Goldman Sachs and US demise By Hossein Askari and Noureddine Krichene
I believe that banking institutions are more dangerous to our liberties
than standing armies. If the American people ever allow private banks to
control the issue of their currency, first by inflation, then by deflation, the
banks and corporations that will grow up around them will deprive the people of
all property until their children wake up homeless on the continent their
fathers conquered.
Famous words, but uttered by whom
and when? No, not some socialist or communist. It was none other than president
Thomas Jefferson. The year was 1802. We forget these words at our own peril.
On November 17, the "leader of the pack", aka Goldman Sachs, apologized. Its
chief honcho, Lloyd Blankfein said: "Certainly, our industry is responsible for
things. We're a leader in our industry, and we participated in things that were
clearly wrong and we have
reasons to regret and apologize for."
To show remorse, Goldman Sachs will contribute US$100 million per year for five
years to help small business. Wow! How generous! They only add insult to
injury. After destroying millions of families, businesses and lives all over
America and the world, they will contribute $100 million a year for five whole
years. What are we supposed to say? Thank you?
Let's look at the record and suggest a more appropriate remedy. Goldman was as
responsible as any financial institution in bringing down the entire US
economy, even threatening its own existence. It needed a government bailout and
guarantees to survive; a fact it now denies.
Today, after pocketing the government's helping hand, it is as arrogant as
ever. Goldman received a $10 billion loan (which it has since paid back). It
received $12.9 billion from AIG; let's not forget that the government paid AIG,
and AIG then turned around and paid Goldman 100 cents on every dollar. Which
bankrupt company has ever gotten such a deal? Shouldn't this alone be the
subject of an investigation by the Justice Department? How could the Federal
Reserve and the US Treasury possibly agree to this? Are they businessmen and
businesswomen who guard America's national interests or are they simply
collaborating with Wall Street?
This year alone, Goldman has put aside $16.7 billion for 2009 bonuses. Compare
that to the $100 million it is so generously earmarking for the millions of
lives it has destroyed. Is this a measure of public-private justice? And the US
taxpayer is still on the line to guarantee Goldman Sachs because it is too big
too fail!
Along with loose Fed monetary policy and inadequate lax supervision and
regulation, banks and bankers have been right up there as leading causes of the
worst financial crisis to hit the world since the Great Depression. Instead of
exhibiting remorse, bankers are looking for new ways to extract another pound
of flesh from ordinary Americans. Banks, not just Goldman Sachs, are again
making record profits and plan to pay record bonuses to bankers for their "good
work".
Even after reporting record profits, some institutions want to delay the
repayment of their federal bailouts to avoid dilution in their stock value;
indeed, banks are putting up a fight to resist regulation calling for
disclosure of overdraft fees that can amount to an annualized interest rate
exceeding 3,500%.
The banking industry obviously doesn't get it. A temporary tax should be
imposed on banks that were bailed out to compensate for the damage they have
inflicted on the economy. This is a fair solution.
Our leaders profess surprise and powerlessness and do nothing. The White House,
Congress, the Treasury and the Fed must put aside their own personal interests
and relations with the financial industry, turn a cold shoulder on lobbyists
and, for once, do what is right. The only way banks will learn not to repeat
their greed-driven behavior is if they are held accountable for the financial
crisis.
While the final cost of the banks' irresponsible actions is anyone's guess -
lost economic output in the US (the largest component), bailouts and stimulus
expenditures - one thing is certain: current and future taxpayers will continue
to pay as the exploding US national debt takes its toll. A temporary tax on the
profits of banks would be a small step in exacting a small measure of justice
for millions of ordinary Americans and could perhaps bring about a much-needed
change in the way banks do business.
The taxpayers' bailout of the banking industry has resulted in the prospect of
budget deficits and a rising national debt as far as the eye can see. The
spiraling national debt will not only result in a poor quality of life for our
children and grandchildren, it will also impair other national initiatives. The
US deficit for fiscal 2008 was $455 billion, or 3.2% of gross domestic product
(GDP); in fiscal 2009, the figure has increased to a whopping $1.4 trillion, or
10% of GDP - that is, the highest ratio since 1945; and over the next 10 years
the deficit will be an eye-popping $9 trillion!
President Barack Obama has vowed to reduce the deficit to GDP ratio to 3% by
the end of his first term in 2013, a task that may be all but impossible
without new initiatives. The only solution is to reduce expenditures and
increase taxes. In this, the financial industry must do its fair share.
It will be tough to cut expenditures on entitlements and to increase taxes on
average Americans who are already hurting. There is no other option but to
increase the tax rate on a temporary basis on those who are more fortunate.
This is only fair. Financial institutions that were bailed out should take a
bigger hit than other entities since they brought on the financial crisis and
would have declared bankruptcy had it not been for Uncle Sam. Moreover, unless
something is done to make them take note, banks are going to take us right back
down the same road to ruin - with continued overleveraging, speculation and
price gauging. They have already started exploiting their customers again as
attested by their exorbitant fees for overdrafts.
Here is how a temporary tax would work.
The temporary tax could be levied on the excess profits of all federally
rescued financial institutions, with excess profits defined as the rate of
return on equity (before payment of bonuses) minus the average return for all
sectors of the US economy. The tax would be temporary, enforced until the
estimated damage done by the financial institutions is paid back. The rescued
banks would still continue to make handsome profits for bankers and their
stockholders. Bankers would pay back some of their above-average profits to
reduce the US national debt and to compensate for the damage they have caused
by their selfishness.
If we wait and do nothing, the national debt will become unmanageable, and we
will have to take even more drastic action in the future. Jefferson would turn
in his grave.
Let's make sure we're ahead of the curve for a change. Institutions such as
Goldman Sachs are bringing in huge profits right now. If the government calls
on banks to help clean up their mess, then the American taxpayers might regain
a measure of the trust they have lost in their leaders, who are so susceptible
to lobbyists.
To support this initiative and set an example, the US Fed should also stop
enriching banks by acting as a quasi-fiscal institution. The Fed should stop
paying interest on bank reserves. The Fed should refrain from inundating banks
with free money in the form of zero-interest lending. Banks are not lending the
money to the business. Instead, banks are lending the same money to the
Treasury and are taking big trading risks, and are making obscene profits to
enrich themselves at the national expense.
Such a policy is purely redistributive in favor of the banks, imposing a huge
tax on workers and pensioners, and requiring trillions of dollars in bailouts.
The government must stop frightening Americans by saying that the sky will fall
if they take retaliatory action against the financial institutions that have
been responsible for our economic crisis.
With the dollar in free fall and gold, oil and food prices again on the rise,
foreigners will do whatever they can to protect themselves from losses in their
dollar-denominated assets. We must act now before a full-blown dollar crisis,
an oil crisis and hunger also envelop the world.
Hossein Askari is professor of international business and international
affairs at George Washington University. Noureddine Krichene is an
economist at the International Monetary Fund and a former advisor, Islamic
Development Bank, Jeddah.
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