‘Band-Aid on a gaping chest wound:’ former TARP official talks crisis politics with RT
RT:You refer to Washington as “an alien world - a culture more concerned with looking out for themselves or the next headline.” What happened with the TARP program that led you to say such a thing?
Neil Barofsky: It was a remarkable thing coming in. I was a life-long Democrat; I even contributed then to President Obama’s presidential campaign. But I was actually appointed by President Bush, a Republican. It was very striking to me, as a life-long Democrat, how little things have changed. And everything, I think – over time it became increasingly so – was very much politicized. Decisions were made with an eye towards the press cycle: what headlines are going to get generated. And sometimes it resulted in remarkably head-scratching arguments that had very little to do with what TARP was supposed to do. So the official story line – the official narrative that survives to this day – is that TARP worked, TARP was incredibly successful because it helped to preserve the financial system. But that was not what TARP was supposed to do. History was eventually rewritten by the Treasury Department to make it seem that all was TARP supposed to do was Band-Aid over a broken financial system. All those other things, for which there would have never been a bank bailout, all those things that were to help all those people other than the executives at the giant financial systems that just got ignored and brushed away.
RT:You have said that the largest banks in the US did and still do hold a gun to the head of America’s financial system. Why?
NB: Essentially in the most recent stuff that we’ve seen coming out of the Department of Justice – and they have done some big settlements – they’ve done HSBC over sort of a breathtaking amount of money laundering, they’ve done some of the LIBOR cases and interest rate-rigging with some big European banks. One of the questions that has been raised was, ‘why are you not requiring guilty pleas from these institutions?’ The response of the Department of Justice was ‘ if we charge these institutions it could potentially destabilize the entire economic system of the world.’ This is a stunning admission. I give them an ‘A’ for honesty. This means that in essence there are two sets of rules. And now there is a special subset of the Too Big to Fail/Too Big to Jail’ corporations. And that creates a tremendous incentive to commit more fraud, to break more laws.
RT:So who is managing the economy: the government or the banks?
NB: It’s a fair question. A lot of the management of the government in the economy is outsourced to the banks. That’s how TARP was originally run. It wasn’t that the US government has hundreds of billions of dollars and they are going to save these banks for the purpose to put back the money into the economy to increase lending to businesses, homeowners … to get the economy rolling again. But when they did they didn’t do it the way you would think you would have if that was your goal: banks – JP Morgan Chase, here is your $25 billion, but when you use this you are going to agree to increase lending and we’re going to measure it or at least require it … incentivize it, and keep track of it. That is how you think it would be if the government was running the program. That’s not what they did. They gave it to the banks with no strings attached – no conditions, no requirements, no incentives, no transparency. When I said, ‘let’s make the banks tell us what they are doing with the money,’ so we would know their goals, I was told that I was stupid, that I was playing politics – that if I did it myself I would destroy the banking system. This led to Tim Geithner himself cursing me out of a meeting when I suggested that he was anything less than the most transparent secretary of the Treasury in US history. That is all part of that incredible deference that they showed to the banks. Just give the money to the banks and trust them. The banks didn’t use the money for lending, they hoarded it, they lent it back to the government, they invested it, they did whatever they could to maximize their profits. They did everything other than increase lending; lending actually contracted. That is the example of when the government had an incredible amount of control and leverage and chose not to use it.
RT:Is that because banks have so much power and influence in Washington? Is that the number one reason why the banks trumped the homeowners when they came to TARP?
NB: Yes, but it not in the way we think that large corporations have influence in Washington. When we say that we typically think of the money and the campaign contributions and the lobbying, all of that is totally valid. What I saw is totally different, and frankly far more insidious and much more damaging and dangerous. It was more of a complete ideological capture of these individuals. These are people who thought and believed they were doing the right thing, but so identified with the interests of Wall Street and the largest banks that that became the only thing that mattered. But even those people who didn’t come from Washington, like Tim Geithner, Secretary of the Treasury, president of the NY Fed – he never worked in a Wall Street bank, but had so adopted this world view that I don’t think he was lying when he said ‘I’m doing what’s best for the country.’ The problem is that he was so blinded by this prejudice in favor of the Wall Street banks – that’s all that mattered.
RT:How much have the bailouts cost the American economy?
NB: Whenever I have a number I’m recounting what the officials are. The Treasury’s official number is in the order of $50-60 billion in losses on the TARP program. I think that the Congressional Budget Office has a lower number – $24 billion in losses. I’m not sure, but there is a tendency to minimize the cost of the bailout to make it seem that it wasn’t that bad. It glosses over the incredible amount of damage. We are talking about an entire years’ worth of GDP, the entire production of the entire American economy wiped out because of this financial crisis. And one of the biggest costs that we haven’t yet realized in the way the bailouts were conducted is that we put a Band-Aid over a gaping chest wound. We have the same broken financial system that we did in 2008, only with banks that are more concentrated, more powerful and more dangerous. All the bad incentives that led to the crisis in 2008 in many ways are still in place, thus leading to what I believe is the next financial crisis. But there’s still a chance to do things to keep that from happening, which I hope will happen. But if left undisturbed – whether it’s two years, four years or eight years – it’s going to happen again. It’s sort of naïve to look at all the incentives and that are still in the system that caused crisis before and presume that for some magical reason they won’t happen again.
RT:What are the biggest challenges for the US economy at this stage? Is it still the issue of little, or weak, regulation? Is it the power of the banks? Or is it other issues like debt and unemployment?
NF: It’s all short-term, medium-term, long-term, all depending on what you are doing. Right now we have an unemployment crisis in this country. Long-term unemployment – it’s just hast been devastating. Our unemployment rate is too high, it’s been too high for too long. We will have people that are out of work for so many years, it’s going to be remarkably difficult for them to get back to work. This fuels income inequality, which is a significant problem in this country. That is going to be a long-term structural issue that somehow we will need to contend with. A recent study came out saying that this so-called financial recovery … that the top 1 per cent basically gobbled up all the recovery amounts while the richer got richer and the poorer got poorer. These are sort of unsustainable long-term trends that are problematic for the economy. As far as what is the biggest thread of the giant shock, it is still the fragile nature of the banks and the amount of money that it will cost if we don’t arrest it before another crisis strikes. The last crisis cost $13 trillion. One can only imagine what will happen next time. Last time we had a lot of room fiscally. The debts and the deficits we were running since then have given us a lot less flexibility to deal with the crisis. The idea of getting an $800-billion stimulus through Congress in the face of the next crisis may be politically much more difficult. Getting a $700-billion bailout like what we had – in part because of the terrible way the bailout was run and administered – is going to be a problem next time. We could be looking at a crisis that will make the last one look almost pedestrian. So that is potentially medium- to long-term dangerous to the economy, so that if we don’t fix it, it could prove very devastating.
RT:Do you think that Eurozone should embark to something similar to TARP?
NB: I think that Europe’s problem with its banks is probably even worse than ours. European banks are even larger as far as percentage of GDP of their various countries. I think they enjoy even more support through the implicit guarantee, which is all but explicit; the difference between Deutsche Bank and the German government is almost impossible to discern. On a larger level, European banks are beyond too big to fail. So you have a situation there where if these banks get into a crisis, the European governments are going to have to bail them out. But my advice is, don’t do what we did here, which is just preserve that status quo and move on. Europe needs to do the exact thing that US needs to do – break up these institutions.
RT:What do you think it will take for the US banks to face true justice or for the government to actually put citizens before banks?
NB: Nothing is going to happen in the near term. That is pretty clear. The only way to break through and get the types of enforcement we need will be won in the aftermath of another crisis, which will be devastating – and let’s hope that that doesn’t happen. But more realistically, that is probably the way. Secondly, if there is a big enough scandal. The one reliable thing about the largest banks is that they are scandal-producing machines. It’s not surprising. It’s because of the incentives, because of the lack of accountability, lack of punishment; it’s profitable to commit fraud or bend the rules. The difference between now and 2008 that there are a lot more people now – politicians, academics, journalists – who recognize that we have a broken system, that the only path to a stable economic system is by breaking up the largest financial institutions. There’s not enough political power to do it now, but when the time is right there will be enough support to make this move forward and finally get the protections we should have had back then.
RT:How much worse can it get?
NB: We saw glimpses in the Occupy Wall Street movement, in the Tea Party movement – which was originally about the unfairness of the bailouts – that triggered a lot of the Tea Party anger. But we also those movements transform. There is still a lot of anger out there, but it hasn’t found a place to channeled. If we continue to go down this path, it’s almost inevitable that it will once again erupt. The question is, where is that trigger is going to be? Can it turn into a bunch of angry people yelling to a significant political movement? It didn’t happen with the presidential race of 2012. But again, it takes additional external shock to get people into this game. But it is a problem. It is made complex by the banks and politicians in order to make people think it’s more complicated. What I tried to do in my book is to make people understand and realize that you don’t need a doctorate in finance to understand that our finance system is broken. So much of the banks’ lobbying power and the politicians’ power is to try to confuse people with concepts that are untrue; simple distortions of simple economic truths in order to carry their agenda. Trying to educate and bring people up to speed on this stuff is probably part of that process.