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Grim Future For US Economy – OpEd

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By Mike Jennings

Credit rating agency Moody’s Corporation has downgraded the debt ratings of the big three US banks, Bank of America, Wells Fargo and Citigroup, reminding Americans once again that the country’s economy is headed in the wrong direction.

The ratings agency lowered the senior debt rating of Bank of America two levels to Baa1 (equvalent of S&P’s BBB+) from A2 (A). Long-term senior ratings were kept at negative, indicating that Moody’s may consider another cut. Short-term debt for the bank was cut from Prime 1 (A-1+) to Prime 2 (A-2).

Wells Fargo’s senior debt went down a notch from A1 (A+) to A2 (A), with its senior long-term ratings kept at negative.

Citigroup’s short-term ratings went from Prime 1 (A-1+) to Prime 2 (A-2), but the agency confirmed its long-term rating of A3 (A-) and Citibank NA’s A1 (A+) long-term and Prime 1 (A-1+) short-term ratings.

Moody’s explained its decision saying that the federal government is “more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute.”

One would argue that lower risk of contagious failure among financial corporation is a glimmer of hope but it would be na?ve to make such an assumption since the mere fact that Moody’s has downgraded three of the biggest banks in the United States means that the chances of their failure has increased.

At the height of the Great Recession of 2007, the Bush Administration’s too-big-fail doctrine – which was later pursued by the Obama Administration — prompted the bailout major corporations ranging from Fannie Mae and Freddie Mac to General Motors.

As part of the bailouts, Bank of America and Citigroup each received USD 45 billion and Wells Fargo received USD 25 billion. In addition to the bailout money, Bank of America also received USD 118 billion in guarantees against bad assets.

The Troubled Asset Relief Program (TARP), however, meant that the banks had to allow some levels of government oversight and a federal cap on compensations, which in turn meant more responsibility and less big bonuses for the CEOs.

The executive compensation caps inserted by Congress into the bill, which allowed the government to bail out troubled financial corporations, prompted the banks to take steps that weaken their financial condition — even as the recovery was sluggish and the outlook of US and global economy was gloomy – and pay back TARP funds in December 2009.

Wall Street Reform and Consumer Protection Act

After the bailouts proved to be not as effective as the government intended, US President Barack Obama vowed to end the practice.

“Never again will the American taxpayer be held hostage by a bank that is too big to fail,” Obama said famously in a weekly address in January 2010.

“Now, limits on the risks major financial firms can take are central to the reforms that I have proposed. They are central to the legislation that has passed the House, under the leadership of Chairman Barney Frank, and that we’re working to pass in the Senate, under the leadership of Chairman Chris Dodd,” Obama continued.

In July 2010, the sweeping reform act which is commonly referred to as the Dodd-Frank financial reform law was signed into law.

In addition to enacting a whole host of regulations and increasing the transparency of derivatives, Dodd-Frank tasked credit agencies to improve their account and tighten their regulations.

Following the downgrade of the three banks’ credit ratings Frank said, “I can’t comment on the absolute value of Moody’s ratings, but I am pleased that the rating agency recognizes that such large institutions are not ‘too big to fail.’”

The cut in the ratings of Bank of America, Citigroup and Wells Fargo followed the downgrade of the United States’ rating from AAA to AA+ by Standard and Poor’s.

Standards and Poor’s downgraded America’s rating after months of warnings that the country’s economic outlook was negative.

To look at the root of the problem, one cannot ignore the fact that Obama’s first economic team – led by Treasury Secretary Timothy Geithner and National Economic Council Chief Larry Summers who were tasked with handling the crisis — was virtually made up of the same people who caused the Great Recession. That is not exactly what you would expect from a president who has promised to bring “Change.”

From 2003 to 2009 Geithner was the President of the Federal Reserve Bank of New York. According to Pulitzer Prize-winning journalist Ron Suskind’s new book titled “Confidence Men: Wall Street, Washington, and the Education of a President,” after being sworn in as the secretary of Treasury, Obama tasks Geithner to devise a plan that would see Citigroup – or at least one of the troubled big banks in the United States – fail.

However, after months Obama realized that Geithner had not been working on such a plan as agreed because “[Geithner] felt he knew more than the president. The president didn’t understand what he was proffering or suggesting, and the president needed to be protected against himself,” reads Suskind’s book, which is a collection of interviews with 200 people within the Obama Administration, including the president.

“A young economist … [once told me that Larry once said] ‘Here’s the way it works. … I can win either side of the argument. That’s my genius. That’s what I do. And then I win both sides and I think about which side I won more fairly when deciding which is right. Sometimes I decide otherwise,’ ” says Suskind. “The young economist who recounts the story says, ‘Jeez, Larry, that gives you an awful lot of power to shape everything,’ and Larry sort of says, ‘Yeah, that’s the point.’ And that’s kind of how Larry sees it – the economic policy will be what Larry decides in consultation with a president who has very, very little in the way of training in economic theory or practice.”

Summers – who was the secretary of the Treasury under President Bill Clinton — did not believe a complete overhaul of the economy was necessary and Geithner – who worked under Summers in Clinton Administration – agreed.

Therefore, President Obama’s decisions were highly affected by his advisers, who one would argue were not probably in the best position to give advice.

Although Larry summers resigned at the end of 2010, Timothy Geithner has maintained his position as the Treasury secretary. As long as people like Geithner – who is largely viewed as sympathetic to Wall Street – are still in charge, there is little hope of improvement in the overall status of the economy.


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Press TV is a 24-hour English language global news network owned by Islamic Republic of Iran Broadcasting (IRIB). Its headquarters are located in Tehran, Iran. Press TV carries news analysis, documentary talk shows and sports news worldwide with special focus on West Asia, Central Asia, and the Middle East.

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