Bailouts are now routine in America, and a lot of disgusted taxpayers have simply tuned out and stopped following the details. That’s too bad, because all that government aid might finally be helping.
I’m not talking about an economic recovery, which is still too far away for most consumers to feel. Instead, I’m talking about signs that accountability is returning to our economy and the better rules of capitalism are once again taking root. Here are some of the indicators:
The bank stress tests. When first announced in February, these were widely expected to be a whitewash that would go too easy on troubled banks, lest investors and consumers get spooked, take their business elsewhere, and make the weak banks even weaker. The results would supposedly be kept secret, a continuation of policies put in place last fall, when there really was a financial panic and any sign of further distress could have triggered a fresh crisis.
[See the best and worst bailed-out banks.]
But the stress tests have turned out to be real tests after all. The worst-case scenarios in the tests – derided by some as too lenient – are still less dire than may actually occur in the real economy. But the government has defied the banks by publishing some of the results and to some extent airing the banks’ dirty laundry. The feds are also effectively dubbing winners and losers, by declaring which banks need more capital and which are okay as is. The tests have determined that banks like JPMorgan Chase, American Express and Bank of New York Mellon, for example, have adequate capital. But others, like Citigroup, Bank of America and Wells Fargo need to raise a lot more.
Identifying the weakest banks was unthinkable last fall, but that’s what the government is doing now. Hooray. The only way to truly clean up the banking mess is to single out the sick banks, figure out what to do about them, and then do it. Acknowledging the weakest links in the system is actually a sign of confidence that the other parts of the system are strong enough to keep the whole thing intact.
The Chrysler bankruptcy. The Obama administration could have poured more money into the ailing automaker, keeping it on life support indefinitely while forestalling job losses and the liquidation of at least part of the company. But by forcing the firm to file for bankruptcy, the government has indicated that there are limits to extraordinary intervention, even in the midst of an awful recession. It has also put its faith in the bankruptcy system, which is an important part of our economy designed specifically to deal with situations like Chrysler. The bailouts of several big banks, AIG, Fannie Mae and Freddie Mac have all taken place outside the normal system. Pushing a significant bailout back into the existing structure is an important step back toward a normal economy.
[See why Chrysler still might not survive.]
The Chrysler creditor brouhaha. President Obama singled out “investment firms and hedge funds” as the villains in the Chrysler drama, for refusing to accept concessions that would have cost them a lot of money. Government negotiators supposedly leaned hard on these Chrysler debtholders to accept just 33 cents on the dollar for their investments. When they refused, Obama announced that “I don’t stand with them….I don't stand with those who held out when everybody else is making sacrifices.”
It must be startling to get flamed during a White House press conference, but since when did the president get to dictate how investors should spend their money? A year ago, it would have seemed abusive, perhaps even illegal, for the government to strong-arm private investors. Last fall, with the markets in a panic, nine big banks took the unprecedented step of doing what the government asked, and accepting bailout money that several didn’t want or need. Now several of them are complaining about government meddling in their business, linked to the payouts. So we should be relieved to see private firms pushing back when the feds lean on them. They have the right to, and in our system, that’s healthy.
TARP paybacks. Most of the firms that have received money from the government’s Troubled Assets Relief Program needed it. But now that they’ve seen the strings that come attached – limits on executive pay, hectoring by members of Congress – several of the firms have decided to pay the money back as soon as they can. A few small banks have already done so, and Goldman Sachs may be one of the first big TARP recipients to return the money. The sooner the better. It’s appropriate for the government to regulate banks, but extremely awkward for it to help run them.
[See why Goldman Sachs should repay its TARP money.]
The return of transparency. The stock markets plunged last year because of bona fide bad news, but also because of fears that even worse news was on the way. With nobody sure which bank would fail next, or whether the feds would be able to ride to the rescue, the markets suffered from one of the worst possible afflictions: unpredictability.
This month, by contrast, something extraordinary happened: The stress tests revealed more bad news about banks like Citigroup and Bank of America, yet their shares actually rose in value. That’s not because investors are pleased that these banks need to raise more funds, possibly from the government. It’s because the tests have cut through the murk and provided clarity about the condition of the banks. Bad news isn’t usually welcome, except when it provides some clarity about the future. In that case, we’re happy to have it.