Wednesday, October 07, 2009

How the bankers stole our prosperity

How the bankers did it.
The best way to rob a bank is to own one.

These two authors are among the few who can write about economics in a clear way. Here they describe how the bankers robbed the economy and caused the current recession.

Good Billions After Bad

By Donald L. Barlett and James B. Steele
Vanity Fair
October 2009

Just inside the entrance to the U.S. Treasury, on the
other side of a forbidding array of guard stations and
scanners that control access to the Greek Revival
building, lies one of the most beautiful interior
spaces in all of Washington. Ornate bronze doors open
inward to a two-story-high chamber. Chandeliers line
the coffered ceiling, casting a soft glow on the marble
walls and richly inlaid marble floor. In this room,
starting in 1869 and for many decades thereafter, the
U.S. government conducted many of its financial
transactions. Bags of gold, silver, and paper currency
arrived here by horse-drawn vans and were carted
upstairs to the vaults. On the busy trading floor,
Treasury clerks supplied commercial banks with coins
and currency, exchanged old bills for new, cashed
checks, redeemed savings bonds, and took in government
receipts. In those days, anyone could observe all this
activity firsthand-could actually witness the
government and the nation's bankers doing business. The
public space where this occurred became known as the
Cash Room.

Today the Cash Room is used for press conferences,
ceremonial functions, and departmental parties. And
that's too bad. If Treasury still used the room as it
once did, then perhaps we'd have more of a clue about
what happened to the billions of dollars that flew out
of Treasury to selected American banks in the waning
days of the Bush administration.

Last October, Congress passed the Emergency Economic
Stabilization Act of 2008, putting $700 billion into
the hands of the Treasury Department to bail out the
nation's banks at a moment of vanishing credit and peak
financial panic. Over the next three months, Treasury
poured nearly $239 billion into 296 of the nation's
8,000 banks. The money went to big banks. It went to
small banks. It went to banks that desperately wanted
the money. It went to banks that didn't want the money
at all but had been ordered by Treasury to take it
anyway. It went to banks that were quite happy to
accept the windfall, and used the money simply to buy
other banks. Some banks received as much as $45
billion, others as little as $1.5 million. Sixty-seven
percent went to eight institutions; 33 percent went to
the rest. And that was just the money that went to
banks. Tens of billions more went to other companies,
all before Barack Obama took office. It was the largest
single financial intervention by Treasury into the
banking system in U.S. history.

But once the money left the building, the government
lost all track of it. The Treasury Department knew
where it had sent the money, but nothing about what was
done with it. Did the money aid the recovery? Was it
spent for the purposes Congress intended? Did it save
banks from collapse? Paulson's Treasury Department had
no idea, and didn't seem to care. It never required the
banks to explain what they did with this unprecedented
infusion of capital.

…Rather than targeting the weak for relief-or allowing
them to fail, as the government allowed millions of
ordinary Americans to fail-Paulson and Treasury pumped
hundreds of billions of dollars into the financial
system without prior design and without prospective
accountability. What was this all about? A case of
panic by Treasury and the Federal Reserve? A financial
over-reaction of cosmic proportions? A smoke screen to
take care of a small number of Wall Street institutions
that received 100 cents on the dollar for some of the
worst investments they ever made?

More than five months after the bulk of the bailout
money had been distributed into bank coffers, Elizabeth
Warren plaintively raised the central and as yet
unanswered question: "What is the strategy that
Treasury is pursuing?" And she basically threw up her
hands. As far as she could see, Warren went on,
Treasury's strategy was essentially "Take the money and
do what you want with it."

Donald L. Barlett and James B. Steele are Vanity Fair
contributing editors.

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