Friday, August 12, 2011
The World's Money Is Draining Away ... Where's It Going?
Spiegel asks:
"Is The World Going Bankrupt?"
That is an odd question.
If some people are losing money, others must be gaining money, right?
But where is all the money going?
Bloomberg's Jonathan Weil hints at the answer in a post entitled "Is There Enough Money on Earth to Save the Banks?"
Two years ago the central planners convinced investors that the biggest surviving financial institutions would be able to earn their way back to health, in part through low interest rates and taxpayer support. The pressing question soon may be whether there is enough money on the planet to save the system as we know it, and if so, how much longer it will be before a crisis comes along that finally swamps the ability of governments to contain it.
One-hit wonders such as Fed-induced stock-market rallies can induce euphoria momentarily. They don’t fix the big problem.
As I've previously noted, the giant banks are drawing the American and world economy down into a black hole. If we don't break up the giant banks now, they'll be bailed out again and again, and virtually all independent economists and financial experts say that will drag the world economy down with them.
Indeed, many economists and financial experts say that we'll have a never-ending depression or perpetual zombification unless the banks and bondholders are forced to write down their bad debt.
But the question remains: if all of the world's money (of the Western world, anyway) is draining out, where's it going to?
Economists note:
A substantial portion of the profits of the largest banks is essentially a redistribution from taxpayers to the banks, rather than the outcome of market transactions.
Indeed, all of the monetary and economic policy of the last 3 years has helped the wealthiest and penalized everyone else. See this, this and this.
A "jobless recovery" is basically a redistribution of wealth from the little guy to the big boys.
The Bush tax cuts and failure to enforce corporate taxes also redistribute wealth to the top 1%. See this and this.
Economist Steve Keen says:
"This is the biggest transfer of wealth in history", as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.
Nobel economist Joseph Stiglitz said in 2009 that Geithner's toxic asset plan "amounts to robbery of the American people".
And economist Dean Baker said in 2009 that the true purpose of the bank rescue plans is "a massive redistribution of wealth to the bank shareholders and their top executives".
The money of individuals, businesses, cities, states and entire nations are disappearing into the abyss ...
... and ending up in the pockets of the top .1% richest people.
Thursday, July 21, 2011
Debt Crisis Being Used as Shock Doctrine to Steal More Money from the American People to Give to the Richest 1%
I noted in 2008:
The powers-that-be have used the "Shock Doctrine" to pass anti-American, fascist legislation while the public was in a state of shock.
This applies to economic shocks, as well as physical attacks like 9/11.
Indeed, right now, Paulson and Bernanke are using the shock doctrine to try to ram through legislation that would help out the fat cats at the expense of taxpayers, and give the government control over the free market.But there is some resistance. For example, Senator Leahy and the New York Times are questioning Paulson's use of shock and awe:
- Senator Leahy said "If we learned anything from 9/11, the biggest mistake is to pass anything they ask for just because it's an emergency"
- The New York Times wrote:
"The rescue is being sold as a must-have emergency measure by an administration with a controversial record when it comes to asking Congress for special authority in time of duress."***
Mr. Paulson has argued that the powers he seeks are necessary to chase away the wolf howling at the door: a potentially swift shredding of the American financial system. That would be catastrophic for everyone, he argues, not only banks, but also ordinary Americans who depend on their finances to buy homes and cars, and to pay for college.
Some are suspicious of Mr. Paulson’s characterizations, finding in his warnings and demands for extraordinary powers a parallel with the way the Bush administration gained authority for the war in Iraq. Then, the White House suggested that mushroom clouds could accompany Congress’s failure to act. This time, it is financial Armageddon supposedly on the doorstep.
“This is scare tactics to try to do something that’s in the private but not the public interest,” said Allan Meltzer, a former economic adviser to President Reagan, and an expert on monetary policy at the Carnegie Mellon Tepper School of Business. “It’s terrible.”
The Tarp bailouts were passed using apocalyptic - and false - threats. For example, as I've previously reported:
The New York Times wrote last year:Indeed, all of the other "emergency" economic and monetary measures - like quantitative easing - didn't help the American people, but just helped the richest 1%. And most of the bailout and "easy" money went to foreign banks (and see this, this and this).In retrospect, Congress felt bullied by Mr. Paulson last year. Many of them fervently believed they should not prop up the banks that had led us to this crisis — yet they were pushed by Mr. Paulson and Mr. Bernanke into passing the $700 billion TARP, which was then used to bail out those very banks.Indeed, Congressmen Brad Sherman and Paul Kanjorski and Senator James Inhofe all say that the government warned of martial law if Tarp wasn't passed:
That is especially interesting given that the financial crisis had actually been going on for a long time, but - instead of dealing with it - Paulson and the rest of the crew tried to cover it up and pretend it was "contained", and that it was obvious to world leaders months earlier that it was not a liquidity crisis, but a solvency crisis (and see this).
Bait And Switch
The Tarp Inspector General has said that Paulson misrepresented the big banks' health in the run-up to passage of TARP. This is no small matter, as the American public would have not been very excited about giving money to insolvent institutions.
And Paulson himself has said:During the two weeks that Congress considered the [Tarp] legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets—our initial focus—would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.So Paulson knew "by the time the bill was signed" that it wouldn't be used for its advertised purpose - disposing of toxic assets - and would instead be used to give money directly to the big banks?Senator McCain also says that Paulson pulled a bait-and-switch:
Even the New York Times called Paulson a liar in 2008:Sen. John McCain of Arizona ... says he was misled by then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. McCain said the pair assured him that the $700 billion Troubled Asset Relief Program would focus on what was seen as the cause of the financial crisis, the housing meltdown.
"Obviously, that didn't happen," McCain said in a meeting Thursday with The Republic's Editorial Board, recounting his decision-making during the critical initial days of the fiscal crisis. "They decided to stabilize the Wall Street institutions, bail out (insurance giant) AIG, bail out Chrysler, bail out General Motors. . . . What they figured was that if they stabilized Wall Street - I guess it was trickle-down economics - that therefore Main Street would be fine."“First [Paulson’s Department of Treasury] says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. Fearing Congress’s reaction, he didn’t tell the Hill about his change of heart.What tax breaks is the Times talking about? The article explains:
Now, he’s shifted gears again, and is directing Treasury to use the money to force bank acquisitions. Sneaking in the tax break isn’t exactly confidence-inspiring, either.”A new tax break [pushed by Treasury], worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”
The Same Thing Is Happening With the Debt Ceiling
The same thing is now happening with the debt ceiling.
We know that the productive actions which would reduce the debt and fix the economy are not being discussed. See this, this, this, this, this and this.
What is being discussed would just steal more money from the American people and give it to the richest 1%. For example, Congress is planning on selling off "unused federal property". Selling off and privatizing public assets and resources is a core tactic in shock doctrine schemes.
As Matt Taibbi shows, another tax holiday for big corporations is one of the main focuses of discussion in D.C.
MSN Money reports:
The plan proposes three [tax brackets] (we now have six) and would lower the top rate -- and the corporate tax rate -- from 35% to a range of 23% to 29%. That would be great news for rich folks. "That could provide a windfall for wealthy taxpayers because the 35% tax bracket currently applies to taxable income above $379,150," said The Associated Press.There are numerous other giveaways to the biggest fatcats, which will be paid for by slashing social security and otherwise fleecing the elderly.
Robert Borsage notes that the proposed debt agreement:
Would add to unemployment in the short term, increase Gilded Age inequality, leave seniors more vulnerable, and shackle any possibility of rebuilding America. It puts the burden of deficit reduction on the elderly, the poor and the vulnerable, endangers jobs and growth, and lards even more tax breaks on the rich.The Nation writes:
The [proposed debt ceiling agreement] proposal shafts those who have already borne so much of the burden of the financial crisis and its fallout—lost pensions, lost homes, lost wealth—while the very people who brought the economy to its knees through their recklessness make out like banksters and bandits. In fact, at a time of inequality akin to that of the Gilded Age, the top marginal tax rate would be lowered—lowered!—to 23 to 29 percent, while there would be massive cuts in Social Security, Medicare and Medicaid.Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), notes that JP Morgan CEO Jamie Dimon and Goldman Sachs CEO Lloyd Blankfein would save approximately $2 million to $3 million on their tax bills. But in twenty years, a 90-year-old living on a Social Security income of $15,000 would lose more than $1,200 a year in benefits.
How’s that a “bargain” for this nation and who exactly finds it “grand”?
All along, the alternatives that reflect the popular idea of shared sacrifice have been marginalized—by the political establishment (and, tragically, the Democratic leadership) and the corporate media.
***
This is not about left and right. This is about right and wrong. And that’s something the political and media establishment just don’t seem to get.
And Senator Sanders points out today that there is no shared sacrifice by the top 1%, but that the government may take from the poor and middle class in numerous ways for years to come:
There will be major cuts in Social Security ... Medicare ... Medicaid and other health care programs ... education ... nutrition program[s] ... environmental protection.Note: As usual, it's not liberal-versus-conservative, but the top 1% versus the rest of the country, and you versus the giant corporations. See this, this, this, this, this, this, this, this, this, this and this.
***
There are very, very clear provisions making sure that we are going to make massive cuts in programs for working families, for the elderly, for the children. Those cuts are written in black and white. What about the revenue? Well, it's kind of vague. The projection is that we would rise over a 10-year period $100 billion in revenue. Where is that going to come? Is it necessarily going to come from the wealthiest people in this economy? Is it going to come from large corporations who are enjoying huge tax breaks? That is not clear at all. I want middle-class families to understand that when we talk about increased revenues, do you know where that comes from? It may come from cutbacks in the home mortgage interest deduction program, which is so very important to millions and millions of families. It may mean that if you have a health care program today, that health care program may be taxed. That's a way to raise revenue. It may be that there will be increased taxes on your retirement programs, your I.R.A.'s, your 401(k)'s.
And - no - the top 1% are not using the money to create more jobs. It's being used for prostitutes and other hanky panky.
Tuesday, July 19, 2011
Economics Professor: "[We’ll Have] a Never-Ending Depression Unless We Repudiate the Debt, Which Never Should Have Been Extended In The First Place"
Preface: Regular debts which are knowingly and honestly incurred should be repaid. This essay focuses solely on debts which are involuntarily incurred by politicians at the expense of the American people - and which do not benefit the public, but only a handful of bankers and defense contractors - and debts based upon false promises.
Economists: The Economy Can Only Recover If We Repudiate the Debt
Leading Austrian-school economist Murray Rothbard - an American - wrote in 1992:Economics professor Steve Keen is also calling for a debt jubilee, stating:I propose ... out-right debt repudiation. Consider this question: why should the poor, battered citizens of Russia or Poland or the other ex-Communist countries be bound by the debts contracted by their former Communist masters? In the Communist situation, the injustice is clear: that citizens struggling for freedom and for a free-market economy should be taxed to pay for debts contracted by the monstrous former ruling class. But this injustice only differs by degree from "normal" public debt. For, conversely, why should the Communist government of the Soviet Union have been bound by debts contracted by the Czarist government they hated and overthrew? And why should we, struggling American citizens of today, be bound by debts created by a ... ruling elite who contracted these debts at our expense?
***
Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The first wave of repudiation of state debt came during the 1840's, after the panics of 1837 and 1839. Those panics were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States. Riding the wave of inflationary credit, numerous state governments, largely those run by the Whigs, floated an enormous amount of debt, most of which went into wasteful public works (euphemistically called "internal improvements"), and into the creation of inflationary banks. Outstanding public debt by state governments rose from $26 million to $170 million during the decade of the 1830's. Most of these securities were financed by British and Dutch investors.
During the deflationary 1840's succeeding the panics, state governments faced repayment of their debt in dollars that were now more valuable than the ones they had borrowed. Many states, now largely in Democratic hands, met the crisis by repudiating these debts, either totally or partially by scaling down the amount in "readjustments." Specifically, of the 28 American states in the 1840's, nine were in the glorious position of having no public debt, and one (Missouri's) was negligible; of the 18 remaining, nine paid the interest on their public debt without interruption, while another nine (Maryland, Pennsylvania, Indiana, Illinois, Michigan, Arkansas, Louisiana, Mississippi, and Florida) repudiated part or all of their liabilities. Of these states, four defaulted for several years in their interest payments, whereas the other five (Michigan, Mississippi, Arkansas, Louisiana, and Florida) totally and permanently repudiated their entire outstanding public debt. As in every debt repudiation, the result was to lift a great burden from the backs of the taxpayers in the defaulting and repudiating states.
***
The next great wave of state debt repudiation came in the South after the blight of Northern occupation and Reconstruction had been lifted from them. Eight Southern states (Alabama, Arkansas, Florida, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia) proceeded, during the late 1870's and early 1880's under Democratic regimes, to repudiate the debt foisted upon their taxpayers by the corrupt and wasteful carpetbag Radical Republican governments under Reconstruction.
We should write the debt off, bankrupt the banks, nationalize the financial system, and start all over again.
We need a twenty-first century jubilee.
[We’re going into] a never-ending depression unless we repudiate the debt, which never should have been extended in the first place.
If we keep the parasitic banking sector alive, the economy dies. We have to kill the parasites and give a chance to the real economy to thrive once more and stop the financial [crooks] doing what they did this time around ever again.
Economics professor Michael Hudson - who also calls for a debt jubiliee - writes:
The only way to resolve the [European debt crisis] is to negotiate a debt write-off.
As I've noted for years, the entire strategy of the Bush and Obama economics teams have been to prevent the big banks, bondholders and other creditors from having to take haircuts by writing down the bad loans, phony instruments and bad debt. They have suspended any objective accounting requirements, allowed endless shell games to hide the debt and pretend all of the insolvent creditors are solvent, done everything under the sun to artificially prop up asset prices, turned a blind eye to the underlying fraud which caused the bubble, the toxic investment instruments and false representations, and then helped cover up the mess. See this, this, this and this.
I noted last month:
America - like most nations around the world - decided to bail out their big banks instead of taking the necessary steps to stabilize their economies (see this, this and this). As such, they all transferred massive debts (from fraudulent and stupid gambling activities) from the balance sheets of the banks to the balance sheets of the country.
Failing to acknowledge the bad debt is dooming the world economy. As leading independent banking analyst Chris Whalen points out:
The invidious cowards who inhabit Washington are unwilling to restructure the largest banks and GSEs [government sponsored enterprises, like Fannie and Freddie]. The reluctance comes partly from what truths restructuring will reveal. As a result, these same large zombie banks and the U.S. economy will continue to shrink under the weight of bad debt, public and private. Remember that the Dodd-Frank legislation was not so much about financial reform as protecting the housing GSEs.
Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: "This is not a monetary problem."
***
The policy of the Fed and Treasury with respect to the large banks is state socialism writ large, without even the pretense of a greater public good.
***
The fraud and obfuscation now underway in Washington to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason.
***
And in the case of the zombie banks, the GSEs and the MIs, the fraud is being actively concealed by Congress, the White House and agencies of the U.S. government led by the Federal Reserve Board. Is this not tyranny?
And Paul Mason - economics editor for BBC Newsnight - told Democracy Now on July 1:
[Interviewer]: Is there a qualitative difference in our era where you have essentially financial institutions that are far more powerful than any governments? Where you had a situation where during the 2008 crisis the United States government was bailing out banks in Europe that had been involved in investments here as well as its own banks, that this concept of too-big-to-fail for banks, but not for countries, or not for populations that end up having to suffer?
***
[Paul Mason]: You’re absolutely right that the situation we are in is unprecedented..... And we are entering a situation where the entire system seems incapable of recognizing bad debt. The bad debt has been flowing around the system since Lehman.
And see this.
Repudiating Debt is MORAL
Religions were founded on the concept of debt forgiveness.
For example, Matthew 6:12 says:
And forgive us our debts, as we forgive our debtors.
As I've previously noted, periodic times of debt forgiveness - or debt "jubilees" - were a normal part ancient Jewish and Christian religions.
David Graeber, author of "Debt: The First 5,000 Years" told Democracy Now recently:
Most revolutions, more revolts in human history have been about debt. It’s the most perennial tool that’s been used by people who are powerful to make the victims of structural inequalities feel that it’s somehow their fault. So I wanted to unveil that and show that we’re actually part of a very very long history. There’s also a lot of hope in it. Because the other thing I realized is that much of the world religions grew out of social movements, which were exactly about “problematizing” debt. Basically saying, who owes what to who?Ambrose Evans-Pritchard wrote in 2009:That made me think that we’re actually at a very strange historical moment because they’ve managed to convince people around the world that debt is somehow something sacred. I mean, a debt is just a promise, right? It has no greater moral standard than any other promise that you would make. Yet, here we have people accepting that it’s perfectly reasonable to say well, we can’t possibly keep our promise to the public, politicians say, to give you health care because it’s absolutely unthinkable we could break our sacred promises to bankers to give them a certain percentage of interest every year. How did that become a convincing argument? It’s utterly odd if you think about in terms of any kind of principle of democracy. As I say, if you look at the history of world religions, of social movements what you find is for much of world history what is sacred is not debt, but the ability to make debt disappear to forgive it and that’s where concepts of redemption originally come from.
***
[Interviewer] David Graeber in this long history is there a qualitative difference in our era where you have essentially financial institutions that are far more powerful than any governments? Where you had a situation where during the 2008 crisis the United States government was bailing out banks in Europe that had been involved in investments here as well as its own banks, that this concept of too-big-to-fail for banks, but not for countries, or not for populations that end up having to suffer?
[Graeber]:I think that marks a significant break in world history. I think when we look back at this, we’re gonna think of 2008. 1972 when the U.S. went off the gold standard was the first moment we sort of moved toward a system of virtual money where we realize that money is not a thing, it’s an arrangement between people. In 2008, where it became clear that the old global financial system is something that’s created politically and has to be periodically recreated, it doesn’t maintain itself, like they want us to believe. I mean, that really marks a break. The question is now that we understand that money is a political construct, that they really do just print it, it is a promise that people make to each other. Well who has control over that process of making promises? Who gets to make them and to whom?
In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.
Repudiating Debt is "Odious" Debt LEGAL
Congresswoman Kaptur advises her constituents facing foreclosure to demand that the original mortgage papers be produced. She says that - if the bank can't produce the mortgage papers - then the homeowner can stay in the house.Look up “fraudulent inducement.” My position as the former Assistant Secretary of Housing-Federal Housing Commissioner and then as lead financial advisor to the U.S. Department of Housing and Urban Development is that the majority of the mortgages originated in the United States after 1996 were fraudulently induced.
The way to deal with criminals is to treat our contracts with them in a manner reciprocal to how they have treated their contracts with us.
As I pointed out last year:
There is an established legal principle that people should not have to repay their government's debt to the extent that it is incurred to launch aggressive wars or to oppress the people.
These "odious debts" are considered to be the personal debts of the tyrants who incurred them, rather than the country's debt.
Wikipedia gives a good overview of the principle:
In international law, odious debt is a legal theory which holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, such as wars of aggression, should not be enforceable. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion.Jubilee USA notes that creditors may lose their rights to repayment of odious debts:
The doctrine was formalized in a 1927 treatise by Alexander Nahum Sack, a Russian émigré legal theorist, based upon 19th Century precedents including Mexico's repudiation of debts incurred by Emperor Maximilian's regime, and the denial by the United States of Cuban liability for debts incurred by the Spanish colonial regime. According to Sack:When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc, this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime, a personal debt contracted by the ruler, and consequently it falls with the demise of the regime. The reason why these odious debts cannot attach to the territory of the state is that they do not fulfil one of the conditions determining the lawfulness of State debts, namely that State debts must be incurred, and the proceeds used, for the needs and in the interests of the State. Odious debts, contracted and utilised for purposes which, to the lenders' knowledge, are contrary to the needs and the interests of the nation, are not binding on the nation – when it succeeds in overthrowing the government that contracted them – unless the debt is within the limits of real advantages that these debts might have afforded. The lenders have committed a hostile act against the people, they cannot expect a nation which has freed itself of a despotic regime to assume these odious debts, which are the personal debts of the ruler.Patricia Adams, executive director of Probe International (an environmental and public policy advocacy organisation in Canada), and author of Odious Debts: Loose Lending, Corruption, and the Third World's Environmental Legacy, has stated that:
by giving creditors an incentive to lend only for purposes that are transparent and of public benefit, future tyrants will lose their ability to finance their armies, and thus the war on terror and the cause of world peace will be better served.
A recent article by economists Seema Jayachandran and Michael Kremer has renewed interest in this topic. They propose that the idea can be used to create a new type of economic sanction to block further borrowing by dictators.The launch of the Iraq war was an unlawful war of aggression. It was based on false premises (weapons of mass destruction and a connection between Iraq and 9/11; see [this], this, this, this, this, this and this). Therefore, the trillions in debts incurred in fighting that war are odious debts which the people might lawfully refuse to pay for.Odious debt is an established legal principle. Legally, debt is to be considered odious if the government used the money for personal purposes or to oppress the people. Moreover, in cases where borrowed money was used in ways contrary to the people’s interest, with the knowledge of the creditors, the creditors may be said to have committed a hostile act against the people. Creditors cannot legitimately expect repayment of such debts.
The United States set the first precedent of odious debt when it seized control of Cuba from Spain. Spain insisted that Cuba repay the loans made to them by Spain. The U.S. repudiated (refused to pay) that debt, arguing that the debt was imposed on Cuba by force of arms and served Spain’s interest rather than Cuba’s, and that the debt therefore ought not be repaid. This precedent was upheld by international law in Great Britain v. Costa Rica (1923) when money was put to use for illegitimate purposes with full knowledge of the lending institution; the resulting debt was annulled.
The Bush and Obama administrations have also oppressed the American people through spying on us - even before 9/11 (confirmed here and here) - harassment of innocent grandmothers and other patriotic Americans criticizing government action, and other assaults on liberty and the rule of law. See this. The monies borrowed to finance these oppressive activities are also odious debts.
The government has also given trillions in bailouts, loans, guarantees and other perks to the too big to fails. [The American people were overwhelmingly against the bailouts, and never consented to the fact that much of the money went to foreign banks (and see this and this). Moreover, government pulled a "bait and switch" as to what the bailout money would be used for.]. These funds have not helped the American people. For example, the giant banks are still not loaning. They have solely gone into speculative investments and to line the pockets of the muckety-mucks in the form of bonuses. PhD economist Dean Baker said that the true purpose of the bank rescues is "a massive redistribution of wealth to the bank shareholders and their top executives". Two leading IMF officials, the former Vice President of the Dallas Federal Reserve, and the the head of the Federal Reserve Bank of Kansas City have all said that the United States is controlled by an oligarchy. PhD economist Michael Hudson says that the financial “parasites” have killed the American economy, and they are "sucking as much money out" as they can before "jumping ship". These are odious debts.
[Bush and Obama officials] who ordered that these debts be incurred must be held personally liable for them. We the American people are not responsible to creditors - such as China, Saudi Arabia - who have knowingly financed these illegal and oppressive activities which have not benefited the American people, but solely the handful of corrupt politicians who authorized them.
Repudiating Debt Is Politically EMPOWERING
Matt Taibbi wrote last year:
Similarly, Gregor MacDonald argued in February 2009:As powerful as these Wall Street banks may seem, they are also exquisitely vulnerable. Right now virtually all of them are dependent upon the government keeping accounting standards lax enough for all of them to claim to be functional businesses. It is generally accepted that if the major banks on Wall Street were forced to mark all of their assets to market tomorrow, they would all be either insolvent or close to it.
Thus their “healthy” financial status is already illusory. So imagine what would happen if large numbers of those dubious loans on their balance sheets that they have marked down as “performing” were suddenly pushed ahead of time into the default column. What if Greece, and the Pennsylvania school system, and Jefferson County, Alabama, and the countless other municipalities and states that are wrapped up in these corrupt deals just decided to declare their debts illegitimate and back out?
I think it’s an interesting question and would like to hear what knowledgeable people in the field have to say about it. But the big picture, to me, is that these companies are almost totally dependent not only upon the continued good faith of aggrieved debtors, but upon the government recognizing the (sometimes fraudulent) loans made to those debtors as fully performing.
The private sector debt in the United States exerts the same power over the banking system as the public debt of the United States exerts over our international creditors. Collectively, the debtors are in control. Not the creditors. This is why the the Creditors, not the Debtors, will be making most of the concessions in the years ahead. Whether the US public debt is inflated away, rescheduled, or repudiated–or some combination of all three–it doesn’t matter much. The process is already underway.The most cynical (but not necessarily inaccurate) view of debt I've seen is that banks loan out imaginary money they don't really have, which money is "collateralized" by capital they do not really have, which is, in turn, based upon central bank printing presses which create money out of thin air which the central banks don't really have. But then when debtors have trouble repaying onerous loans, the bankers seize real assets. See this, this and this.
In other words, according to the most cynical view, the entire debt-money system is a scam ... and should be repudiated.
Repudiating Debt is POPULAR
Walking away from home mortgages has actually become mainstream, being trumpeted by:
- The New York Times (and New York Times Magazine)
- Even popular personal finance advisor Suze Orman is highlighting the debtors revolt phenomenon on her national tv show
Thursday, July 14, 2011
What Both Sides Are Missing In The Debt Ceiling Debate
The blood pressure of the patient in the emergency room drops precipitously.
The ER docs have already given 15 pints of fblood over the course of many hours. But the patient is still on the verge of dying.
Medical rules and regulations say that more than 15 pints of blood should never be given, as too much transfusion can cause other fatal problems.
The "liberal" doctors want to give the patient more blood. After all, this is a life-or-death emergency ... and if they can just buy more time, they might be able to figure out a way to save the patient.
The "conservative" doctors want to stop with the transfusions. After all, giving too much blood could kill the patient ... and maybe he'll be able to pull out of it on his own.
Who is right?
Well, the "liberal" and "conservative" doctors are so busy arguing their point of view that they haven't noticed that one of the patient's legs has been half chewed off. He's bleeding out through the huge open wound.
Unless the doctors suture up the wound, the patient will bleed out no matter how much blood they give him.
I've previously explained this fact using water as an analogy:
(Note: If you're sure that your side of the aisle is right and the other side is wrong, please read this.)"Deficit hawks" like top economic historian Niall Ferguson says that America's debt will drive it into a debt crisis, and that any more quantitative easing will lead our creditors to pull the plug. See this, this and this. Indeed, PhD economist Michael Hudson says (starting around 4:00 into video):
If the problem that is grinding the economy to a halt is too much debt, and if no one in the government - in either party - is looking at solving the debt problem, then ... we're going to go into a depression as far as the eye can see.Yet the U.S. hasn't reined in its profligate spending. While modern economic theory shows that debts do matter (and see this), the U.S. is spending on guns and butter.
As PhD economist Dean Baker points out, the IMF is cracking down on the once-proud America like a naughty third world developing country. (As I've repeatedly noted, the IMF performed a complete audit of the whole US financial system during Bush's last term in office - something which they have only previously done to broke third world nations.)Indeed, economics professor and former Senior Economist for the President’s Council of Economic Advisers Laurence Kotlikoff wrote yesterday:
Let’s get real. The U.S. is bankrupt.
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Last month, the International Monetary Fund released its annual review of U.S. economic policy.... The IMF has effectively pronounced the U.S. bankrupt.
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Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt.
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This is what happens when you run a massive Ponzi scheme for six decades straight....
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Bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.
On the other hand, as I also pointed out last month, the government isn't even stimulating in an effective way:
"Deficit doves" - i.e. Keynesians like Paul Krugman - say that unless we spend much more on stimulus, we'll slide into a depression. And yet the government isn't spending money on the types of stimulus that will have the most bang for the buck: like giving money to the states, extending unemployment benefits or buying more food stamps - let alone rebuilding America's manufacturing base. See this, this and this.(Yes, Congress has just thrown twenty billion dollars at jobs and the states, but it is a tiny drop in the bucket compared to the many tens of trillions of dollars in handouts to the giant banks.)
Keynes implemented his policies in an era of much less debt than we have today. We're now bankrupt, with debt levels so high that they are dragging down the economy.
Even if Keynesian stimulus could help in our climate of all-pervading debt, Washington has already shot America's wad in propping up the big banks and other oligarchs.
More important still, Keynes implemented his New Deal stimulus at the same time that Glass-Steagall and many other measures were implemented to plug the holes in a corrupt financial system. The gaming of the financial system was decreased somewhat, the amount of funny business which the powers-that-be could engage in was reined in to some extent.
As such, the economy had a chance to recover (even with the massive stimulus of World War II, unless some basic level of trust had been restored in the economy, the economy would not have recovered).
Today, however, [politicians] haven't fixed any of the major structural defects in the economy [update]. So even if Keynesianism were the answer, it cannot work without the implementation of structural reforms to the financial system.
A little extra water in the plumbing can't fix pipes that have been corroded and are thoroughly rotten. The government hasn't even tried to replace the leaking sections of pipe in our economy.
Quantitative easing can't patch a financial system with giant holes in it.
What are the giant holes?
Some of the biggest are:
- Rampant fraud
- Worse-than-third-world inequality
- Insanely high levels of leverage
- Warping of the economy and the political process by a handful of monstrously bloated banks
- Focusing on policy objectives other than reducing unemployment (which has the net effect of actually increasing unemployment)
I've used a third analogy to describe these problems.
As I wrote in 2009 in a post called "Why the Patient Is Not Getting Better: Government is Strengthening the Parasite and Poisoning the Real Economy":
I noted a couple of months later:Why isn't the economy getting better, even though the government is pumping trillions of dollars into bailouts and stimulus packages and intervening in markets left and right?
Because the government is treating the wrong patient.
Let's say you travel to the tropics and pick up a parasite. You go to your doctor who gives you very powerful drugs that make you sick. You go back to the doctor, he looks you over, and then adds more potent drugs to your prescription.
You go back a third time and say "Doctor, I'm getting sicker and sicker, why isn't it working?"
He responds "Oh, I thought the parasite was the patient. The drugs are making it healthier".
The Government is Strengthening the Parasite
The real economy is:
According to top federal reserve officials and economists, the government's actions will encourage big financial players to make even riskier gambles in the future.(1) People making things or providing real, useful services
(2) People saving money
and
(3) People investing the money they saved into productive businesses which will make more things or provide needed services.
Indeed, the government is in the process of giving hundreds of billions - if not trillions - of dollars and guarantees to hedge funds (hedge funds are some of the biggest speculators of all). Indeed, the various bailout programs are giving huge sums to companies that make money by pushing paper around without actually producing any useful goods or services.The heads of the big banks and financial companies are also getting huge bonuses even though they have driven their companies so far into the ditch that they need government bailouts. Even Paul Volcker says the incentive system is broken. Indeed, the government is making the CEOs richer by giving them billions of dollars of bailout money with which to feather their own nests.
And credit derivatives [at least to the extent they are naked, unregulated and opaque] act as a parasite on the real economy: credit default swap buyers bet that the referenced company will go down the tubes (see this and this). And yet the government is allowing the credit default swap trades to increase, driving CDS spreads against many companies and governments to reach all-time highs.
The Government is Poisoning the Real EconomyNot only is the parasite being boosted by government actions, but the patient - the real economy - is being poisoned.
Manufacturing has been shipped out of America for decades, and the government is still actively encouraging companies to move manufacturing abroad.
Taxpayers will be on the hook for trillions of dollars of obligations through taxes/or inflation (even Bernanke has admitted that inflation is a tax, because people have less money in their pockets after buying necessities). So Americans will be able to save less.
And government has not only failed to require that companies accurately report their finances - so that investors can know which companies are stable and productive - but it has actually thwarted such accuracy. For example:
- A government agency prevented the SEC from investigating multi-billion dollar Ponzi-schemer Stanford
The government has been strengthening the parasite and poisoning the real economy. No wonder the patient is getting worse.
- As of 2006:
"President George W. Bush has bestowed on his intelligence czar ... broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations."- One or more treasury department officials actively allowed banks to "cook their books"
To come back to my original analogy, the dying patient has a horde of leeches inside the gaping wound in his leg, and the transfused blood has done nothing but fed the leeches. [Sorry for the gross analogy.] The doctors have been helping the parasites, not the patient.Michael Hudson is a highly-regarded economist. He is a Distinguished Research Professor at the University of Missouri, Kansas City, who has advised the U.S., Canadian, Mexican and Latvian governments as well as the United Nations Institute for Training and Research. He is a former Wall Street economist at Chase Manhattan Bank who also helped establish the world’s first sovereign debt fund.
Hudson has frequently described Wall Street as "parasitic". For example, in a 2003 interview, Hudson said:
The problem with parasites is not merely that they siphon off the food and nourishment of their host, crippling its reproductive power, but that they take over the host's brain as well. The parasite tricks the host into thinking that it is feeding itself.
Something like this is happening today as the financial sector is devouring the industrial sector. Finance capital pretends that its growth is that of industrial capital formation. That is why the financial bubble is called "wealth creation," as if it were what progressive economic reformers envisioned a century ago. They condemned rent and monopoly profit, but never dreamed that the financiers would end up devouring landlord and industrialist alike. Emperors of Finance have trumped Barons of Property and Captains of Industry.More recently, Hudson said:
You can think of the financial sector as being wrapped around the real economy, almost like a parasite, and that's why it's been called parasitic for so long. The financial sector extracts interest from the economy, the property sector extracts economic rent, as do monopolies. Now the key thing about parasites, is that it's not simply that they extract nourishment from the host. The parasite takes over the
host's brain, to make it think it's part of the economy, to make it think
it's part of the host's own body, and, in fact, that's it almost like a child of the host, to be protected. And that's what the financial sector has done today.
You have Obama coming out and saying, "We have to save the banks in order to save the real economy". The fact is, you can't serve both the parasite and the host.And see this.
On August 10th, Hudson went even further. Specifically, he said:
- The giant financial institutions have already killed their host - the real American economy
- Since they realize that the American economy is dead, they are trying to suck as much blood out of America as possible while the corpse is still warm
- Because the American economy is dead, their plan is to soon jump to another host. They will ship all of their money overseas
Unless the doctors clean out the parasites and close the gaping wound, the patient has no chance.
As Dennis Kucinich writes today:
We have to realize what this country's economy has become. Our monetary policy, through the Federal Reserve Act of 1913, privatized the money supply, gathers the wealth, puts it in the hands of the few while the Federal Reserve can create money out of nothing, give it to banks to park at the Fed while our small businesses are starving for capital.
Mark my words -- Wall Street cashes in whether we have a default or not. And the same type of thinking that created billions in bailouts for Wall Street and more than $1 trillion in giveaways by the Federal Reserve today leaves 26 million Americans either underemployed or unemployed. And nine out of ten Americans over the age of 65 are facing cuts in their Social Security in order to pay for a debt which grew from tax cuts for the rich and for endless wars.
There is a massive transfer of wealth from the American people to the hands of a few and it's going on right now as America’s eyes are misdirected to the political theater of these histrionic debt negotiations, threats to shut down the government, and willingness to make the most Americans pay dearly for debts they did not create.
These are symptoms of a government which has lost its way, and they are a challenge to the legitimacy of the two-party system.
Wednesday, July 13, 2011
If We Don't Break Up the Giant Banks NOW, They'll Be Bailed Out Again and Again ... Dragging the World Economy Down With Them
I warned last year:
Anyone who thinks that Congress will use the current financial regulation - Dodd-Frank - to break up banks in the middle of an even bigger crisis is dreaming. If the giant banks aren't broken up now - when they are threatening to take down the world economy - they won't be broken up next time they become insolvent either. And see this. In other words, there is no better time than today to break them up.
Standard and Poors is providing evidence for this assertion.
As the Financial Times notes today:
Officials fighting the next financial crisis may again bail out banks using the public purse, S&P has said, in an opinion that casts doubt on one of the fundamental tenets of US financial reform.
The rating agency said on Wednesday that the US Treasury, Federal Reserve and Congress might rescue a large financial group rather than allow it to fail like Lehman Brothers. Dodd-Frank, the legislation signed into law a year ago next week, was supposed to prevent bail-outs by allowing the government to seize and wind down safely an ailing "systemically important financial institution", or Sifi.And see this (written after the passage of Dodd-Frank).
But in a research note, S&P said: “We believe the government may try to avoid contagion and a domino effect if a Sifi finds itself in a financially weakened position in a future crisis.”The agencies’ views are crucial to the fight over whether the phenomenon of “too big to fail” has been ended. If not, the largest banks will continue to enjoy a funding advantage over their smaller rivals.
Why Break Up the Giant Banks?
Virtually all independent economists and financial experts say that the giant banks are too big, and that their very size is hurting the economy:
- Nobel prize-winning economist, Joseph Stiglitz
- Nobel prize-winning economist, Ed Prescott
- Nobel prize-winning economist, Paul Krugman
- Former chairman of the Federal Reserve, Alan Greenspan
- Former chairman of the Federal Reserve, Paul Volcker
- Former Secretary of Labor Robert Reich
- Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard
- Former Director of the National Economic Council Larry Summers
- Former chief IMF economist and economics professor Simon Johnson (and see this)
- President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)
- President of the Federal Reserve Bank of Dallas, Richard Fisher (and see this)
- President of the Federal Reserve Bank of St. Louis, Thomas Bullard
- Deputy Treasury Secretary, Neal S. Wolin
- The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine
- The Congressional panel overseeing the bailout (and see this)
- The head of the FDIC, Sheila Bair
- Former Tarp overseer and creator of the Consumer Financial Protection Bureau, Elizabeth Warren
- The head of the Bank of England, Mervyn King
- The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
- Economics professor and creator of the "efficient market hypothesis", Eugene Fama
- Economics professor and senior regulator during the S & L crisis, William K. Black
- Leading British economist, John Kay
- Economics professor, Nouriel Roubini
- Economics professor, James Galbraith
- Economist, Marc Faber
- Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
- Economics professor, Thomas F. Cooley
- Economist Dean Baker
- Economist Arnold Kling
- Former investment banker, Philip Augar
- Chairman of the Commons Treasury, John McFall
- Leading bank analyst, Chris Whalen
Why do these experts say the giant banks need to be broken up?
Well, small banks have been lending much more than the big boys. The giant banks which received taxpayer bailouts have been harming the economy by slashing lending, giving higher bonuses, and operating at higher costs than banks which didn't get bailed out.
As Fortune pointed out, the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:
So the very size of the giants squashes competition, and prevents the small and medium size banks to start lending to Main Street again.Growth for the nation's smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under...
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
And as I noted in December 2008, the big banks are the major reason why sovereign debt has become a crisis:
The Bank for International Settlements (BIS) is often called the "central banks' central bank", as it coordinates transactions between central banks.
BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:
The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don't have, central banks have put their countries at risk from default.
A study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent hurts the economy:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
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All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.Now, Greece, Ireland, Portugal, Spain, Italy and many other European countries - as well as the U.S. and Japan - are facing serious debt crises. We are no longer wealthy enough to keep bailing out the bloated banks.
Indeed, the top independent experts say that the biggest banks are insolvent (see this, for example), as they have been many times before. By failing to break up the giant banks, the government will keep taking emergency measures (see this and this) to try to cover up their insolvency. But those measures drain the life blood out of the real economy.
And by failing to break them up, the government is guaranteeing that they will take crazily risky bets again and again, and the government will wrack up more and more debt bailing them out in the future.
Moreover, Richard Alford - former New York Fed economist, trading floor economist and strategist - recently showed that banks that get too big benefit from "information asymmetry" which disrupts the free market.
Indeed, Nobel prize-winning economist Joseph Stiglitz has noted that giants like Goldman are using their size to manipulate the market:
"The main problem that Goldman raises is a question of size: 'too big to fail.' In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information."
Further, he says, "That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that's why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you're going to trade on behalf of others, if you're going to be a commercial bank, you can't engage in certain kinds of risk-taking behavior."
The giants (especially Goldman Sachs) have also used high-frequency program trading which not only distorts the markets - making up more than 70% of stock trades - but which also lets the program trading giants take a sneak peak at what the real (that is, human) traders are buying and selling, and then trade on the insider information. See this, this, this, this and this. (This is frontrunning, which is illegal; but it is a lot bigger than garden variety frontrunning, because the program traders are not only trading based on inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing). Goldman also admitted that its proprietary trading program can "manipulate the markets in unfair ways".
The giant banks have also allegedly used their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated mutually beneficial actions, all with the government's blessings.
Again, size matters. If a bunch of small banks did this, manipulation by numerous small players would tend to cancel each other out. But with a handful of giants doing it, it can manipulate the entire economy in ways which are not good for the American citizen.
Further, fraud was one of the main causes of the Great Depression and the current financial crisis. The banks are so big that they are buying off politicians so that it has become official policy not to prosecute fraud. Indeed, everyone from Paul Krugman to Simon Johnson has said that the banks are so big and politically powerful that they have bought the politicians and captured the regulators. So their very size is allowing economy-killing corruption to flourish.
Moreover, the banks' enormous size means that the executives make orders of magnitude more in bonuses and salary than the executives of small banks. They are so big that their executives are living like kings. This is making inequality worse ... and rampant inequality was another primary cause of the Great Depression and the current financial crisis.
Indeed, failing to break up the big banks will result in the sale of national assets and the looting of national treasuries in order to pay off debts to the giant banks. This, in turn, will destroy the national sovereignty of virtually every country.
Leading independent bank analyst Christopher Whalen argues:
The fraud and obfuscation now underway in Washington to protect the TBTF [i.e. giant or "too big to fail"] banks ... totals into the trillions of dollars and rises to the level of treason.Just look at Greece. That is our future - and see this - unless we break up the "too big to fails".
These concepts have been known for hundreds of years:
"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes... Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."
- Napoleon Bonaparte
"There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt."
- John Adams
“If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied”.
— Thomas Jefferson
"I believe that banking institutions are more dangerous to our liberties than standing armies...The issuing power should be taken from the banks and restored to the Government, to whom it properly belongs."
- Thomas Jefferson
"[It was] the poverty caused by the bad influence of the English bankers on the Parliament which has caused in the colonies hatred of the English and . . . the Revolutionary War."
- Benjamin Franklin
“The Founding Fathers of this great land had no difficulty whatsoever understanding the agenda of bankers, and they frequently referred to them and their kind as, quote, ‘friends of paper money. They hated the Bank of England, in particular, and felt that even were we successful in winning our independence from England and King George, we could never truly be a nation of freemen, unless we had an honest money system. ”
-Peter Kershaw, author of the 1994 booklet “Economic Solutions”
- Historian Alexander Del Mar
"The British Parliament took away from America its representative money, forbade any further issue of bills of credit, these bills ceasing to be legal tender, and ordered that all taxes should be paid in coins ... Ruin took place in these once flourishing Colonies . . . discontent became desperation, and reached a point . . . when human nature rises up and asserts itself."
- British historian John Twells
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