Robert Reich Asks, “Why Save Citigroup Bank and Not Save General Motors?”

In the wake of yesterday’s decision to bail out Citigroup, Robert Reich questions the reasoning that puts such emphasis on saving banks, but so little on saving automobile manufacturers.  Reich says, “Citigroup is not much different from General Motors. It’s a company that once made lots of money but, through a series of management blunders, is now losing money big time. Citi’s shareholders and creditors are taking a beating, just like the shareholders and creditors of GM.”

Reich says there is not a good reason why banks should be saved and auto makers not saved.  Reich says, “In fact, there may be more reason to do the reverse. GM has a far greater impact on jobs and communities. Add parts suppliers and their employees, and the number of middle-class and blue-collar jobs dependent on GM is many multiples that of Citi. And the potential social costs of GM’s demise, or even major shrinkage, is much larger than Citi’s — including everything from unemployment insurance to lost tax revenues to families suddenly without health insurance to entire communities whose infrastructure and housing may become nearly worthless. I’m not arguing that GM should be bailed out; as I’ve noted elsewhere, GM’s creditors, shareholders, executives, and workers should have to make substantial sacrifices before taxpayers should be expected to sacrifice as well.”

Excerpts from Reich’s article:

  • The current panic on Wall Street is not a “run” in this sense. It has almost nothing to do with banks’ roles as financial intermediaries. It’s a run on the shares of Wall Street banks, not a run on the pool of savings they oversee. The mutual funds, pension funds, and deposits they hold are perfectly safe. Before the asset bubbles burst, financial institutions were generating whopping profits, so naturally they attracted many investors and creditors. After the burst, the profits disappeared and their share prices plunged. These days, you’d be hard pressed to find many people who want to invest in or lend to financial institutions. So what?
  • Citi is about to be bailed out while GM is allowed to languish. That’s because Wall Street’s self-serving view of the unique role of financial institutions is mirrored in the two agencies that run the American economy — the Treasury and the Fed. Their job, as they see it, is to keep the financial economy “sound,” by which they mean keeping Wall Street’s own investors and creditors reasonably happy.
  • Because the public doesn’t understand the intricacies of finance, it’s easily persuaded that this is definition of “soundness” is the same as keeping savings flowing to the banks so that the banks can lend to them to Main Street. That’s why the public and its representatives have committed $700 billion of taxpayer money to Wall Street and another $500 to $600 billion of subsidized loans to the Street from the Fed — bailing out the investors and creditors of every major bank, including , any moment, Citi — only to discover, at the end of this frantic and unbelievably expensive exercise, that American jobs and communities are more endangered than they were at the start.
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