The Republican prescription: Do nothing

A congressman asks the banking CEOs: Why not let the magic of the market fix Wall Street?

Topics: Globalization, How the World Works, Barney Frank, D-Mass., Wall Street,

Randy Neugebauer, R-Texas, asked the banking CEOs assembled in Washington Wednesday morning why we just don’t “let the market work these things out.”

(UPDATE: In my haste transcribing the live hearing, I originally identified the Congressman asking this questions as Rep. Jeb Hensarling, also a Texan Republican.  That was a serious error, brought to my attention  by Hensarling’s office, and I regret it.)

He was referring to the critical issue of how to resolve the value of the “toxic assets” held by financial institutions. The emerging hard-line Republican position appears to be that the government should not attempt to solve the toxic asset problem by purchasing these assets from the banks itself through some form of “bad bank” strategy, or by coming up with an as yet unspecified scheme to backstop private efforts to purchase these assets at prices higher than what the private sector is currently willing to pay. Instead, the reasoning seems to be, if these assets have such a low value because no one wants to buy them, then the banks just have to suck it up and accept reality. As Sen. Bob Corker, R.-Tenn., said on Tuesday, maybe it’s time to just “take our medicine.” Nobody ever said the free market would be easy!

(NOTE: I now believe I misinterpreted Corker’s position in my post yesterday, when I wondered if he was suggesting that the government should step in and pay whatever it takes to solve the problem.)

Vikram Pandit rejected the idea that Citigroup should be selling off its vast holdings of toxic assets at the (nonexistent) prices the market is currently willing to pay. His ostensible explanation was that the assets aren’t really worth that little — basically: the prices aren’t fair. So he wants to wait for a better price.

The real reason, however, is that Citigroup would no longer continue to exist as a financial institution if it booked the losses that would be entailed by recognizing what the market currently thinks its assets are worth.

So let’s be absolutely clear what Neugebauer is recommending. For starters: the bankruptcy of Citigroup and Bank of America.

Conservative Republicans aren’t the only people in the United States who wouldn’t mind seeing Citigroup and Bank of America fail. There is a great deal of populist anger at Wall Street that crosses political boundaries; an entirely understandable desire to see the companies that helped catalyze the current economic contraction pay for their sins.

But is this a realistic position? The failure of Lehman Brothers set off a global economic crisis and Hank Paulson and Ben Bernanke have been castigated ever since for allowing it to happen. Citigroup and Bank of America are far larger than Lehman Brothers. Allowing them to fail would likely constitute a shock to an already damaged economy greater than anything we have experienced since the depths of the Great Depression. If you want to encourage the mother of all bank runs, then you let Citigroup or Bank of America go down.

That does not seem to me to be a realistic option. Let the market work these things out? Isn’t that how we got here in the first place?

UPDATE: I should note, there is a critical difference between just letting the banks fail, and a government-mediated financial reorganization that to all intents and purposes would be equivalent to a temporary nationalization, as outlined in this interview Josh Marshall conducted with Joseph Stiglitz last Friday. I don’t think that’s what Randy Neugebauer has in mind.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

More Related Stories

Featured Slide Shows

  • Share on Twitter
  • Share on Facebook
  • 1 of 11
  • Close
  • Fullscreen
  • Thumbnails
    Burger King Japan

    2014's fast food atrocities

    Burger King's black cheeseburger: Made with squid ink and bamboo charcoal, arguably a symbol of meat's destructive effect on the planet. Only available in Japan.

    Elite Daily/Twitter

    2014's fast food atrocities

    McDonald's Black Burger: Because the laws of competition say that once Burger King introduces a black cheeseburger, it's only a matter of time before McDonald's follows suit. You still don't have to eat it.


    2014's fast food atrocities

    Domino's Specialty Chicken: It's like regular pizza, except instead of a crust, there's fried chicken. The company's marketing officer calls it "one of the most creative, innovative menu items we have ever had” -- brain power put to good use.


    2014's fast food atrocities

    Arby's Meat Mountain: The viral off-menu product containing eight different types of meat that, on second read, was probably engineered by Arby's all along. Horrific, regardless.


    2014's fast food atrocities

    KFC'S ZINGER DOUBLE DOWN KING: A sandwich made by adding a burger patty to the infamous chicken-instead-of-buns creation can only be described using all caps. NO BUN ALL MEAT. Only available in South Korea.

    Taco Bell

    2014's fast food atrocities

    Taco Bell's Waffle Taco: It took two years for Taco Bell to develop this waffle folded in the shape of a taco, the stand-out star of its new breakfast menu.

    Michele Parente/Twitter

    2014's fast food atrocities

    Krispy Kreme Triple Cheeseburger: Only attendees at the San Diego County Fair were given the opportunity to taste the official version of this donut-hamburger-heart attack combo. The rest of America has reasonable odds of not dropping dead tomorrow.

    Taco Bell

    2014's fast food atrocities

    Taco Bell's Quesarito: A burrito wrapped in a quesadilla inside an enigma. Quarantined to one store in Oklahoma City.

    2014's fast food atrocities

    Boston Pizza's Pizza Cake: The people's choice winner of a Canadian pizza chain's contest whose real aim, we'd imagine, is to prove that there's no such thing as "too far." Currently in development.


    2014's fast food atrocities

    7-Eleven's Doritos Loaded: "For something decadent and artificial by design," wrote one impassioned reviewer, "it only tasted of the latter."

  • Recent Slide Shows



Comment Preview

Your name will appear as username ( settings | log out )

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>