loans are like millstones of crushing debt around their necks. Postal banking could offer to struggling Americans the same type of government credit already given to banks—at a much lower cost and with a much more direct public benefit. The United States has just begun an era in the ongoing evolution of the bank-state relationship in which the government’s stake in the banks is at its historical apex and the banks’ stake in the public’s well-being is at an all-time low. Banks and their wealthy customers reap the benefits of unprecedented public support even as the banks no longer service a significant portion of the population. Cheap credit flows from the government to these banks with a vague but unexpressed hope that it will reach the public. After all, this is the function of banks: to serve as credit intermediaries, or middlemen, between the source of credit and the eventual borrower. But the banks feel no compulsion to democratize credit, and our elected leaders make no such demands. This is, of course, the result of a pervasive ideology of the last several decades that has convinced banks and the public alike that nothing could or should be required of the industry besides assuring shareholder profits.

Source: How the Other Half Banks