Sunday, February 1, 2009

U.S. Giveaway Has New Twist? "Watered Treasury Bonds" Created For the Public

Not a single Republican Congressman went along, just as Rep. Boehner refused to support the Bush bailout on that fatal Friday when Mr. McCain and Mr. Obama debated each other over marginal issues not touching on the giveaway, which both candidates passionately supported. The Party of Wealth sees the political handwriting on the wall, for which the Party of Labor seems happy to take all responsibility. This probably is the only place where I'd like to see "bipartisanship." Watch the campaign contributions flow for an index of how well this will pay off for the Democrats! How many families would like a "give-back" on every bad investment they've ever made? It's like a parent coming to a child who has just broken a toy, saying "That's all right. We'll just go out and buy you a new one." This from the apostles of "responsibility" for poverty, for mortgage debtors owing more than they can afford to pay, for people who get sick and can't afford medical care, and for states and cities now left high and dry by the fiscal wipe-out that the Bush-Obama "cleanup" has foisted onto the economy. No do-over for anyone but the hundred or so billionaires who have just been endowed with enough free money to become America's ruling elite for the rest of the 21st century.*
(See below for the rest of the essay above or click on the link (emphasis marks were added and some editing was necessary).) We've been treated to the upcoming "progressive" policies of the Obama Administration for the two weeks since the Inauguration including the plan for closing Gitmo in one year, stem cell research reinvigoration, abortion funding turned back on (whoops, not so fast on that one) . . . . While just this week we learn: 1. The GDP has experienced the biggest drop in 27 years. 2. The U.S. economy shrank 3.8% in the 4th Quarter. 3. As of January 9, 2009, nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors. (It is now common knowledge that the unemployment number can be anywhere from 10 - 15% above that 7.2% reported based on the uncounted population seeking employment who were dropped from the official numbers or are part of the shadow economy.) 4. Street violence is occurring due to dire economic conditions in France, Greece, Hungary and Bulgaria. 5. The CBS Morning Show regulars on Friday displayed their sense of taste (in the midst of a developing economic tragedy engulfing much of the country as well as the world) as they featured Harry Smith showcasing his obvious gluttony by making pig noises as he (surrounded by the loud roars of staff approval) attacked that segment's touted Super Bowl munchies (prepared by chef Bobby Flay) - a fried egg atop a huge steak sandwich alongside a filet mignon salad. I guess the message is "Party on, Garth!" Are you still buying this glutfest? We also hear from the AP on Saturday that:
Banks collecting billions of dollars in federal bailout money sought government permission to bring thousands of foreign workers to the U.S. for high-paying jobs, according to an Associated Press review of visa applications. The dozen banks receiving the biggest rescue packages, totaling more than $150 billion, requested visas for more than 21,800 foreign workers over the past six years for positions that included senior vice presidents, corporate lawyers, junior investment analysts and human resources specialists. The average annual salary for those jobs was $90,721, nearly twice the median income for all American households. The figures are significant because they show that the bailed-out banks, being kept afloat with U.S. taxpayer money, actively sought to hire foreign workers instead of American workers. As the economic collapse worsened last year - with huge numbers of bank employees laid off - the numbers of visas sought by the dozen banks in AP's analysis increased by nearly one-third, from 3,258 in fiscal 2007 to 4,163 in fiscal 2008.
Michael Hudson knows that
*After spending a lifetime denouncing socialism as inherently unfair, Wall Street is now doing a hideous parody – as if "socialism for the rich" were not an oxymoron in the first place. Certainly the banks are not being "nationalized." Giving away the largest sum of spendable securities in history without direct managerial power that goes with ownership is not "nationalization." Ask Lenin. Now that the details of the new, larger but definitely not improved bank giveaway of between $2 and $4 trillion more have been leaked out in time for Wall Street's Davos attendees to celebrate, we may ask whether, financially speaking, the Obama Administration should best be thought of as Bush-3 – or indeed, whether it is still on a pro-creditor trend that may better be traced as Clinton-5, or perhaps even Reagan-8. Since 1980 the financial sector has made a sustained money grab at the expense of labor and "taxpayers." More accurately, it has been a debt grab, on the opposite side of the balance sheet from assets.
(1) threatening for eight years that the prospect of a trillion-dollar deficit spread over a generation or so is sufficient reason to stiff Social Security recipients and abolish debts to the nation's retirees, and (2) after the Bush administration provided $8 trillion over the past three months in cash-for-trash swaps of good Treasury bonds for Wall Street junk derivatives, the Obama Administration is now speaking of (3) some $2 to $4 trillion more to be given in just the next week or so. Not a single Republican Congressman went along. . . . Backed by Mr. (Larry) Summers, Boris Yeltsin's Harvard Boys transferred trillions of dollars of Russian mineral wealth and public enterprises into the hands of kleptocrats. That was an asset transfer, pure and simple. In 1997, to be sure, the IMF gave Russia a loan that immediately disappeared into the kleptocrats' bank accounts, to be paid out of subsequent oil-export proceeds. But assets were the name of the game. Today's U.S. giveaway has a new twist. The analogy is the "watered stocks" and bonds that railroad magnates and Wall Street emperors of finance gave themselves and their political mouthpieces, simply adding the interest coupons and dividends onto the prices charged the public as if they were real "costs." Today's version – "watered Treasury bonds" – are being created on the public sector's balance sheet. "Taxpayers" must pay bear the interest charges – leaving less for the infrastructure investment that Mr. Obama suggests we may need. The Bush-Obama bailout bore "small print" already has given Wall Street a decade's tax-free status by letting it count its financial losses against its tax liability. So not only has there been a great fiscal giveaway, there has been a tax shift off finance onto labor and industry. States and localities already have begun to announce plans to sell off roads and airports, land and other public assets to the financial sector in order to finance their looming budget deficits (which localities are not allowed to run under present legislation). No federal funding has been granted to finance the cities as their tax receipts plunge. There has been a token amount to relieve some low-income families saddled with junk mortgages. But this does not involve actually giving them a spendable money "bonus." Their role is simply to be trotted out like widows and orphans used to be, as justification to bail out banks for their bad gambles on currency, interest rates and bond derivative gambles. Insolvent debtors are merely passive vehicles to get a book-credit of mortgage relief that the government will turn over in their name to their bankers to make these institutions whole. Whole, and then some! Chris Matthews just reported his statistic of the day (January 29): $18.4 billion in Wall Street bonuses, paid for out of the government giveaway. This is called "saving the economy." That is as much an oxymoron as "socializing the losses." Socializing the losses would mean wiping the mortgages and other bank loans of debtors off the books. These giveaways are to keep the debts on the books, but for the government to buy them and make the creditors whole – while a quarter of real estate has fallen into Negative Equity as its debts are not being bailed out but kept on the books. The economy's "toxic waste" remains. But a matching volume of new waste is being created and given to a few hundred families. No wonder the stock market soared by 200 points on Wednesday, led by bank stocks! In the seemingly frenetic ten days since Mr. Obama took office, it is beginning to look as if his good political decisions regarding Guantanamo, Iraq, employee rights to sue for employer wrongdoing, are sugar coating for the giveaway to Wall Street, a quid pro quo to avert opposition from his Democratic Party constituency. At least this seems to be their effect. To accuse Mr. Obama of a giveaway would seem at first glance to contradict the basic thrust of his actions – or would be if one did not take into account his appointments of Larry Summers at the White House and the conspicuous leadership role in the bailout played by Barney Frank in the House and Chuck Schumer in the Senate. There is a simple way to think about what has happened – and why it won't help the economy, but will hurt it. Suppose the new $4 trillion "bad bank" works. The government shell will give away Treasury bonds for bad bank loans and derivatives gambles, without the government "marking to market." (So much for the pretense that giving Wall Street credit is "free market" policy. But the alternative to free markets does not turn out to be "socialism" at all, even if "socialism for the rich." There are worse words for it, which I won't use here.) The real question is what the Wall Street elite will do with the money. From Chuck Schumer and Barney Frank through Larry Summers, the Obama administration hopes that the banks will lend it out to Americans. Borrowers are to take on yet more debt – enough to start re-inflating house prices and making homes yet more unaffordable, requiring buyers to take on yet larger mortgages. Larger mortgages at rising prices are supposed to help the banks rebuild their balance sheets – to earn enough to compensate for their gambling losses. But this neglects the fact that today's looming depression is caused by debt deflation. Families, businesses and government having to spend more wage income, profits and tax revenues on debt service instead of buying goods and services. So why is the solution to this debt overhead held to be yet MORE debt? Is there not something crazy here? The government's solution, placed in its hands by the financial lobbyists, is to bail out the bankers and Wall Street while leaving the "real" economy even more highly indebted. All this talk about "more credit" being needed, all this begging of banks to lend more money and then extract yet more interest and amortization from the economy, is leading it even deeper into the debt hole. It is not helping families repay their debts. And indeed, homeowners whose mortgages already exceed the market price of their property are not going to be able to borrow more. It would take only $1 trillion or so – or simply to let "the market" work its magic in the context of renewed debtor-oriented bankruptcy laws – to cure the debt problem. But that obviously is not what the government aims to solve at all. It simply wants to make creditors whole – creditors who are, after all, the largest political campaign contributors and lobbyists these days. The most important thing to understand about the present economic crisis is that it was not necessary technologically, politically or fiscally. Government at the state, local and federal levels are strapped for funds – but only because the natural source of taxation, land rent and monopoly rent and the user fees from public enterprise have been financialized. That is, whereas property taxes used to finance about three-quarters of state and local budgets back in 1930, today they supply only about a sixth. The shrinkage has not been passed on to homeowners and renters or commercial users. Prices for homes and office buildings are set by the marketplace. The rise in market price has been pledged to bankers as mortgage interest. The financial sector thus has replaced government as recipient of the economic surplus – leaving the public sector starved of cash. The financial sector also has replaced the government as economic planner. This role has followed from its monopoly in credit creation, which turns out to be the key to resource allocation. Bank credit is created freely. Governments could do the same. Indeed, this is what the U.S. Treasury did during America's Civil War, when it issued greenback credit. If today's looming economic depression is a manmade (that is, lobbyist-financed) phenomenon, then what policy is needed as a remedy? 2009 Bailout.
And on a much lighter note, John Mauldin's Trading With the Big Boys shares with us the tidbit that "Hope is not a viable investment strategy."
I can't tell you how many (millionaires) have ridden this market down. The size of their portfolios does not make them better money managers. They or their managers had no discipline for selling. Seriously, buy and hold in a secular bear market like we are in is a losing strategy. On an inflation-adjusted basis, you are down if your holding period has been 30 years! Most of us would think that 30 years is the long run! On a nominal basis, you are about where you were ten years ago, if you are in a broad index. Even if you are a value investor, you have gotten creamed in this market. (Some great value investors are down 60%. Their experience of buying and holding solid companies, which had worked so well for so long, needs to be married with some risk discipline.) You need a sell discipline. Barry's system, or others like it, can at least get you thinking about selling rather than riding a stock all the way to the bottom and hoping it comes back. Hope is not a viable investment strategy.
Are you back to paying attention yet? Suzan ______________________


Dr. Know said...

I believe Paul Krugman calls this "lemon socialism".

Suzan said...

Thanks, Greg,

It's been a while since I've quoted our Precious Professor Paul - and you know how much I admire his judgment. (And don't you think PO should have picked him instead of Summers or Geithner - saving us tons of indigestion and political upset?) His prose has revealingly personified how we must hold our mouths after partaking of this bitter penance.

Michael Hudson is another favorite of mine - so passionate and literarily inspired in his depictions of our plight. He doesn't get enough print in my opinion.

And John Mauldin is so sweetly amusing with his absentminded professor pose as he paints our profound malaise with such dulcet tones that even Jimmy Carter would be piqued.

Thanks again for your comment.

Love ya,


Dr. Know said...

With all of your waxing eloquent, I'll have to research your other mentions. I'm more than a bit skeptical of economists as those pushed to the forefront tend to be shills for some perverted scheme or another.

BTW, I watched the Charlie Rose/Carter segment and was disappointed when Carter claimed not to be interested in seeing a prosecution of BushCo should it be proven that they knowingly lied about Iraq and WMDs. I would like to have been a fly on the wall during a frank, private discussion of that issue...

Bitter penance indeed.

Suzan said...

I saw Jimmy say that to Charlie too. And thought "So everyone's in on the con game." I was also disappointed. And don't worry about my choice of economists. They are the paragons of education and integrity. Go ahead. Look them up. Mauldin is so afraid of the coming bad times that he abandoned shop, found a cheap complex in Tx (no less) and moved his whole operation and family in. Says he thinks he can ride out the next years there.

Thanks for your "bitter" comments!


BadTux said...

A word of terminology correction: The inflation in real terms of the value of debts as the currency deflates is, well, debt INFLATION. That is, deflation inflates the real (as vs. nominal) value of debts, causing said debts to corral an increasingly large portion of the national income and thereby cause consumption to drop, which in turn causes more deflation as owners of excess commodities are forced to cut wages and prices in order to get rid of their excess commodities, wash, rinse, repeat.

Which is why deflationary spirals are just peachy-keen for oligarchs to use to transfer wealth from the debt-owing class (i.e. us) to the debt-owning class (i.e. them). Especially since they just passed a law prohibiting most of us from declaring bankruptcy and thereby managing to get out of unpayable debts. Instead, we must sell them (or have repossessed from us) our assets for pennies on the dollar...

- Badtux the Economics Penguin

Suzan said...

And thus one of the best, the Economics Penguin, chimes in to straighten out my wayward readers' perceptions governing the inflation of the value of debts by the deflation of currency causing

consumption to drop, which in turn causes more deflation as owners of excess commodities are forced to cut wages and prices in order to get rid of their excess commodities

which is why the deflationary spiral we are currently experiencing is just "peachy keen" for those who caused it and benefit from it.

As if this is new news.

Thanks, Tuxy, you are my favorite "splainin'" penguin.