Can The Banksters Be Trusted? Short Answer: Not For A Nanosecond

With Republicans determined to fight their vicious political war of obstruction against President Obama, even if it means dragging the country into a decade-long Depression, it looks like they have sabotaged his Stimulus legislation as best they could. Paul Krugman states flatly that the final bill that came of out the Conference Committee isn't enough. In today's NY Times Krugman criticized the Republicans both on their political treachery and economic malfeasance.

One might have expected Republicans to act at least slightly chastened in these early days of the Obama administration, given both their drubbing in the last two elections and the economic debacle of the past eight years.

But it’s now clear that the party’s commitment to deep voodoo-- enforced, in part, by pressure groups that stand ready to run primary challengers against heretics-- is as strong as ever. In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts.

And the rhetorical response of conservatives to the stimulus plan-- which will, it’s worth bearing in mind, cost substantially less than either the Bush administration’s $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq-- has bordered on the deranged.

It’s “generational theft,” said Senator John McCain, just a few days after voting for tax cuts that would, over the next decade, have cost about four times as much.

...And the ugliness of the political debate matters because it raises doubts about the Obama administration’s ability to come back for more if, as seems likely, the stimulus bill proves inadequate.

For while Mr. Obama got more or less what he asked for, he almost certainly didn’t ask for enough. We’re probably facing the worst slump since the Great Depression. The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn’t nearly enough to bridge that chasm.

Officially, the administration insists that the plan is adequate to the economy’s need. But few economists agree. And it’s widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have-- that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support. We’ve just seen how well that worked.

Now, the chances that the fiscal stimulus will prove adequate would be higher if it were accompanied by an effective financial rescue, one that would unfreeze the credit markets and get money moving again. But the long-awaited announcement of the Obama administration’s plans on that front, which also came this week, landed with a dull thud.

But even with the NY Times reporting that some of the nation's largest banks are insolvent and with the L.A. Times reporting that the FBI is preparing a number of major bailout fraud cases against the banksters, bank officials and their reactionary Republican allies are still obsessed with preventing working people from joining unions and have been using bailout money to finance their campaign of lies and distortions against unions. Yes, not lending the money to consumers or businesses, putting together lavish meetings to plot strategy against American workers.

While Alan Greenspan now says he never understood the derivitive-based subprime market, and with the Justice Department seeking new powers to fight the kind of offshore tax evasion that was encouraged and abetted by Republican Party dogma (and winked at by corrupt legislators on both sides of the aisle, coupled with the assertion by William Greider in The Nation that "the governing elites" Inside-the-Beltway and on Wall Street and planning to force President Obama-- in the name of "fiscal responsibility"-- to loot Social Security, it is important to not allow crooked banksters to get away with spending more taxpayer dollars on anything not related to unfreezing the credit markets-- no more bonuses, no more lobbying, no more golden parachutes, no more war on American working families.

The banksters' lobbying slime (AKA, the Financial Services Roundtable) was caught red-handed using taxpayer funds to coordinate a meeting of top executives from insolvent banks at the luxurious Ritz-Carlton Beach Resort in Naples, Florida to put plot strategy for a united front on a range of issues, including their savage war against employee free choice.

Watch (below) how Rep. Keith Ellison (D-MN) catches crooked bankster, Bank of America CEO Ken Lewis, lying to Congress about using TARP funds to lobby against unions, which, when cornered like a rat, he then defended. It becomes clearer and clearer that for the sake of the country, the big banks need to be nationalized, at least temporarily. It's worth reading this preview from a Sunday piece that will appear in the Washington Post by distinguished economists Matthew Richardson and Nouriel Roubini that lays out the case for nationalization. "The U.S. banking system," they write, "is close to being insolvent, and unless we want to become like Japan in the 1990s-- or the United States in the 1930s-- the only way to save it is nationalization."

Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and allow lending finally to resume. Of course, the economy would still stink, but the death spiral we are in would stop.

Nationalization-- call it "receivership" if that sounds more palatable-- won't be easy, but here is a set of principles for the government to go by:

First, and this is by far the toughest step, determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it must determine which are solvent and which aren't in one fell swoop to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.

Second, immediately nationalize insolvent institutions. The equity-holders will be wiped out, and long-term debt-holders will have claims only after the depositors and other short-term creditors are paid off.

Third, once an institution is taken over, separate its assets into good and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.

The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.

Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.

The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms also would be instituted to reduce the chances of costly future crises.

Meanwhile, Glenn Greenwald is suggestion over at Salon today that if there really was a progressive movement in this country agitating for progressive values and principles and policies, President Obama would have a much easier time fighting off the reactionaries-- even if it causes him and the Democratic Party some pain from time to time.