Foreclosure Crisis Is Aggravated by Unhealthy Banks
Simon Johnson an economist from MIT opines that the foreclosure crisis has been aggravated by unhealthy banks. He said, “A desperately ill banking sector that threatens to choke off any incipient recovery is a network of connections and ideology that give the financial sector a veto over public policy, even as it loses popular support.”
Nobel Laureate Joseph Stiglitz said that the political clout of the banks is there for all to see – naked and brazen. He commented that a “relatively small” contribution of $5 billion towards campaigning from these banks, “succeeded in transferring losses to the public estimated well in excess of a trillion dollars.” He described the government at Washington to be the only source of capital for the lenders. But Washington has been suppliant and giving the banks whatever they want. They have wrung out satisfactory deals by instilling fear in Washington about the meltdown of the system.
The financial oligarchs get their power not from political power or ability to threaten but because of the reigning ideology of belief in the apparently free-market. So long as Wall Street prospers, this view will keep its hold on the world. The general idea is that if Wall Street is happy everybody is happy.
Johnson explains that the favourite villains in the drama are the policy of lowering interest rate, the doing away of regulations and pampering of Fannie Mae and Freddie Mac. There is one common theme among these three – all of them catered to the best interests of the financial system and not that of the public.
Johnson elaborated, “The power of the financial sector goes far beyond a single set of people, a single administration, or a single political party. He added that the “bloated, ungovernable, and predatory institutions that were at the center of the crisis” should be cut up into small local firms or business entities.
Stiglitz is of the opinion that more competition is the answer to the theory of these banks being “too big to fail”. The financial segment has actually become obese and loud gorging on too much income in relation to what it returns to society at large. He said, “These big banks are not responsible for whatever dynamism there is in the American economy. The high returns that they earned in the past were the result of risk taken at the expense of American taxpayers. Being too big to fail creates perverse incentives for excessive risk taking.”
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