March 26, 2009
The voting, taxpaying public had no trouble understanding the outrageousness of AIG’s use of government-supplied, bailout money to pay $165 million in bonuses to its employees. As we all saw, there was a non-stop chorus of outrage, running from letters to the editors of small-town newspapers to death threats against AIG employees and their next-of-kin. However, what most people don’t really understand is how this crisis came about and what the failed solutions have been. Some of us have tried to familiarize ourselves with the alphabet soup of acronyms for those government-created entities, entrusted with the task of solving the most complex financial problems of all time. Nevertheless, we are behind the curve with our own understanding and we will remain behind the curve regardless of how hard we try. It’s no accident. Opacity is the order of the day from the Federal Reserve, the Treasury, the Securities and Exchange Commission and the Commodity Futures Trading Commission. In other words: You (the “little people”) are not supposed to know what is going on. So just go back to work, pay your taxes and watch the television shows that are intended to tie-up your brain cells and dumb you down.
This week, Wall Street was excited to learn the details of Treasury Secretary “Turbo” Tim Geithner’s latest version of what, last week, was called the Financial Stability Plan. In order to make the unpopular plan sound different, it was given a new name: the PPIP (Public-Private Investment Partnership or “pee-pip”). Those economists who had voiced skepticism about the plan’s earlier incarnations were not impressed with the emperor’s new clothes. As Nobel laureate and Princeton University Professor Paul Krugman explained in The New York Times:
But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.
The plan’s supporters now claim that Professor Nouriel Roubini, an advocate for “nationalization” (or more accurately: temporary receivership) of insolvent banks now supports the “new” plan. As one can discern from the New York Daily News op-ed piece by Dr. Roubini and fellow New York University Professor Matthew Richardson, they simply described this plan a “a step in the right direction”. More important were the caveats they included in their article:
But let’s not have any illusions. The government bears the risk if and when the investors take a bath on the taxpayer-provided loans. If the economy gets worse, it could get very ugly, very quickly. The administration should be transparent in making clear that there is still a wealth transfer taking place here – from taxpayers to investors and banks.
* * *
Moreover, there’s the issue of transparency – or lack thereof. No one knows what the loans or securities are worth. Competing investors will help solve this by promoting price discovery. But be careful what you wish for. We might not like the answers.
James K. Galbraith (the son of famed economist John Kenneth Galbraith) has a PhD in Economics from Yale and is a professor at the University of Texas at Austin. His reaction to the PPIP appears on The Daily Beast website in an article entitled: “The Geithner Plan Won’t Work”:
The ultimate objective, and in President Obama’s own words, the test of this plan, is whether it will “get credit flowing again.” (I have dealt with that elsewhere.) Short answer: It won’t. Once rescued, banks will sit quietly on the sidelines, biding their time, until borrowers start to reappear. From 1989 to 1994, that took five years. From 1929 to 1935 — you get the picture.
* * *
And the reality is, if the subprime securities are truly trash, most of the big banks are troubled and some are insolvent. The FDIC should put them through receivership, get clean audits, install new management, and begin the necessary shrinkage of the banking system with the big guys, not the small ones. It should not encumber the banking system we need with failed institutions. And it should not be giving CPR to a market for toxic mortgages that never should have been issued, and certainly never securitized, in the first place.
Back in May of 2006, Dr. Galbraith wrote an article for Mother Jones that is particularly relevant to the current economic crisis. Many commentators are now quoting Galbraith’s observations about how “the predator class” is in the process of crushing the rest of us:
Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia. Instead, predation has become the dominant feature — a system wherein the rich have come to feast on decaying systems built for the middle class. The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth. But it is the defining feature, the leading force. And its agents are in full control of the government under which we live.
The validity of Galbraith’s argument becomes apparent after reading Matt Taibbi’s recent article for Rolling Stone, called “The Big Takeover”. Taibbi’s article is a “must read” for anyone attempting to get an understanding of how this mess came about as well as the sinister maneuvers that were made after la mierda hit the fan. It’s not a pretty picture and Matt deserves more than congratulations for his hard work on this project, putting the arcane financial concepts and terminology into plain, easy-to-understand English. Beyond that, he provides the Big Picture, which, for those who read Galbraith’s discourse on predation, is all too familiar:
People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’etat. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.
The crisis was the coup de grace: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — “our partners in the government,” as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.
The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.
Let’s hope I haven’t scared you out of reading Matt’s article. Besides: If you don’t — you are going to feel really stupid when you have to admit that you don’t know what the ABCPMMMFLF is.
A Page From The Jimmy Carter Playbook
March 30, 2009
When Barack Obama began his Presidential campaign, I was initially skeptical. Here was another guy from “out of the blue” pursuing a bid for the White House. I was reminded of Jimmy Carter: a man who had served a term as Governor of Georgia, who began his Presidential campaign with little name recognition. Carter’s Presidency was marked by rampant inflation and an ill-advised decision to allow Iran’s ailing, deposed Shah into the United States (from exile in Mexico) to die here. That move resulted in the attack on the U.S. Embassy in Iran, and the holding of 52 American diplomats as hostages until the end of Carter’s term in office. Teddy Kennedy unsuccessfully challenged Carter for the Democratic nomination in 1980, knowing that Carter had little chance of re-election. After serving only one term as President, Carter was voted out of office.
At the outset, Carter’s Presidential campaign got a lot of traction from the widespread belief among young voters that Carter would do something to change our nation’s marijuana laws. Not only did Carter lack the political courage to take such a stand once he became President, he did the opposite. Carter authorized the use of an herbicide called Paraquat, to be sprayed on marijuana fields in Colombia and Mexico. Upon realizing that their crops were sprayed with this substance, the sleazy pot farmers quickly harvested the contaminated weed and sent it to market in the United States. As a result, many Americans developed permanent respiratory problems.
Now that the Obama Administration has taken a “States’ rights” position on medical marijuana laws (by refusing to continue the Bush administration’s tactic of prosecuting medical marijuana facilities) proponents for repeal of pot prohibition, have stepped up their campaign. Given the current economic crisis, now might be the time for the government to consider legalizing marijuana and taxing it, as is done with the more dangerous ethyl alcohol.
On Thursday, March 26, President Obama held a “town hall” meeting in the East Room of the White House. Although there were only 100 audience members in the East Room, viewers were invited to submit questions over the Internet. Nearly 100,000 questions were submitted on-line in response to this invitation. As John Ward Anderson reported for Politico:
Although the enthusiastic sycophants in the audience shared a chuckle with the President, many commentators took a dim view of Obama’s discourteous response. Conservative pundit Andrew Sullivan was particularly incensed by the President’s affront to “the online audience”:
On his blog at Salon.com, Pete Guither took stock of reactions to the President’s superciliousness from across the blogosphere. Many of the rejoinders he quoted came from people at The Huffington Post. I will include some of them here.
Jim Gilliam said:
Sam Stein’s retort included the reaction of a law enforcement professional:
Dan Sweeney had this to say:
President Obama’s expressed position on the marijuana issue demonstrates the same political cowardice America witnessed in Jimmy Carter. If you want to read an uplifting story about political courage, Constitutional law and civil rights attorney, Glenn Greenwald, wrote an excellent piece concerning Virginia Senator Jim Webb’s political courage for Salon.com. Not surprisingly, the example Mr. Greenwald chose to contrast with Jim Webb’s political bravery was President Obama’s “adolescent, condescending snickering when asked about marijuana legalization”. The marijuana controversy presents our new President with the opportunity to demonstrate the same degree of political courage exhibited by Jim Webb. He ought to give it a try.