March 15, 2010
Thanks to the great work of Anton Valukas, as court-appointed bankruptcy examiner investigating the collapse of Lehman Brothers, people are finally beginning to realize how significant a role fraud plays on Wall Street. It turned out that the Enron scandal wasn’t the once-in-a-lifetime event people thought it was. Accounting fraud occurs on a regular basis, as does fraudulent stock price manipulation. The 2200-page report prepared by Valukas and his team at Jenner & Block has everyone talking. It’s about time.
Other lies are getting more exposure as well. President Obama justified the bank bailouts with the rationale that giving the money to the banks creates a “money multiplier” effect because banks can loan out 8-10 dollars for every bailout dollar they get, giving the economy more bang for the bailout buck. As I pointed out on September 21, Australian economist Steve Keen published a fantastic report from his website, explaining how the “money multiplier” myth, fed to Obama by the very people who helped cause the crisis, was the wrong paradigm to be starting from in attempting to save the economy. Here’s some of what Professor Keen had to say:
He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:
the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)
This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.
This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.
So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.
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If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375% — more than twice the level that ushered in the Great Depression.
This is a rescue? It’s a “hair of the dog” cure: having booze for breakfast to overcome the feelings of a hangover from last night’s binge. It is the road to debt alcoholism, not the road to teetotalism and recovery.
Fortunately, it’s a “cure” that is also highly unlikely to work, because the model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.
Now that Australia’s economy is beginning to recover, they have already found it necessary to begin raising interest rates. As I pointed out last September:
If only Mr. Obama had stuck with his campaign promise of “no more trickle-down economics”, we wouldn’t have so many people wishing they lived in Australia.
Michael Shedlock (“Mish”) recently referred to Professor Keen’s debunking of the money multiplier myth in a fantastic essay:
However, conventional wisdom regarding the money multiplier is wrong. Australian economist Steve Keen notes that in a debt based society, expansion of credit comes first and reserves come later.
Indeed, this is easy to conceptualize: Banks lent more than they should have, and those loans are going bad at a phenomenal rate. In response, the Fed has engaged in a huge swap-o-rama party with various banks (swapping treasuries for collateral of dubious value) in addition to turning on the printing presses.
This was done so that banks would remain “well capitalized”. The reality is those excess reserves are a mirage. Banks need those reserves for credit losses coming down the pike, as unemployment rises, foreclosures mount, and credit card defaults soar.
Banks are not well capitalized, they are insolvent, unwilling and unable to lend.
Blogger George Washington recently wrote an extensive, thought-provoking piece about public banking and other potential alternatives to resolve the economic crisis, which appeared at the Naked Capitalism website. The essay began with a discussion of Steve Keen’s work in exposing the “money multiplier” as a sham.
Speaking of shams, former Labor Secretary Robert Reich recently wrote a great essay entitled, “The Sham Recovery”. Reich has exposed the propagandists touting the imaginary economic recovery in his unique, clear style:
Business cheerleaders naturally want to emphasize the positive. They assume the economy runs on optimism and that if average consumers think the economy is getting better, they’ll empty their wallets more readily and — presto! — the economy will get better. The cheerleaders fail to understand that regardless of how people feel, they won’t spend if they don’t have the money.
It’s always nice when a big lie gets exposed. It’s even better that we are now learning that the true cause of the financial crisis was plain, old sleaze.
Troublesome Creatures
A recent piece by Glynnis MacNicol of The Business Insider website led me to the conclusion that Shepard Smith deserves an award. You might recognize Shep Smith as The Normal Guy at Fox News. In case you haven’t heard about it yet, a controversy has erupted over a 20-minute crank telephone call made to Wisconsin Governor Scott Walker by a man who identified himself as David Koch, one of two billionaire brothers, famous for bankrolling Republican politicians. The caller was actually blogger Ian Murphy, who goes by the name, Buffalo Beast. In a televised discussion with Juan Williams concerning the controversy surrounding Wisconsin Governor Walker, Shep Smith focused on the ugly truth that the Koch brothers are out to “bust labor”. Here are Smith’s remarks as they appeared at The Wire blog:
Those “troublesome creatures” called facts have been finding their way into the news to a refreshing degree lately. Emotional rhetoric has replaced news reporting to such an extreme level that most people seem to have accepted the premise that facts are relative to one’s perception of reality. The lyrics to “Crosseyed and Painless” by the Talking Heads (written more than 30 years ago) seem to have been a prescient commentary about this situation:
Budgetary disputes are now resolved on an emotional battlefield where facts usually take a back seat to ideology. Despite this trend, there are occasional commentaries focused on fact-based themes. One recent example came from David Leonhardt of The New York Times, entitled “Why Budget Cuts Don’t Bring Prosperity”. The article began with the observation that because so many in Congress believe that budget cuts are the path to national prosperity, the only remaining question concerns how deeply spending should be cut this year. Mr. Leonhardt provided those misled “leaders” with the facts:
Leonhardt’s objective analysis drew this response from Yves Smith of Naked Capitalism:
Those “troublesome creatures” called facts became the subject of an opinion piece about the budget, written by Bill Schneider for Politico. While dissecting the emotional motivation responsible for “a dangerous political arms race where the stakes keep escalating”, Schneider set about isolating the fact-based signal from the emotional noise clouding the budget debate:
Let’s hope that those “troublesome creatures” keep turning up at debates, “town hall” meetings and in commentaries. If they cause widespread allergic reactions, let nature run its course.