The Expiring Economy & "Six Reasons Why Granting the Fed Even More Power is a Really Bad Idea"

Paul Craig Roberts believes our economy is expiring. Really. Read on. (Emphasis marks added - Ed.)

Tent cities springing up all over America are filling with the homeless unemployed from the worst economy since the 1930s. While Americans live in tents, the Obama government has embarked on a $1 billion crash program to build a mega-embassy in Islamabad, Pakistan, to rival the one the Bush government build in Baghdad, Iraq.

Hard times have now afflicted Americans for so long that even the extension of unemployment benefits from 6 months to 18 months for 24 high unemployment states, and to 46 - 72 weeks in other states, is beginning to run out. By Christmas 1.5 million Americans will have exhausted unemployment benefits while unemployment rolls continue to rise.

Amidst this worsening economic crisis, the House of Representatives just passed a $636 billion “defense” bill.

Who is the United States defending against? Americans have no enemies except those that the US government goes out of its way to create by bombing and invading countries that comprise no threat whatsoever to the US and by encircling others - Russia for example - with threatening military bases.

America’s wars are contrived affairs to serve the money laundering machine: from the taxpayers and money borrowed from foreign creditors to the armaments industry to the political contributions that ensure $636 billion “defense” bills.

President George W. Bush gave us wars in Iraq and Afghanistan that are entirely based on lies and misrepresentations. But Obama has done Bush one better. Obama has started a war in Pakistan with no explanation whatsoever.

If the armaments industry and the neoconservative brownshirts have their way, the US will also be at war with Iran, Russia, Sudan and North Korea.

Meanwhile, America continues to be overrun, as it has been for decades, not by armed foreign enemies but by illegal immigrants across America’s porous and undefended borders.

It is more proof of the Orwellian time in which we live that $636 billion appropriated for wars of aggression is called a “defense bill.”

Who is going to pay for all of this? When foreign countries have spent their trade surpluses and have no more dollars to recycle into the purchase of Treasury bonds, when US banks have used up their “bailout” money by purchasing Treasury bonds, and when the Federal Reserve cannot print any more money to keep the government going without pushing up inflation and interest rates, the taxpayer will be all that is left. Already Obama’s two top economic advisors, Treasury Secretary Timothy Geithner and director of the National Economic Council Larry Summers, are floating the prospect of a middle class tax increase. Will Obama be maneuvered away from his promise just as Bush Sr. was?

Will Americans see the disconnect between their interests and the interests of “their” government? In the small town of Vassalboro, Maine, a few topless waitress jobs in a coffee house drew 150 applicants. Women in this small town are so desperate for jobs that they are reduced to undressing for their neighbors’ amusement.

Meanwhile, the Obama government is going to straighten out Afghanistan and Pakistan and build marble palaces to awe the locals half way around the world.

The US government keeps hyping “recovery” the way Bush hyped “terrorist threat” and “weapons of mass destruction.” The recovery is no more real than the threats. Indeed, it is possible that the economic collapse has hardly begun. Let’s look at what might await us here at home while the US government pursues hegemony abroad.

The real estate crisis is not over. More home foreclosures await as unemployment rises and unemployment benefits are exhausted. The commercial real estate crisis is yet to hit. More bailouts are coming, and they will have to be financed by more debt or money creation. If there are not sufficient purchasers for the Treasury bonds, the Federal Reserve will have to purchase them by creating checking accounts for the Treasury, that is, by debt monetization or the printing of money.

More debt and money creation will put more pressure on the US dollar’s exchange value. At some point import prices, which include offshored goods and services of US corporations, will rise, adding to the inflation fueled by domestic money creation. The Federal Reserve will be unable to hold down interest rates by buying bonds.

No part of US economic policy addresses the systemic crisis in American incomes. For most Americans real income ceased to grow some years ago. Americans have substituted second jobs and debt accumulation for the missing growth in real wages. With most households maxed out on debt and jobs disappearing, these substitutes for real income growth no longer exist.

The Bush-Obama economic policy actually worsens the systemic crisis that the US dollar faces as reserve currency. The fact that there might be no alternative to the dollar as reserve currency does not guarantee that the dollar will continue in this role. Countries might find it less risky to settle trade transactions in their own currencies.

How does an economy based heavily on consumer spending recover when so many high-value-added jobs, and the GDP and payroll tax revenues associated with them, have been moved offshore and when consumers have no more assets to leverage in order to increase their spending?

How does the US pay for its imports if the dollar is no longer used as reserve currency? These are the unanswered questions.

Our brilliant economist friend, Bill Greider has written a must-read essay on Dismantling the Temple and "Six Reasons Why Granting the Fed Even More Power is a Really Bad Idea." (Emphasis marks added - Ed.)

1. It would reward failure. Like the largest banks that have been bailed out, the Fed was a co-author of the destruction. During the past twenty-five years, it failed to protect the country against reckless banking and finance adventures. It also failed in its most basic function - moderating the expansion of credit to keep it in balance with economic growth. The Fed instead allowed, even encouraged, the explosion of debt and inflation of financial assets that have now collapsed. The central bank was derelict in enforcing regulations and led cheers for dismantling them. Above all, the Fed did not see this disaster coming, or so it claims. It certainly did nothing to warn people.

2. Cumulatively, Fed policy was a central force in destabilizing the US economy. Its extreme swings in monetary policy, combined with utter disregard for timely regulatory enforcement, steadily shifted economic rewards away from the real economy of production, work and wages and toward the financial realm, where profits and incomes were wildly inflated by false valuations. Abandoning its role as neutral arbitrator, the Fed tilted in favor of capital over labor. The institution was remolded to conform with the right-wing market doctrine of chairman Alan Greenspan, and it was blinded to reality by his ideology (see my Nation article "The One-Eyed Chairman," September 19, 2005).

3. The Fed cannot possibly examine "systemic risk" objectively because it helped to create the very structural flaws that led to breakdown. The Fed served as midwife to Citigroup, the failed conglomerate now on government life support. Greenspan unilaterally authorized this new financial/banking combine in the 1990s - even before Congress had repealed the Glass-Steagall Act, which prohibited such mergers. Now the Fed keeps Citigroup alive with a $300 billion loan guarantee. The central bank, in other words, is deeply invested in protecting the banking behemoths that it promoted, if only to cover its own mistakes.

4. The Fed can't be trusted to defend the public in its private deal-making with bank executives. The numerous revelations of collusion have shocked the public, and more scandals are certain if Congress conducts a thorough investigation. When Treasury Secretary Timothy Geithner was president of the New York Fed, he supervised the demise of Bear Stearns with a sweet deal for JPMorgan Chase, which took over the failed brokerage - $30 billion to cover any losses. Geithner was negotiating with Morgan Chase CEO and New York Fed board member Jamie Dimon. Goldman Sachs CEO Lloyd Blankfein got similar solicitude when the Fed bailed out insurance giant AIG, a Goldman counterparty: a side-door payout of $13 billion. The new president at the New York Fed, William Dudley, is another Goldman man.

5. Instead of disowning the notorious policy of "too big to fail," the Fed will be bound to embrace the doctrine more explicitly as "systemic risk" regulator. A new superclass of forty or fifty financial giants will emerge as the born-again "money trust" that citizens railed against 100 years ago. But this time, it will be armed with a permanent line of credit from Washington. The Fed, having restored and consolidated the battered Wall Street club, will doubtless also shield a few of the largest industrial-financial corporations, like General Electric (whose CEO also sits on the New York Fed board). Whatever officials may claim, financial-market investors will understand that these mammoth institutions are insured against failure. Everyone else gets to experience capitalism in the raw.

6. This road leads to the corporate state - a fusion of private and public power, a privileged club that dominates everything else from the top down. This will likely foster even greater concentration of financial power, since any large company left out of the protected class will want to join by growing larger and acquiring the banking elements needed to qualify. Most enterprises in banking and commerce will compete with the big boys at greater disadvantage, vulnerable to predatory power plays the Fed has implicitly blessed. Whatever good intentions the central bank enunciates, it will be deeply conflicted in its actions, always pulled in opposite directions. If the Fed tries to curb the growth of the megabanks or prohibit their reckless practices, it will be accused of damaging profitability and thus threatening the stability of the system. If it allows overconfident bankers to wander again into dangerous territory, it will be blamed for creating the mess and stuck with cleaning it up. Obama's reform might prevail in the short run. The biggest banks, after all, will be lobbying alongside him in favor of the Fed, and Congress may not have the backbone to resist. The Fed, however, is sure to remain in the cross hairs. Too many different interests will be damaged - thousands of smaller banks, all the companies left out of the club, organized labor, consumers and other sectors, not to mention libertarian conservatives like Texas Representative Ron Paul. They will recognize that the "money trust" once again has its boot on their neck, and that this time the government arranged it.

Suzan ___________________________

Paulson's Swindle Revealed - You'll Need A Hankie!

Once again we find that it's good to be king, even if you are not king. Ask Cheney/Bush/Greenspan/ Gramm/Rove/Hankie/et al. Bill Greider, a giant in plain-spoken circles, tried to fill us in (the week before the election) about what had been going on while we were busy looking the other way (as instructed) and working to elect a candidate of "change." Do you think it's like a game of "finders keepers" (in this case the finder found a shocked-and-awed populace that couldn't keep-er(!)), and that's it's too late to demand a recount (or at least a public accounting)? You're going to need a hankie. (Emphasis marks and some editing are mine - Ed.)

"I am sure that someone at Treasury saw the terms of Buffett's investment," the union president wrote. "In fact, my suspicion is that you studied it pretty closely and knew exactly what you were doing. The 50-50 deal - 50 percent invested and 50 percent as a gift - is quite consistent with the Republican version of spread-the-wealth-around philosophy." Paulson's Swindle Revealed William Greider October 29, 2008 The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride - a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return. These are dynamite facts that demand immediate action to halt the bailout deal and correct its giveaway terms. Stop payment on the Treasury checks before the bankers can cash them. Open an immediate Congressional investigation into how Paulson and his staff determined such a sweetheart deal for leading players in the financial sector and for their own former employer. Paulson's bailout staff is heavily populated with Goldman Sachs veterans and individuals from other Wall Street firms. Yet we do not know whether these financiers have fully divested their own Wall Street holdings. Were they perhaps enriching themselves as they engineered this generous distribution of public wealth to embattled private banks and their shareholders? Leo W. Gerard, president of the United Steelworkers, raised these explosive questions in a stinging letter sent to Paulson this week. The union did what any private investor would do. Its finance experts vetted the terms of the bailout investment and calculated the real value of what Treasury bought with the public's money. In the case of Goldman Sachs, the analysis could conveniently rely on a comparable sale twenty days earlier. Billionaire Warren Buffett invested $5 billion in Goldman Sachs and bought the same types of securities - preferred stock and warrants to purchase common stock in the future. Only Buffett's preferred shares pay a 10 percent dividend, while the public gets only 5 percent. Dollar for dollar, Buffett "received at least seven and perhaps up to 14 times more warrants than Treasury did, and his warrants have more favorable terms" Gerard pointed out. "I am sure that someone at Treasury saw the terms of Buffett's investment," the union president wrote. "In fact, my suspicion is that you studied it pretty closely and knew exactly what you were doing. The 50-50 deal - 50 percent invested and 50 percent as a gift - is quite consistent with the Republican version of spread-the-wealth-around philosophy." The Steelworkers' close analysis was done by Ron W. Bloom, director of the union's corporate research and a Wall Street veteran himself who worked at Lazard Freres, the investment house. Bloom applied standard valuation techniques to establish the market price Buffett paid per share compared to Treasury's price. "The analysis is based on the assumption that Warren Buffett is an intelligent third party investor who paid no more for his investment than he had to," Bloom's report explained. "It also assumes that Goldman Sachs' job is to protect its existing shareholders so that it extracted from Mr. Buffett the most that it could . . . . Further, it is assumed that Henry Paulson is likewise an intelligent man and that if he paid any more than Mr. Buffett - if he paid $1 for something for which Mr. Buffett would have paid 50 cents - that the difference is a gift from the taxpayers of the United States to the shareholders of Goldman Sachs." The implications are staggering. Leo Gerard told Paulson: "If the result of our analysis is applied to the deals that you made at the other eight institutions - which on average most would view as being less well positioned than Goldman and therefore requiring an even greater rate of return - you paid $125 billion for securities for which a disinterested party would have paid $62.5 billion. That means you gifted the other $62.5 billion to the shareholders of these nine institutions." If the same rule of thumb is applied to Paulson's grand $700 billion bailout fund, Gerard said this will constitute a gift of $350 billion from the American taxpayers "to reward the institutions that have driven our nation, and it now appears the whole world, into its most serious economic crisis in 75 years." Is anyone angry? Will anyone look into these very serious accusations? Congress is off campaigning. The financiers at Treasury probably assume any public outrage will be lost in the election returns. I hope they are mistaken. - - - - - - - - National affairs correspondent William Greider has been a political journalist for more than 35 years. A former Rolling Stone and Washington Post editor, he is the author of the national bestsellers One World, Ready or Not, Secrets of the Temple, Who Will Tell The People, The Soul of Capitalism (Simon & Schuster) and - due out in February from Rodale - Come Home, America.

Anyone else ready to hit the streets? Suzan _____________________________

The Lies of Alan Greenspan

I can't believe that U.S. taxpayers (an increasingly smaller and smaller demographic) are not jumping up and down and screaming their voices hoarse over yesterday's public bailout of Freddie Mac and Fannie Mae. My disbelief is not because I think it will do much (if anything) to change the outcome (which has obligated the middle- and lower-class taxpayers at the bottom of the U.S. wealth pyramid to pay off the debts incurred by the largely non-taxpaying wealthy at the top of the pyramid), but mainly because the debt is so huge, so long lasting and so totally unknown to the vast majority of those who will immediately begin paying it off with their next paycheck (so that the markets can continue creating opportunities for those at the top to find another scheme in the future anywhere near so successful). After all (give them their due), it's not everyday that a little financial chicanery can make so many billionaires out of mere millionaires. My attention (as an economist) is also engaged because this new taxpayer debt dwarfs the taxpayer contribution needed by the Keating Five's Savings and Loan fiasco beginning in the 80's, which prior to this time was the largest taxpayer bailout arising from politician-facilitated treasury extortion (compliments of John McCain and his cronies (which included Alan Greenspan, someone who should have known better than to roll the dice putting the future wealth of this nation at peril), who are once again hungrily eyeing even greater positions of power and opportunities for enrichment). When Bill Greider (The Nation’s national affairs correspondent, who has been a political journalist for more than 35 years and a former Rolling Stone and Washington Post editor) in the following essay states (somewhat drolly) "He (Alan Greenspan) can see the conservative era he celebrated and helped to impose upon the American economy is in utter ruin," I can say with some assurance that if you watch the MSM you get no such message. I don't see any economic reporting of consequence, except the news that comes out of nowhere every few days that another bank or financial institution is going under if they don't also get an immediate shot of taxpayer funds (which supposedly will save them and the whole economy (at least this week) if you can continue to believe the shocked tones of the youngsters reading the new news). (Emphasis marks and some editing are mine.) ________________________________________________

The Lies of Alan Greenspan William Greider The Nation via San Francisco Chronicle (Posted by oikonomikablog) Tuesday, September 18, 2007 Alan Greenspan has come back from the tomb of history to correct the record. He did not make any mistakes in his 18-year tenure as Federal Reserve chairman. He did not endorse the regressive Bush tax cuts of 2001 that pumped up the federal deficits and aggravated inequalities. He did not cause the housing bubble that is now in collapse. He did not ignore the stock market bubble that subsequently melted away and cost investors $6 trillion. He did not say the Iraq war is “largely about oil.” Check the record. These are all lies. Greenspan’s testimony endorsing the Bush tax cuts was extremely influential but now he wants to run away from it. In the instance of Iraq, Greenspan is actually correcting his own memoir, The Age of Turbulence, which just came out. Last weekend, newspapers reported provocative snippets from the book, including this: “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.” Wow, talk about your “inconvenient truth.” Greenspan was blithely acknowledging what official Washington has always denied and the news media faithfully ignored. “Blood for oil.” No, no, no, that’s not what he meant, Greenspan corrected in a follow-up interview (with Bob Woodward in the Sept. 17 Washington Post). He was only saying that “taking out Saddam was essential” for “oil security” and the global economy. Are you confused? Welcome to the world of slippery truth that Greenspan has always lived in. He was the Maestro, as Woodward’s loving portrait dubbed him. Wall Street loved the chairman best because the traders and bankers knew he was always on their side and would come to their rescue. The major news media treated him like an Old Testament prophet. Whatever the chairman said was carved on stone tablets, even when it didn’t make any sense, as it often didn’t.[Ed's note: Most of it due to the Ayn Randian-neoCon pervasive influence.] Some of us, who followed his tracks more closely, were not so kind. Harry Reid, now the Democratic Senate leader, said Greenspan was “one of the biggest political hacks in Washington.” Amen. I called him “the one-eyed chairman” who could always spot reasons to stomp on the real economy of work and production, but was utterly blind to the destructive chaos in the financial system. No matter. The adoration of him was nearly universal. Until now. The economic consequences of his rule are accumulating, and even the dullest financial reporters are stumbling on crumbs of truth about Greenspan’s legendary reign. It sowed profound and dangerous imbalances in the U.S. economy. That’s what happens when government power tips the balance in favor of capital over labor, favoring super-rich over middle class and poor, then holds it there for nearly a generation. Things get out of whack and now the country is paying enormously. A pity reporters and politicians didn’t have the nerve to ask these questions when Greenspan was in power. [Ed's note: And don't forget his wife, Andrea Mitchell (Greenspan) who is still running around PBS with her astute comments about the economic woes of the lower classes. I guess she feels our pain from personal experience.] He retired only a year ago, but is already trying to revise the history — to explain away blunders that are now a financial crisis facing his successor; to rearrange the facts in exculpatory ways; to deny his right-wing ideological bias and his raw partisanship in behalf of the Bush Republicans. The man is shrewd. He can see the conservative era he celebrated and helped to impose upon the American economy is in utter ruin. He is trying to get some distance from it before the blood splashes all over his reputation. Of course, he also came back to cash in — an $8 million advance for a book that is sure to be a huge best-seller. I don’t want to be unkind, but Greenspan could have avoided all the embarrassing questions if his book was posthumous. I haven’t read it yet. I have a hunch I am not going to like it. William Greider is the author of One World, Ready or Not, Secrets of the Temple, Who Will Tell The People?, and, most recently, The Soul of Capitalism (Simon & Schuster).

________________________________________________ Just saying. Suzan

Wall Street's Great Deflation

Here's Bill Greider's astute take in The Nation on exactly what is happening in today's financial markets. (Emphasis marks are mine.) Wall Street's Great Deflation William Greider 07/14/2008 Phil Gramm, the senator-banker who until recently advised John McCain's campaign, did get it right about a "nation of whiners," but he misidentified the faint-hearted. It's not the people or even the politicians. It is Wall Street--the financial titans and big-money bankers, the most important investors and worldwide creditors who are scared witless by events. These folks are in full-flight panic and screaming for mercy from Washington, Their cries were answered by the massive federal bailout of Fannie Mae and Freddy Mac, the endangered mortgage companies. When the monied interests whined, they made themselves heard by dumping the stocks of these two quasi-public private corporations, threatening to collapse the two financial firms like the investor "run" that wiped out Bear Stearns in March. The real distress of the banks and brokerages and major investors is that they cannot unload the rotten mortgage securities packaged by Fannie Mae and banks sold worldwide. Wall Street's preferred solution: dump the bad paper on the rest of us, the unwitting American taxpayers. The Bush crowd, always so reluctant to support federal aid for mere people, stepped up to the challenge and did as it was told. Treasury Secretary Paulson (ex-Goldman Sachs) and his sidekick, Federal Reserve Chairman Ben Bernanke, announced their bailout plan on Sunday to prevent another disastrous selloff on Monday when markets opened. Like the first-stage rescue of Wall Street's largest investment firms in March, this bold stroke was said to benefit all of us. The whole kingdom of American high finance would tumble down if government failed to act or made the financial guys pay for their own reckless delusions. Instead, dump the losses on the people. Democrats who imagine they may find some partisan advantage in these events are deeply mistaken. The Democratic party was co-author of the disaster we are experiencing and its leaders fell in line swiftly. House banking chair, Rep. Barney Frank, announced he could have the bailout bill on President Bush's desk next week. No need to confuse citizens by dwelling on the details. Save Wall Street first. Maybe lowbrow citizens won't notice it's their money. We are witnessing a momentous event - the great deflation of Wall Street - and it is far from over. The crash of IndyMac is just the beginning. More banks will fail, so will many more debtors. The crisis has the potential to transform American politics because, first it destroys a generation of ideological bromides about free markets, and, second, because it makes visible the ugly power realities of our deformed democracy. Democrats and Republicans are bipartisan in this crisis because they have colluded all along over thirty years in creating the unregulated financial system and mammoth mega-banks that produced the phony valuations and deceitful assurances. The federal government protects the most powerful interests from the consequences of their plundering. It prescribes "market justice" for everyone else. Of course, the federal government has to step up to the crisis, but the crucial question is how government can respond in the broad public interest. Bernanke knows the history of the last great deflation in the 1930s - better known as the Great Depression - and so he is determined to intervene swiftly, as the Federal Reserve failed to do in that earlier crisis. By pumping generous loans and liquidity into the system, the Fed chairman hopes to calm the market fears and reverse the panic. So far, he has failed. I think he will continue to fail because he has not gone far enough. If Washington wants real results, it has to abandon the wishful posture that is simply helping the private firms get over their fright. The government must instead act decisively to take charge in more convincing ways. That means acknowledging to the general public the depth of the national crisis and the need for more dramatic interventions. Instead of propping up Fannie Mae or others, the threatened firm should be formally nationalized as a nonprofit federal agency performing valuable services for the housing market. That is the real consequence anyway if the taxpayers have to buy up $300 billion in stock. The private shareholders "are walking dead men, muerto," Institutional Risk Analytics, a private banking monitor, observed. Make them eat their losses, the sooner the better. The real national concern should be focused on the major creditors who lend to Fannie Mae and other US agencies as well as private financial firms. They include China, Japan and other foreign central banks. Foreign investors hold about 21 percent of the long-term debt paper issued by US government agencies--$376 billion in China, $229 billion in Japan. It is not in our national interest to burn these nations with heavy losses. On the contrary, we need to sustain their good regard because they can help us recover by bailing out the US economy with more lending. If these foreign creditors turn away and stop their lending now, the US economy is toast and won't soon recover. Americans should forget about whining; it's too late for that. People need to get angry--really, really angry--and take it out on both parties. What the country needs right now is a few more politicians in Washington with the guts to stand up and tell us the hard truth about out situation. It will be painful to hear. They will be denounced as "whiners." But truth might be our only way out. Comments (104) Suzan ________________________________