Bank policy of necessity or calculation?
With Goldman Sachs joining the ranks of banks that want to return their TARP funds, some are wondering if the Obama administration's banking policy is working. Commentator David Frum says it depends on which policy you're talking about.
David Frum (David Frum)
More on Commentaries, America's Financial Crisis
TEXT OF STORY
BOB MOON: We began today talking about those much-anticipated stress test results from the nation's banks. That testing was one of the strings attached to the government's Troubled Asset Relief Program. But lately some financial giants have been questioning whether it's worth getting tangled up in those strings.
Goldman Sachs has raised billions of dollars this week, aiming to repay TARP funds. It would need government approval to give the money back, and it's not clear if or when that might come. Is the government's banking policy working? Well as commentator David Frum sees it, that depends on which one you're talking about.
DAVID FRUM: President Barack Obama has two bank policies. One policy is motivated by economic necessity. The other is motivated by political calculation. The two policies contradict each other. You'll never guess which one is prevailing.
Policy one -- the policy of necessity -- is aimed at getting banks lending again. To do that, the Obama administration has put federal money into banks' hands to rebuild their capital bases. The amount a bank can safely lend is a function of the bank's capital.
Policy two -- the policy of calculation -- imposes all kinds of populist limits on the decision-making of subsidized banks. They have been told how much they may pay or bonus their executives.
This is reasonable enough in the case of true zombie banks like Citigroup. But the same rules are being applied to institutions like Goldman Sachs and Northern Trust, the largest bank in Illinois, that could have stabilized themselves without direct aid.
Northern Trust was pressured into canceling an annual golf tournament the government regarded as too lavish. Northern's mistake: inviting the band Earth, Wind, and Fire to perform. Shortly afterward, the band found a venue at which it was welcome: It performed at the White House for President Obama.
Chafing under policy two, the policy of calculation, some of those financial institutions -- Goldman Sachs most notably -- are talking about repaying their TARP funds.
The Obama administration is resisting. The administration fears that premature repayment of federal money would shrink the banks' capital bases, and reduce their ability to lend, threatening the recovery. So the government is sending a double message to banks: We want you to keep government funds, whether you need them or not. And we want to use those government funds as a justification for dictating to you, whether you asked for them or not.
Agreed: some institutions have provoked populist outrage by their own irresponsible behavior. A little moral restraint would be welcome. But political restraint is not: The message that should be sent back to government is -- back off.
David Frum is a senior fellow at the American Enterprise Institute.
Comments
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From Philadelphia, PA, 04/16/2009
Frum is a "behavioral economist," meaning that he's insane! This pseudo-economics was developed in order to use behavior modification to get people to love their servitude and to create a "concentration camp of the mind" as Aldous Huxley said in the '50's. What is needed is a Pecora Investigation, an orderly bankruptcy reorganization combined with a freeze on home foreclosures (Constitution addresses people before financial institutions) and NOT stimulus or 3Ps (public-private-partnerships)--like Mussolini, but an FDR jobs program, or an Abraham Lincoln jobs program.
From San Diego, CA, 04/16/2009
Frum is suggesting that banks should take the money (from the government) and run. This is the typical strategy that banks and other large corporations have always used in capitalist economies: socialize the risk and losses and privatize the profits.
From Redondo Beach, CA, 04/16/2009
David Frum argues government should "back off" but his one and only example is the canceling of a golf tournament. Really? That's his best instance of White House policy crushing a bank's freedom?
Whom exactly does Frum expect to be outraged by this when his commentary comes on April 15th?
For taxpayers whose idea of a salary bonus is they get to keep their salary, they won't tell the Obama administration to back off. Instead, they'll tell the White House to keep it up.
From Miami, FL, 04/16/2009
We know from basic philosophy that anything can be logically explained and proved to be true, provided that there is no verification of the primary statement. For instance, you first train a frog to jump on commmand; you then cut one limb at a time; with each cut you command the poor frog to jump and it jumps. Once all the limbs are gone you command once more and the frog remains still. Conclusion: frongs lose their hearing when they loose all their limbs.
Mr. Frum remarks have a dark comedic sense, rooted on the belief of strong exercise of Article 19 of the Universal Declaration of Human Rights.
James Keddie said it best on a previous posting. I guess we all should be laughing now.
From Scottsdale, AZ, 04/16/2009
Goldman Sachs "could have stabilized themselves without direct aid"? What are you smoking? Without the $13 billion from AIG's bailout and the $19 billion in guaranteed loans, Goldman would not have had two nickels to trade the markets that money last quarter.
Goldman's trading and underwriting behavior was sociopathic before, during and after our nation's financial markets meltdown. Their disreputable behavior is prima facia evidence that they are the preeminent oligarch responsible for a major share of the financial hardship dealt Main Street by Wall Street. Goldman owes America far more that the funds they borrowed from TARP.
From TX, 04/16/2009
At the risk of facing a backlash from some of the other listeners (readers), I think it's important to keep in perspective a bank's motivators and decision making process.
When the TARP money became available; the country (and likely the decision making entities at most of these banks) was in a severe state of uncertainty (I'll refrain from the term panic, but in my opinion that's not an inaccurate descriptor).
Several big name, seemingly well established, banks had gone under. The banks were stuck holding illiquid assets in a market where the value of those assets were unknown (some would say the values are still unknown). A lifeline was offered to them and they took it. Given the speed at which things happened I'm sure they didn't have time to fully analyze the repercussions associated.
I'm sure if any of us were in a similar situation on an individual level we'd do the same... If you think you're drowning, and someone offers you a life vest you'll likely take it even if there are strings attached. If you later realize the shore isn't that far away and you could have made it... are you wrong then for taking the life vest? Remember that for banks, money is as important as air is to us; their entire business model revolves around money and capital and if they don't have a sufficient amount they go under. Their need for money shouldn't be entirely viewed as greed, anymore than an individual's constant need for air is viewed as greedy. Note: in saying this I don't mean to imply banks and the individuals at those institutions can't be greedy, but just that it's inappropriate to chastise a bank as greedy solely for taking money offered to it.
The key thing to remember is that the environment in which the TARP money was offered to the banks was one in which the banks had less than complete knowledge of their own assets (not due to their own actions but due to the uncertainty of the market as a whole), and the time-frame involved was very short.
Now that we're several months down the road the banks have the benefit of further evaluating their assets, the market and the consequences of the government restrictions associated with taking the TARP money. In addition there's several additional government policies coming into play that have helped (ex: AIG bailout resulted in banks collecting on assets due to them) / will help (the public/private investment plan to buy mortgage backed assets). Plus the banks have had time to evaluate non-taxpayer sponsored ways to raise capital (ex: Goldman Sachs).
In short, if some of the banks want to give back our (taxpayer) money, why wouldn't we let them? I'd love to see that money go to an institution that needs it more, or better yet see the TARP fund downsized and applied towards our national debt (not that this would happen).
If we want to put regulation on the banks (and I think there's a need to at the very least revise many financial regulations, if not impose additional ones)... let's not tie that to TARP money; let's revise the system holistically.
From Richmond, TX, 04/16/2009
Back to Goldman. Sorry Market Place, but you bring Frum on the show. Your risk.
Mr Frum says that the Government "forces" the banks to take the money.
No. Not quite the way it happened.
As I remember one of the "stories", Paulson did call the Bankers to DC. He offered them to opportunity to take the TARP money.... or Not.... Paulson has publically stated that the told the bankers that if they walked out of the meeting without taking the money, that if they needed it down the road, the money might not be there for them.
That's not making them take the money. That's offering them a choice.
Take it now, or out of here with you.
If the banks are as strong as Mr Frum says, why didn't they just walk out of the meeting?
They had a choice.
They stayed. They took the money. And the US Tax payers became the majority equity holder of these companies.
Unfortunately MR Frum, in case you haven't heard, the Majority Equity holder has a LOT of say.
To Market Place.
I love your show. Listen every day, sometimes multiple times. But this Frum spot that you do periodically... questionable!
From Bethel, CT, 04/15/2009
I just want to know if David Frum really subscribes to the principle that the Federal Government could give taxpayer money to any institution, and not exercise oversight as to how it is spent? Some of that money is mine, and I want it watched, by the regulatory agencies, the GAO, and above all, Congress and the Executive, who eventually will come asking for my vote. That's political restraint, and it is absolutely appropriate when taxpayer money is involved. I think it is clear that the overwhelming majority of Americans want this scrutiny.
Does it sometimes stray into micromanagement, and occasional political grandstanding over specific, unpopular items? Yes, but that is a risk we take to maintain accountability.
From Sausalito, CA, 04/15/2009
Whether I agree or disagree with Frum (disagree - Sachs is playing the game, using gov't money as false profit, then balking when they are asked to do something in return) the issue for me is he is never identified as a Right Wing talking head, for the CONSERVATIVE AEI, a former Bush speechwriter, and a Fox News talking head. I think that knowing who this guy really is is crucial to understanding his take on Pres. Obama's policies. I think if NPR is going to use far right talking heads, they should identify them as such.
From Richmond, TX, 04/15/2009
Hmmm... Since Frum's commetary is so often completely off the mark, like the comments on why we all should RENT instead of OWN... I got to thinking...
Is Market Placing deliberating giving him airtime to wind us up and see if we are really listening.....?!! The joke would be on us, the listeners then.... LOL!
Just a thought....
From Richmond, TX, 04/15/2009
On David Frum -
Alternate points of view are a good thing.
If they are informed, just from a different angle.
Mr Frum's views though are obtuse. Why does Mr Frum think that Goldman Sachs could pull themselves out of their mess?
GS took BILLIONs... BILLIONs from the Federal Government... In fact, they changed their charter from an Investment Bank to a commercial bank JUST SO THEY COULD QUALIFY for the TARP money. They were not even eligiable for it... and the government didn't ask them to take any... GS asked for it..
Where was Frum when all of that was going on... The midnight and weekend meetings.... the holding up of the American Tax payer to get BILLIONS of dollars...
I'm sorry... But Frum is JUST WRONG as usual.
Obama needs to lean on the banks EVEN MORE!
Take that Frum..
From baltimore, MA, 04/15/2009
I disagree with Frum's comment about the gov. backing off. We are in this mess precisely because gov. backed off. Just because the child has taken two steps does not mean that you can trust it to walk down the street.
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