November 10, 2009
Dean Baker
TPM Café, November 10, 2009
See article on original website
Remember way back in 2008 when the three leading contenders for the Democratic presidential nomination all argued in favor of renegotiating NAFTA? We don’t hear much talk about renegotiating NAFTA these days, even though one of the three leading contenders now sits in the White House.
NAFTA is not very popular, so coming out against it sells well with the electorate, especially among people who vote in Democratic primaries. However, the people who vote in Democratic primaries are not deciding trade policy, so it does not look like NAFTA is going to be renegotiated. There is a similar feel to the discussion of new banking rules where everyone is committed to dismantling “too big to fail” institutions.
The basic point is that we have a number of huge banks – Goldman Sachs, J.P. Morgan, Citigroup, Bank of America, Wells Fargo, and Morgan Stanley top everyone’s list – that everyone knows cannot fail. If these banks make bad bets and end up effectively bankrupt (as was the case last fall for Citigroup and Bank of America), the government will step in and bail them out.
This means that lenders don’t have to worry about whether these banks are good credit risks, because they know that the federal government will guarantee their credit. This is a huge subsidy to these banks since it allows them to borrow at a lower cost than their competitors. I calculated that the value of this subsidy may be as much as $34 billion a year.
While everyone agrees that taxpayers should not be subsidizing these financial behemoths, it is not clear that any of the reform proposals will actually address the problem. Needless to say, Goldman Sachs, J.P. Morgan and the rest are incredibly well connected politically. For this reason, it is hard not to feel like we are hearing promises to renegotiate NAFTA. When this round of financial reform is over and done with, in all probability Goldman Sachs, J.P. Morgan and the rest will likely still be standing there, looking pretty much the same as they do now. And the rest of us will still be waiting for NAFTA to be renegotiated.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, “Beat the Press,” where he discusses the media’s coverage of economic issues.
