Geithner's Protections Are Banking Opportunities Lost

MIT economist Lester Thurow once observed that, “One man’s security [protection] is another man’s lack of opportunity.” Thurow’s words take on greater relevance today given the seeming reluctance on the part of Treasury secretary Tim Geithner and other administration officials to let banks pay back the protective loans foisted upon them through TARP.

So while Geithner suggested in testimony Tuesday that payback might be ok in certain cases, he left himself a lot of wiggle room such that stocks did not retrace all the losses incurred on Monday. Monday’s equity decline was largely due to rumblings from Obama administration officials over the weekend that even healthy banks would face resistance when it came to giving back TARP funds.

The Administration’s reasoning on the above was laid out last Sunday by Lawrence Summers, President Obama’s NEC chairman, on NBC’s Meet the Press. Summers said “We want people to be paying back the government. But we don’t want people to be paying back the government in ways that will put themselves back in trouble and leaving themselves with inadequate capital.” Translated, the Obama administration would prefer a process whereby it could turn the federal government’s preferred shares in banks into equity stakes. Nationalization, here we come.

This serves the Administration’s main purpose in propping up the banks, which is to socialize banking activities. While it pines for a healthy banking system out of one side of its mouth, the Administration speaks with a forked tongue. Indeed, it wants ownership in banks so that interest rates charged customers can be regulated more heavily, loans for strapped customers can be reduced or forgiven, future loans can be directed toward preferred constituents, not to mention that hiring can be restricted at times to those possessing U.S. citizenship. In short, banks will take on the prosaic nature of utilities and other industries given security in the past by government.

While this should properly scare anyone with a basic understanding of markets, it has to be remembered that owing to the Keynesian orientation of many in the Obama regime, spending is spending. Keynesians believe that government spending is investment in much the same way that Microsoft’s $240 million investment in Facebook was. In that sense, if Geithner et al can exercise a greater form of control over banks, government-directed loans will pack just as much economic punch as privately-driven loans, and even better, the money will reach preferred constituents. While sentient minds in the real world would heartily disagree, many in the Obama camp don’t draw a distinction about where money goes so long as it’s being lent.

This perhaps explains Geithner’s argument in favor of banks holding onto the TARP funds. As he noted in an interview with the Wall Street Journal, “You can’t have economic recovery without a financial system.” And without “a financial system you have no credit, which means higher unemployment, lower production capacity and a higher number of failing institutions.”

Nice rhetoric from Geithner for sure, and it’s even the kind of rhetoric that some on the Right bought into last fall in defense of the Bush administration’s imposition of bank bailouts on a country that did not want them. Without well capitalized banks, wouldn’t the financial system implode followed by the rest of the economy?

The above would be true if sources of finance were limited to what we see as the banking system. The happy problem there is that within capitalist economies new substitutes regularly reveal themselves such that industries as we define them regularly take new shapes. Schumpeter was writing about the retail sector, but as he observed, “the competition that matters arises not from additional shops of the same type, but from the department store, the chain store, the mail-order house and the supermarket which are bound to destroy those pyramids sooner or later.”

Indeed, Blockbuster Video was not crushed by a like competitor along the lines of Movie Gallery, but instead by Netflix. When we consider finance, for years retailer Wal-Mart has been panting to get into banking only to be thwarted by many of the same banks presently on life support. Quicken began as a company peddling personal finance software, and ETrade low-cost stock trades, but now both are very much in the loan business. Most in the U.S. think of British retailer Tesco as a retail behemoth, but its lending arm is growing by leaps and bounds.

Looked at from the perspective of banks, it’s quite simply not true that finance would have dried up had one or many big U.S. banks failed. Instead, and as Thurow made clear, their failure would have created an opportunity for substitutes to fill in where their predecessors failed. So while it’s seemingly settled “logic” on both sides of the political aisle that we must empower to an even greater degree the very regulators who proved so unequal to the crises before us, and that occurred on their watch, it seems the better answer is less regulation so that well-run companies inside and outside the financial sector can do what gasping banks could not.

Thurow concluded long ago that “demands for protection” arise due to the abandonment of “belief in the virtues of a competitive, unplanned economy.” His words describe today’s economic environment very well, and as long our federal minders keep offering us false security, the alleged economic recovery will be stillborn thanks to a bipartisan lurch away from the very competitive economic principles that made us so prosperous to begin with.