Citizens don’t understand why the banks that caused the crisis now receive great government support.
Opinion polls in the United States reveal great citizen discomfort and annoyance with the banks. They don’t understand how the institutions that provoked crisis have obtained great government support now show big profits, have raised the salaries of executives and are still reducing credit.
Obama, in open deception, announced measures to limit the size and risk of the banking institutions. He established taxes that vary with the size of the banks, denied the utilization of bank deposits in order to carry out risky operations, and prohibited commercial banks from possessing and investing in hedge funds.
Of late, the financial institutions have operated with enormous advantages through the inter-relations between them and risk management. Those bankrupting financial institutions will just move on to other sectors, forcing the government to provide bail-outs and speculative opportunities in order to avoid the greater of two evils. Moreover, financial players make large profits by taking large risks, but if a risk fails, they shift losses to others. Contrary to the postulates of Adam Smith, in order to justify the free market, individual gain is reached by injuring society.
Regardless of the existing theories attributed to the progress of capital or technology, the growth of the United States depends on the financial sector and speculation. From 1982-2007, the economy underwent a continued elevation of stock prices and stable growth, and the market’s collapse signified the worst performance since the thirties. Looking back, one can see a strong relationship between the prices of shares and economic growth. Without going very far, the curbing of the recession at the beginning of 2009 was preceded by stock market recovery. The explanation was simple. The elevation of stock market prices generates wealth that spreads consumption and investment.
The stock market appears as the main bond between the monetary and real sector. Therefore, the economic authorities have become the principal promoters of the stock market. Bailouts are given so that institutions will raise share prices, grant credit and move their interest rates.
Obama didn’t stop causing fissures in his economic team. Without a doubt, they are in open conflict with Bernanke and Geithner, who, during the Bush administration, were big promoters of the stimulus that generated the rise and fall of the market, as well as with Summer, the designer of the 1999 Clinton administration deregulation law that fused commercial and investment banks. Moreover, the effects on the markets didn’t delay in manifesting themselves. In the last week, the Dow Jones dropped 5 percent.
Obama’s intuition is correct. If the bailout continues elevating stock prices, the economy will recuperate with a fragile structure of bubbles that will extend the inequalities of U.S. society and continue to burst.
Unfortunately, the measures are only partial and do not include structural aspects. Without action from the Fed, which is responsible for the relationship between productive activity and the financial sector as well as the monetary politics of interest rates, only attempts to raise stock prices as a method of controlling market cycles can be used. This opens the door for the combination of fiscal and monetary politics, leaving the autonomy of the central bank in doubt. The most serious part is that there has been no progress to replace the rampant speculation with exports and industrial production for the domestic market. In this context, the decrease of speculative opportunities depresses the price of the stocks and weakens recovery.
The crossroads of the U.S. is that, in the interest of the free market, progress was tuned to the engine of the stock market and asset valuation. Obama’s proposal for limiting the size and the risk of the banks is necessary, but insufficient.