Government Says No to Helping States and Main Street, While Continuing to Throw Trillions at the Giant Banks
by George Washington
The Wall Street Journal noted last week:
Federal Reserve Chairman Ben Bernanke on Friday ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority.
“We have no expectation or intention to get involved in state and local finance,” Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, “should not expect loans from the Fed.”
Congress has also discontinued the Build American Bond program, which was significant in temporarily financing California and other states’ budgets. See this, this, this and this.
That’s unfortunate, given that many states and big cities are in a dire financial situation, and given that Keynesian economists say that aid to the states is one of the best forms of stimulus.
In any event, as Steve Keen points out, giving money to the debtors is much better for stimulating the economy than giving it to the lenders.
Unfortunately, as I will demonstrate below, virtually the entire government economic policy is to throw trillions of dollars at the biggest banks.
Because there are so many rivers and streams of bailout money going to the big banks, I will start with the specifics and end with broader monetary policies.
Tarp: a Preview of Things to Come
The $700 billion dollar TARP bailout was a massive bait-and-switch. The government said it was doing it to soak up toxic assets, and then switched to saying it was needed to free up lending. It didn’t do that either. Indeed, the Fed doesn’t want the banks to lend.
As I wrote in March 2009:
The bailout money is just going to line the pockets of the wealthy, instead of helping to stabilize the economy or even the companies receiving the bailouts:
•Bailout money is being used to subsidize companies run by horrible business men, allowing the bankers to receive fat bonuses, to redecorate their offices, and to buy gold toilets and prostitutes
•A lot of the bailout money is going to the failing companies’ shareholders
•Indeed, a leading progressive economist says that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”
•The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)
And as the New York Times notes, “Tens of billions of [bailout] dollars have merely passed through A.I.G. to its derivatives trading partners”.