What A Liberal Would Have Done

I saw this post by James Galbraith on what Obama should have done to stem the financial crisis.

Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.

Team Obama did none of these things. Instead they announced "stress tests," plainly designed so as to obscure the banks' true condition. They pressured the Federal Accounting Standards Board to permit the banks to ignore the market value of their toxic assets. Management stayed in place. They prosecuted no one. The Fed cut the cost of funds to zero. The President justified all this by repeating, many times, that the goal of policy was "to get credit flowing again."

The banks threw a party. Reported profits soared, as did bonuses. With free funds, the banks could make money with no risk, by lending back to the Treasury. They could boom the stock market. They could make a mint on proprietary trading. Their losses on mortgages were concealed -- until the fact came out that they'd so neglected basic mortgage paperwork, as to be unable to foreclose in many cases, without the help of forged documents and perjured affidavits.

Maybe it wouldn't have been as easy as it sounds here, but the fact is that the bail-out plan was not successful and has not gotten us out of the woods. One of the reasons banks are able to report profits again is because much of their balance sheets are not properly valued. We see this with single-family mortgages, and we definitely see it with the multifamily stock.

The solution so far has been to be easy on banks, lest they fail. But while Obama is going easy, state and local governments - and homeowners and tenants - are paying the price. All so that we didn't have to take over the banks and be accused of being socialists. Except that happened anyway.