A single piece of paper may just be one of the most surprising and illuminating documents of the whole banking crisis.
It's a one-page research note from an economist at Deutsche Bank, and it outlines in the clearest terms the kind of solution many bankers are looking for. The basic message: We should forget trying to get a good deal for taxpayers because even trying will hurt.
"Ultimately, the taxpayer will be on the hook one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line," the document says.
In other words, the paper says, if the government tries to save taxpayers money, many people will lose their jobs and the whole economy will suffer.
The research note offers a solution any banker would love: The government should "estimate the highest price it can pay for the various toxic assets on financial institution balance sheets," then pay that price to buy them.
Another economist, Simon Johnson, a professor at the Massachusetts Institute of Technology's Sloan School of Management, wrote about this note on his blog.
"This is a robbery note!" Johnson says. "It's saying, 'Guys, either you'll have 20 percent unemployment or national debt will go up to these dangerous levels, unless you buy toxic assets — not for what they're worth, not for what the market price is, as much as you can pay.' "
Johnson says his "first reaction was: 'It's a spoof.' My second reaction was: 'Oh my God.' "
Who's Going To Lose?
We figured Johnson should argue it out by phone with Joseph LaVorgna, chief U.S. economist for Deutsche Bank and the man who wrote the paper.
Johnson was actually really nervous. He thought LaVorgna would get mad because Johnson called the research paper a robbery note. But LaVorgna was cool.
"I think the bottom line is, simply, someone has to pay for the mess that's been created. And there's no escaping: The taxpayer is on the hook," LaVorgna says.
LaVorgna is finally coming out and saying something that every other bank and lots of government people have avoided saying. They've been suggesting there's some magical recipe with which the government bails out the banks, the banks do better and the taxpayers end up making money. Everyone wins. But the research note states outright what many economists have been warning: That probably can't happen. Someone is going to lose.
LaVorgna is saying he knows exactly who's going lose: you.
"I think, Joe, I found it refreshingly honest. But it also took my breath away," Johnson tells LaVorgna during the call.
So what does LaVorgna think of referring to the document as a ransom note?
"If I was on my own, I'd say fine. But I wouldn't say a ransom note. I'd say a reality check," LaVorgna says. "Simon is exactly right. And this is the issue: We're delaying the pain. You've got to deal with the problem."
Johnson actually agrees with LaVorgna on one thing: American taxpayers are going to have to pay to get the economy out of this mess.
Johnson thinks that if the U.S. is going to spend taxpayer money anyway, it's ridiculous to use it to save the same bankers who caused the current crisis. He likes a different approach: where the government directly takes over banks and then sells them to new owners. Maybe for a profit, maybe for a loss.
David Beim, a former banker who is now a professor at the Columbia Business School, has something to say for people who want to pin this whole thing on the banks.
He has a chart illustrating how much debt American citizens owe, how much we all owe — with our mortgages and credit cards — compared with the economy as a whole. For most of American history, that consumer debt level represented less than 50 percent of the total U.S. economy, as measured by gross domestic product.
And then ...
"From 2000 to 2008, it's almost a hockey stick. It just goes dramatically upward," Beim says. "It hits 100 percent of GDP. That is to say, currently, consumers owe $13 trillion when GDP is $13 trillion. That is a ton."
This has happened before. The chart shows two peaks when consumer debt levels equaled the GDP: One occurred in 2007, the other in 1929.
And that scares Beim.
"That chart is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks. It's something that has little to do with the mechanics of mortgage securitization, or ethics on Wall Street, or anything else," Beim says. "It says: The problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us."
We have overborrowed, Beim says: "We've been living very high on the hog. Our living standard has been rising dramatically in the last 25 years. And we have been borrowing much of the money to make that prosperity happen."
In other words, the problem the banks are facing is the problem we, as a society, are facing: We all have too much debt. And getting rid of it is going to be painful.
If you want a solution in which those who bear the most guilt for the financial crisis pay the most to fix it, while the innocent don't have to pay anything, that's not going to happen.
It seems that the U.S. economy is way past that point. Americans are going to spend a lot of money. The government may bail out some banks that some people wish it wouldn't. There is no magical solution where the U.S. gets out of this mess without any pain.
While they might disagree on who will bear the brunt of that pain, all the experts interviewed for this report say the longer the U.S. waits, the worse it will be for everyone.