Zero Sum game

Josh Marshall of TPM interviews economist Joseph Stiglitz about the current bailout plan. His take should, at once, frighten and madden.

Some highlights:

a. “To a large extent, this is a Zero sum game.” If someone wins, someone must lose. So, either banks win or taxpayers win.

b. In this high stakes environment, a bank’s losing, e.g. Citibank, would mean it is wiped out. Many banks’ balance sheets are so far in the red that current assets cannot possibly sustain the loss.

c. In response to whether bank failure(s) would lead to the often used word, ‘catastophe’, Stiglitz seemed quite sanguine over the matter. It isn’t a big deal. We need to keep in mind, he says, that a bank’s failure does not imply a destruction of any assets, but merely their reorganization. Moreover, there are benefits to allowing bank failure: we change the incentive structure so that long term, as opposed to short term, risk taking is incentivized. Failing CEO’s are fired, new one’s brought in, perhaps motivating private capital injections.

d. Lastly, we taxpayers now essentially own the major banks, given previous large capital injections. The problem is we don’t have, have not given ourselves, ownership control—and that is a disaster or will lead to one. Not for the banks, of course, but for tax payers.

Populist intuitions and general contempt for Wall St., at least in this scenario, seem to be verified. We intuitively understand that we are propping banks up at our own collective expense. And that ‘the shock doctrine’ is being deployed to great effect. Surely, those who have private interest in banks are doing whatever they can to ensure that they win this zero sum game.

It is a sorry state of affairs that Geithner’s and Obama’s plan seem to be facilitating that move. A move which was once referred to as ‘Cash for trash’ should now be called, as Stiglitz memorably puts it, ‘Cash for bundles of trash’. Since there’s no way of pricing this large and complex bundle, how much should we pay? Surely, it will end up being way, way too much.