Those of us who found it necessary to explain quantitative easing during the course of a blog posting, have struggled with creating our own definitions of the term. On October 18, 2010, I started using this one:
Quantitative easing involves the Federal Reserve’s purchase of Treasury securities as well as mortgage-backed securities from those privileged, too-big-to-fail banks.
What I failed to include in that description was the fact that the Fed was printing money to make those purchases. I eventually resorted to simply linking the term to the definition of quantitative easing at Wikipedia.org.
Suddenly, in November of 2010, a cartoon – posted on YouTube – became an overnight sensation. It was a 6-minute discussion between two little bears, which explained how “The Ben Bernank” was trying to fix a broken economy by breaking it more.
We eventually learned a few things about the cartoon’s creator, Omid Malekan, who produced the clip for free on the xtranormal.com website. Kevin Depew, the Editor-in-Chief of Minyanville, interviewed Malekan within days of the cartoon’s debut. Malekan expressed his disgust with what he described as “the Washington-Wall Street Complex” and the revolving door between the financial industry and those agencies tasked to regulate it. David Weigel of Slate interviewed Malekan on November 22, 2010 (eleven days after the cartoon was made). At that point, we learned a bit about the political views of the 30-year-old, former stock trader-turned-real estate manager:
I’m all over the map. Socially, I’m pretty liberal. Economically, I’m fairly free-market oriented. I generally prefer to vote third party, because it’s just good for the country if we get another voice in there. To me none of this is really partisan because things are the same under both parties. Ben Bernanke was appointed by Bush and re-appointed by Obama, so they both have basically the same policies. The problem, really, is that monetary policy is now removed from people in general. People like Bernanke don’t have to get elected. There’s a disconnect between them and the people their decisions are affecting.
One month later, Malekan was interviewed by “Evan” of The Point Blog at the Sam Adams Alliance. On this occasion, the animator explained his decision to put “the” in front of so many proper names, as well as his reference to Ben Bernanke as “The Bernank”. Malekan had this to say about the popularity of the cartoon:
To be fully honest, I had no idea this would get the wide audience that it did. Initially when I made it, it was to explain it to a select group of friends of mine. And any other straggler that happened to see it, and I never thought that would be over 3 million people. But, the main reason was cause I think monetary policy is important to everybody because it’s monetary policy. Unlike fiscal policy or regulation, monetary policy, because of the way it impacts interest rates and the dollar, impacts every single person that buys and sells and earns dollars. So I think it’s something that everybody should be paying attention to, but most people don’t because it’s not ever presented to them in a way they could hope to understand it.
Omid Malekan produced another helpful cartoon on January 28. The new six-minute clip, “Bank Bailouts Explained” provides the viewer with an understanding of what many of us know as Maiden Lane III – as well as how the other “backdoor bailouts” work, including the true cost of Zero Interest Rate Policy (ZIRP) to the taxpayers. This cartoon is important because it can disabuse people of the propaganda based on the claim that the Wall Street megabanks – particularly Goldman Sachs – owe the American taxpayers nothing because they repaid the TARP bailouts. I discussed this obfuscation back on November 26, 2009:
For whatever reason, a number of commentators have chosen to help defend Goldman Sachs against what they consider to be unfair criticism. A recent example came to us from James Stewart of The New Yorker. Stewart had previously written a 25-page essay for that magazine, entitled “Eight Days” — a dramatic chronology of the financial crisis as it unfolded during September of 2008. Last week, Stewart seized upon the release of the recent SIGTARP report to defend Goldman with a blog posting which characterized the report as supportive of the argument that Goldman owes the taxpayers nothing as a result of the government bailouts resulting from that near-meltdown. (In case you don’t know, a former Assistant U.S. District Attorney from New York named Neil Barofsky was nominated by President Bush as the Special Investigator General of the TARP program. The acronym for that job title is SIGTARP.) In his blog posting, James Stewart began by characterizing Goldman’s detractors as “conspiracy theorists”. That was a pretty weak start. Stewart went on to imply that the SIGTARP report refuted the claims by critics that, despite Goldman’s repayment of the TARP bailout, it did not repay the government the billions it received as a counterparty to AIG’s collateralized debt obligations. Stewart referred to language in the SIGTARP report to support the spin that because “Goldman was fully hedged on its exposure both to a failure by A.I.G. and to the deterioration of value in its collateralized debt obligations” and that “(i)t repaid its TARP loans with interest, bought back the government’s warrants at a nice profit to the Treasury” Goldman therefore owes the government nothing — other than “a special debt of gratitude”. One important passage from page 22 of the SIGTARP report that Stewart conveniently ignored, concerned the money received by Goldman Sachs as an AIG counterparty by way of Maiden Lane III, at which point those credit default obligations (of questionable value) were purchased at an excessive price by the government. Here’s that passage from the SIGTARP report:
When FRBNY authorized the creation of Maiden Lane III in November 2008, it lent approximately $24.6 billion to the newly formed limited liability company, and AIG provided Maiden Lane III approximately $5 billion in equity. These funds were used to purchase CDOs from AIG counterparties worth an estimated fair value of $29.6 billion at the time of the purchases, which were done in three stages on November 25, 2008, December 18, 2008, and December 22, 2008. AIGFP’s counterparties were paid $27.1 billion, and AIGFP was paid $2.5 billion per an agreement between AIGFP and FRBNY. The $2.5 billion represented the amount of collateral that AIGFP had previously paid to the counterparties that was in excess of the actual decline in the fair value as of October 31, 2008.
FRBNY’s loan to Maiden Lane III is secured by the CDOs as the underlying assets. After the loan has been repaid in full plus interest, and, to the extent that there are sufficient remaining cash proceeds, AIG will be entitled to repayment of the $5 billion that the company contributed in equity, plus accrued interest. After repayment in full of the loan and the equity contribution (each including accrued interest), any remaining proceeds will be split 67 percent to FRBNY and 33 percent to AIG.
The end result was a $12.9 billion gift to “The Goldman Sachs”.
Thanks to Mr. Malekan, we now have a cartoon that explains how all of AIG’s counterparties were bailed out at taxpayer expense, along with an informative discourse about the other “backdoor bailouts”.
Omid Malekan has his own website here. You should make a point of regularly checking in on it, so you can catch his next cartoon before someone takes the opportunity to spoil all of the jokes for you. Enjoy!
Manifesto
For the past few years, a central mission of this blog has been to focus on Washington’s unending efforts to protect, pamper and bail out the Wall Street megabanks at taxpayer expense. From Maiden Lane III to TARP and through countless “backdoor bailouts”, the Federal Reserve and the Treasury Department have been pumping money into businesses which should have gone bankrupt in 2008. Worse yet, President Obama and Attorney General Eric Hold-harmless have expressed no interest in bringing charges against those miscreants responsible for causing the financial crisis. The Federal Reserve’s latest update to its Survey of Consumer Finances for 2010 revealed that during the period of 2007-2010, the median family net worth declined by a whopping thirty-eight percent. Despite the massive extent of wealth destruction caused by the financial crisis, our government is doing nothing about it.
I have always been a fan of economist John Hussman of the Hussman Funds, whose Weekly Market Comment essays are frequently referenced on this website. Professor Hussman’s most recent piece, “The Heart of the Matter” serves as a manifesto of how the financial crisis was caused, why nothing was done about it and why it is happening again both in the United States and in Europe. Beyond that, Professor Hussman offers some suggestions for remedying this unaddressed and unresolved set of circumstances. It is difficult to single out a passage to quote because every word of Hussman’s latest Market Comment is precious. Be sure to read it. What I present here are some hints as to the significance of this important essay:
For some insight as to why the American megabanks were never taken into temporary receivership, it is useful to look back to February of 2010 when Michael Shedlock (a/k/a“Mish”) provided us with a handy summary of the 224-page Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky). My favorite comment from Mish appeared near the conclusion of his summary:
On January 29 2010, David Reilly wrote an article for Bloomberg BusinessWeek concerning the previous week’s hearing before the House Committee on Oversight and Government Reform. After quoting from Reilly’s article, Mish made this observation:
David Reilly began the Bloomberg Business Week piece this way:
That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner. David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:
At least in the Eurozone there is fear that the taxpayers will never submit to enhanced economic austerity measures, which would force the citizenry into an impoverished existence so that their increased tax burden could pay off the debts incurred by irresponsible bankers. In the United States there is no such concern. The public is much more compliant. Whether that will change is anyone’s guess.