Monday, February 9, 2009

Just to reiterate....

There's been a lot of hubbub surrounding the Obama administration's decision to cap executive pay. As has already been noted on this blog by all of its contributors at some point or another: this move by Obama is, to paraphrase arvilla, "a tepid crowd-pleaser" meant to obscure any criticism of capitalism, as such.

I think it's worth re-posting some of Krugman's breakdown of the issue:

"So banks need more capital. In normal times, banks raise capital by selling stock to private investors, who receive a share in the bank’s ownership in return. You might think, then, that if banks currently can’t or won’t raise enough capital from private investors, the government should do what a private investor would: provide capital in return for partial ownership.

But bank stocks are worth so little these days — Citigroup and Bank of America have a combined market value of only $52 billion — that the ownership wouldn’t be partial: pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.

My response to this prospect is: so? If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome."
Right: because they think public ownership is the devil. But they shouldn't they be hard pressed to say, as they have been saying, that this whole 'solution' about 'keeping private enterprise private'. If that were truly what it was about, then the private enterprises would be privately fuct. Were they truly the private, ebullient beacons of free-market glory that the Administration wants to pretend they are, they would be imploding and collapsing before our eyes. If private investors give the banks capital, then they demand partial ownership. If the Federal Government gives the banks hundreds of billions of dollars, they demand nothing except (after some public criticism) that the really, really fat cats keep their compensation under a half million. Is this a joke?

It's also worth re-posting an excerpt from a Willem Buiter column in the Financial Times from a while back. While Krugman suggests that the banks should be taken into public ownership "at least until a private owner is found", Buiter wonders why certain types of banking should be privately-run affairs at all:

Is the reality of modern... capitalism that large private firms make enormous private profits when the going is good and get bailed out...when the going gets bad, with the tax payer taking the risk and the losses?

If so, then why not keep these activities in permanent public ownership?There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.


...either deposit-banking licenses should be periodically auctioned off competitively or depostit-taking banks should be in public ownership to ensure that the tax payer gets the rents as well as the risks.

No comments: