The Insightful Trader

US Government can’t Bail out the Banks, Fund the Stimulus, and Maintain the Dollar’s Status Too

by on Mar.29, 2009, under Editorials

     The latest Geithner bank bailout proposal is yet another giveaway to the banks at taxpayer expense.     We just don’t understand why Obama — who is, after all, Geithner’s boss — continues to give the bankers whatever they want. And what they want is to save their skins, even if they manage to destroy our economy along with the strength of the US dollar. All of which means, that if you don’t already own at least some gold, you should.

    If you want to understand what is happening here, you need to understand the politics as much as the finance. The politics began shifting the banks’ way when Reagan got elected in 1980, but the shift accelerated in 1998. That’s when Democrats got tired of being outgunned in fundraising and began courting the banks, and the last check on the banks’ ability to get whatever they wanted from Congress evaporated. As Matt Taibbi reports,  the banks then started sending campaign cash to Congressional Democrats as well as Republicans, and the banks got the deregulation they paid for. Congress repealed the Glass-Steagall Act, which had kept banks with insured deposits out of investment banking and insurance. They also got the Repulbican Senator Phil Gramm’s Commodity Futures Modernization Act, which exempted credit default swaps from regulation. Finally, they got the SEC to regulate with a light hand, or as one wag put it, an invisible hand, allowing securities firms to increase their leverage ratios to 30:1.

    So the banks own the whole political process? Well, not quite, thanks to Howard Dean’s 2004 campaign, which pioneered large scale fundraising from small donors via the Internet. Barack Obama improved on Dean’s strategy. Therefore, while Obama certainly raised lots of cash from Wall Street, he had proved that he could raise plenty of money independently of Corporate America and Wall Street too. Yet Obama acts as if the Street owns him. Why would that be?

    We can only speculate. It would seem that political strategist David Axelrod, whose relationship with the Obama goes back to the latter’s days as a local Chicago pol, lost out in a turf fight with White House economic adviser Larry Summers, who is a Geithner patron and helped preside over financial deregulation under President Clinton. It would seem that Summers needs to defend ande perpetuate his past policies rather than admit any errors. Summers has also seemed to marginalize Paul Volcker, who knows better than to advocate policy like this. And then as we have noted previously, a Buffett factor could be at work… 

    However they were decided, the continued bailouts are going to cost us; we just don’t understand how we can bail insolvent banks out (as opposed to shutting them down the way the FDIC traditionally does), fund enough economic stimulus to turn the economy around, and maintain the US dollar’s international primacy (which requires continuing demand for US Treasury securities). The US might be able to win two out of three but we don’t understand how the US could possibly win the trifecta. So far one-time events such as the repatriation of US investments in foreign countries have helped keep the dollar up, as have troubles in Euroland, which make the Euro look weaker by comparison. Over the long term, though, we wonder where the funding will come from, given that other countries are experiencing a slowdown in the growth of their official reserves.

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