Monday, May 23, 2011

Strawmen vs.real bad guys

Mr. Akst’s article about banks is an example of misdirection that would make Houdini proud. The formula is predictable: Lead with something about the Bad Guys - CEO’s make a lot of money and credit card rates are high - to stir the populist pot; link that to the need for unavoidable Government action - holding rates down; and throw in a sympathy line - Grandma is paying for this).

The implications are that Grandma is paying CEO salaries, that Banks are holding down their borrowing rates, and that the government is the white knight that will correct this mess. Well, no it is not.

CEO salaries have nothing to do with Fed Rates or Grandma; perhaps shareholders should hold them more accountable but that is another discussion.

The bailouts (all of them, some of them?) were not unavoidable. The Government’s responsibility was to honor the guarantees they made on the sub prime mortgages that Fannie Mae and Freddie Mac were pushing and securitizing. The sub prime market was their creation in an effort to support the Government’s social policies.

Banks are certainly beneficiaries of the Federal Reserve policy of artificially keeping interest rates low but they do not make the policy and the policy is certainly not unavoidable. It is the Federal Reserve that sets the rate and has printed trillions of dollars in the last few years. This devaluation has made everything more expensive – gas, clothes, food, - everything. This is inflation that Bernanke does not recognize but it does impact Grandma. Her savings have less value and her monthly check buys less but has nothing to do with the banks, their CEOs or their salaries. The Fed is just supporting the Administration’s announced policy of making oil more expensive.

Some banks credit card rates are higher than other - so shop around – some cars cost more than others. It should also be noted that recent Government legislation limits the fees for overdrafts, bounced checks, exceeding card credit lines and such. This spreads the costs for these things from the people who do them to everyone. The government thinks that is only fair but means that Grandma is paying for bounced checks whether she does or not.

It has a favored tactic to link government action to protecting people. Just set up some bad guys – banks, oil companies, insurance companies, drug companies – and link anything that goes wrong to them. It keeps the pressure off of the ineptitude of Government actions.

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