Sunday, March 08, 2009

Day of Infamy

Last week I wrote about a day of infamy, but did not get around to talking about this. I was too happy about President Obama following through on his pledge to get our military forces out of Iraq. On that same day, the government did something that was not so good. The Fed essentially took control of Citibank.

But wait, we've heard Secretary Geithner and Chairman Bernake both say that they oppose nationalization of our banks, and assure us that what we are doing at Citibank is not nationalization. This is a classic case of mincing words. The Fed has not only assumed a commanding position of ownership, but they have already begun dictating the company's policies. They have remade the board of directors and mandated policies on employee compensation and lending standards. This is de facto control. It's like in The Sopranos when Uncle Junior was the nominal leader of the Jersey mafia, but everybody knew that Tony was calling the shots. This is what has happened with the US and Citibank. The US is Tony and Citibank is the Jersey mafia. The actual executives might as well be old, senile, and in jail.

Now the government has taken control of banks before, most notably in the S&L runs back in the 80's. This was always done to liquidate the assets of the bank. Maybe that is what is going on with Citibank, and the government is misleading the public because ... well who knows.

I do not think so. The government wants banks to loan money. They want businesses to borrow and hire workers. They want consumers to borrow and spend. This is not happening, for many very good reasons. If you are a bank, you need to clean up your balance sheet by increasing your cash and reducing your risky investments. If you are a consumer, you need to increase your savings and reduce your debt. But if the government has control over large banks, they can make the bank forget about increasing cash and reducing risk. They can offer up loan to any and everybody. They can make it really hard on consumers to resist the temptation of free money. Imagine getting a letter in the mail everyday saying that you have been pre-approved for a new credit card with a 0% interest rate and a $100,000 limit! It's the modern day version of the chicken in every pot.

And so it is that I think February 27 will be a day of infamy in American history. It may be the beginning of an era where the government is an essential part of all economic activity in America. Want to buy a house? Ask the government. Want to buy a car? Ask the government. Want to send your kids to college? Oh wait, nevermind on that one. Want to plan for retirement? Umm ...

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