And the Oscar goes to… a bank?

The 2011 Academy Awards, hosted this year by acting ingénues James Franco and Anne Hathaway, was an attempt by the Academy of Arts and Sciences to reach out to a new, younger audience.  By that measure, the Academy failed miserably, reaching 12% less viewers in the 18-49-age bracket.   Ultimately, the Academy’s strategy, to reach all audiences at once, was baldly transparent and ineffective.  The projected image of Bob Hope, who produced the funniest lines of the night, represented the Academy jumping the shark.

While The King’s Speech, a film about a British monarch overcoming a speech impediment, took the biggest honors of the night, the most competitive and interesting race was for Best Documentary.  Presenter Oprah Winfrey said that, “It has never been more important for us to see these stories to help us try to make some sense of the world we live in.” Five strong films entered, including Sebastian Junger’s Restrepo and Josh Fox’s Gasland. Inside Job, Charles Ferguson’s searing inquiry into the roots of the financial crisis, took the Oscar.  As Ferguson accepted his Oscar, he started by saying, “Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong,”

One can’t help but think that JP Morgan Chase (JPMC) foresaw Inside Job’s victory and the speech by Ferguson, as no less than four times during the Oscar broadcast, their “New Way Forward” commercial appeared, promoting JPMC as a key driver of our ‘recovery:’

Conveniently, JPMC released their annual 10-K financial statement one day after the Oscars, so we can put their claims in perspective.  In 2010, JPMC held just over $50 Billion in wholesale commercial loans to United States businesses, a significant drop from their commercial commitments in 2007 and 2008.  While they are committed to making $10 Billion available to small businesses, that doesn’t mean that they will actually make the loans.  Additionally, their offer of a second review seems reminiscent of the situation when you aren’t getting the assistance you need on the phone and ask to speak with a customer service representative’s manager.  Why is this process necessary, and what does it actually offer to the small businessperson?  More importantly, why are small businesses having trouble getting access to money in the first place?

The quandary over small business loans goes to a larger question: what did the bailout of our financial institutions, through the Troubled Asset Relief Program (TARP) and FED actions, accomplish, if we don’t yet have a strong recovery?   After the financial crisis the Federal Reserve and the Treasury Department bailed out many of our largest banks, including investment banks, through funds from TARP and through access to cheap money from the discount window at the FED.  Many of the banks were overleveraged, and these programs allowed them to recapitalize.  In essence, the government allowed these banks to repair their balance sheet by printing money, and forcing the public to take the loss through devalued currency.  The actions in late 2008 and early 2009 by Hank Paulson, Ben Bernanke, and Tim Geithner certainly prevented a collapse of our banking sector.  The TARP program remains universally unpopular, despite reports that even losses from loans to AIG won’t top $14 Billion, a significant drop from earlier estimates.

During the last few years, banks like JPMC and Goldman Sachs have made tidy profits and made tidy bonus payments, but that hasn’t necessarily translated into an economic recovery.  We have stronger banks, but not a stronger recovery.  The Excess Reserves of Depository Institutions (EXCRESNS) is a valuable lens with which to view this quandary.  In 2009, after nearly 50 years of being near zero, meaning that banks lent out as much as they could based on their reserves, the data jumps to hockey stick proportions.  You don’t have to believe me, you can see the data yourself on the FED’s website.  Many banks are standing pat on reserves that they could be lending.

While JPMC isn’t actually saying much in their Oscar ad, they do sound earnest and committed to a recovery.  I wonder how much that ad cost?  JPMC paid to lobbyists $6.2 Million in 2009 to help make the Dodd-Frank Financial Reform Bill to their liking.  What if JPMC lent that money out to small businesses in 2009, instead?  In retrospect, I think the Oscar voters missed out on an award-winning acting performance by JPMC.

What can key an economic recovery?  Lets look at the stimulus efforts to date, made up of both tax cuts and direct government expenditures.  John Maynard Keynes argued that both tax cuts and government spending would help to increase the GDP, but that government investments were far more effective, driving a more powerful Keynesian multiplier.  In essence, the expenditures recycle themselves more directly into the economy and have a larger impact, whereas tax cuts are often put into savings or used to pay off debt meaning that less money gets recycled back into the economy.

Republicans often argue that tax cuts ‘pay for themselves,’ relying on the unsubstantiated and discredited ‘Laffer curve;’ for example, the Republican House does not require tax cuts to be paid for in regards to the deficit.  With Republican governors continuing to reject direct government stimulus, as Wisconsin and Florida governors recently did with high-speed rail money, this means that our efforts to stimulate the economy will still hurt the deficit, but they will not be very effective.

However, the recent ‘Obama’ tax cuts, the extension of the Bush tax cuts including those on the top 2% of wage earners, amounts to Supply Side economics redux.  Capital gains cuts are similar in their effect to tax cuts, as the windfalls go to wealthy taxpayers who won’t spend the money immediately.  Supply Side economists argue that by reducing tax rates and eliminating regulation, businesses will be able to hire more workers, and increase the GDP.  To date, after many rounds of tax cuts for businesses, unemployment (and more importantly, underemployment) remains high.   Looking at the big picture, the actions of our government in response to the financial crisis is a bit like the Academy – trying to please a lot of different audiences at once, without delivering a clear, concise, and effective message.

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