Big Banks Break Economic Backbone
9:56 AM
by Nick Stone of Drawnlines Politics.
One of the very few times I was frustrated with John McCain’s on the campaign trail last year was when he “suspended his campaign” just before the first presidential debate and went to Washington to enter the fray and help broker a deal with the president and Congress over financial bailouts. Over a few days in mid-September, McCain effectively handed the presidency to Obama. Many of us who vehemently supported him were appalled by his support over the bailouts, and undecideds were unnerved by his apparent erratic behavior surrounding the events.
I’m slowly and reluctantly reconsidering McCain’s support for the bailouts.
Through the Drawnlines Blog, I continued to support the candidate’s decision for two reasons. Firstly, we knew that the financial sector was beginning a freefall with one domino prepared to take down others until whole sectors of our economy were obliterated. We knew something huge was happening,but it was unclear what the repercussions of doing nothing would be. Secondly, I applauded the candidate for feeling that he had to do something instead of giving speeches about tightening our belts and personal restraint. I strongly felt that the Obama campaign treated it as another “inflate your tires” (but don’t dare suggest tapping into that giant pool of energy right below your feet) strategy that infuriated me in every iteration.
So, while I myself had whiplash, I had to trust that I was supporting a man that had a long resume, was the gold standard of both ethics and reform, and had access to information I was fortunate enough not to have to know. He was the “man in the arena” and decisive action had to be taken.
I’m compelled to write this editorial because the value of hindsight has provided me endless reading material in the financial fallout aftermath of the past year as more details and more specifics have bubbled to the surface. It is now striking and obvious how important the decision to “do something” was in the wake of the Bear Stearns and Lehman Brothers disasters. Today's job situation might be far worse had we let the dominoes fall.
Access to financial capital is absolutely critical for small and medium sized businesses. Conservatives rightly tout these companies as “the backbone of our economy” and until you read the jobs numbers, you’ll have no clue how true that is. In a WSJ editorial on October 16, Ann Lee wrote “The Banking System is Still Broken.” While her conclusion that the banking system might need to be nationalized is probably an overreach, it was the layout of the employment figures that jumped off the page.
According to Lee, businesses of less than 50 employees account for 48 million jobs in America. Businesses of 50-499 employees come in at 42 million, and 500+ companies at a surprisingly low 17 million jobs. Lee says, “Without access to capital, these small and medium-sized businesses will continue to lay off their employees, creating a vicious cycle of shrinking consumer credit and demand.” How true that is, especially with hindsight as a guide.
The idea leads me to ask: If a bank (or any other business) is “too big to fail”, isn’t it too big to exist? Something certainly has to be done to make sure that the country isn't taken to the brink again, and the debate over the "what" is a polarizing and highly ideological one. Whether we break up the big banks, remove risk incentives, reduce salaries or tighten the collar on investors remains to be seen. For Americans who have lost everything, the ends will matter little. Small businesses need access to cash so they can expand and hire. Period.
As the debate continues over financial reform, many businesses struggle with low liquidity and tight credit. The layoffs that follow are resulting in record foreclosures while unemployment continues to climb. This is the vicious cycle that would only be worse if we had done nothing.
There's ALWAYS something new happening at Drawnlines Politics.
For videos and archives visit our homepage
Check out our new Election Center!
I’m slowly and reluctantly reconsidering McCain’s support for the bailouts.
Through the Drawnlines Blog, I continued to support the candidate’s decision for two reasons. Firstly, we knew that the financial sector was beginning a freefall with one domino prepared to take down others until whole sectors of our economy were obliterated. We knew something huge was happening,but it was unclear what the repercussions of doing nothing would be. Secondly, I applauded the candidate for feeling that he had to do something instead of giving speeches about tightening our belts and personal restraint. I strongly felt that the Obama campaign treated it as another “inflate your tires” (but don’t dare suggest tapping into that giant pool of energy right below your feet) strategy that infuriated me in every iteration.
So, while I myself had whiplash, I had to trust that I was supporting a man that had a long resume, was the gold standard of both ethics and reform, and had access to information I was fortunate enough not to have to know. He was the “man in the arena” and decisive action had to be taken.
I’m compelled to write this editorial because the value of hindsight has provided me endless reading material in the financial fallout aftermath of the past year as more details and more specifics have bubbled to the surface. It is now striking and obvious how important the decision to “do something” was in the wake of the Bear Stearns and Lehman Brothers disasters. Today's job situation might be far worse had we let the dominoes fall.
Access to financial capital is absolutely critical for small and medium sized businesses. Conservatives rightly tout these companies as “the backbone of our economy” and until you read the jobs numbers, you’ll have no clue how true that is. In a WSJ editorial on October 16, Ann Lee wrote “The Banking System is Still Broken.” While her conclusion that the banking system might need to be nationalized is probably an overreach, it was the layout of the employment figures that jumped off the page.
According to Lee, businesses of less than 50 employees account for 48 million jobs in America. Businesses of 50-499 employees come in at 42 million, and 500+ companies at a surprisingly low 17 million jobs. Lee says, “Without access to capital, these small and medium-sized businesses will continue to lay off their employees, creating a vicious cycle of shrinking consumer credit and demand.” How true that is, especially with hindsight as a guide.
The idea leads me to ask: If a bank (or any other business) is “too big to fail”, isn’t it too big to exist? Something certainly has to be done to make sure that the country isn't taken to the brink again, and the debate over the "what" is a polarizing and highly ideological one. Whether we break up the big banks, remove risk incentives, reduce salaries or tighten the collar on investors remains to be seen. For Americans who have lost everything, the ends will matter little. Small businesses need access to cash so they can expand and hire. Period.
As the debate continues over financial reform, many businesses struggle with low liquidity and tight credit. The layoffs that follow are resulting in record foreclosures while unemployment continues to climb. This is the vicious cycle that would only be worse if we had done nothing.
There's ALWAYS something new happening at Drawnlines Politics.
For videos and archives visit our homepage
Check out our new Election Center!
Posted by Nick Stone
on 9:56 AM.
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If it was truly unclear what the repercussions of doing nothing would be, how can you say that "we knew that the financial sector was beginning to freefall... until whole sectors of our economy were obliterated"? I don't think doing "nothing" was such a bad idea.
I think McCain did the right thing by "suspending his campaign". It might not have been what he should have called it, but it was correct for him to focus on the issue so consuming the nation. The outcome was the problem; his decision to support the bailout. If he had proposed and worked to have passed a solution, it would have gone better for him. I would have preferred that he too do "nothing" compared to what they did do. Unemployment might have been higher, but it also may have peaked much earlier (i.e. by now, if not by Spring/Summer 2009). The constant government in and government out (a la Cash for Clunkers, homebuyer tax credit, extension of unemployment benefits, and so forth) only confuses the situation and leads to additional instability in the system.
I used to think that "too big to fail" meant that it was literally too big to fail, as if such an organization existed. I now realize that "too big to fail" to the government means "too big to not intervene". As you wrote, it really means that the organization is "too big to exist". If any organization has that much power, it has a monopoly.
Well, I think the point is that we were in uncharted waters and had to put faith in smart people to do what was right. Obviously the preferred answer would be as little government intervention as possible.
But the subpoint is that if we are going to intervene, let's intervene. If big banks are the problem, then let's make sure they never get to be so behemoth that they can hurt the economy again. Then we can let them loose to lend and invest in our people.