We were always told - the invisible hand would take care of itself

Writing at The Black Commentator, David A. Love, JD, brilliantly deconstructs the folly of the currently-proposed $700,000,000,000 "bail-out" of the U.S. "financial system."

Some experts are telling us that this bailout of Wall Street by the taxpayers - with no oversight, no strings attached, no obligations for those who seek the bailout - is necessary to prevent a total collapse of the economy. As for this, I say don’t give it to them. After all, we were always told that the free market, the invisible hand, unencumbered by government regulation, will take care of itself. The Wall Street robber barons would never find such charity in their hearts for the common folk. They would tell us that we can’t depend on government handouts, that we should pull ourselves up by our bootstraps and play by the rules.

And what’s in it for us?

We certainly don’t need a 9-11-style commission to state the obvious, that this financial meltdown is the result of greed. It has finally put to rest a number of fallacies:

The first fallacy is that what is good for Wall Street is good for Main Street, and that increases in worker productivity lead to wage increases. If that were true, then as Wall Street boomed, the average family would not have witnessed a stagnation or decline in their standard of living. Capitalism depends on making a profit, so they say, and if that means cutting wages, then so be it.

The second is that Wall Street hates socialism. Not true. Apparently, they love socialism for the few, socialism for themselves, and to hell with everyone else.

The third is that deregulated free market capitalism, served up for public consumption, is the best thing since shrimp and cheese grits. The reality, however, is pretty clear. Deregulation is a proxy for greed and excess, allowing the hustlers to run their hustle unencumbered, in the light of day, and with the sales receipt in hand for the government they just bought and paid for, and these swindlers have the sales receipt to prove it. Unregulated markets give you mortgage scams, a polluted environment, and now a wrecked economy.

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And who is going to bail out the common, everyday people? The money always seems to be there for certain things, such as war profiteering and corporate bailouts, and of course, that massive upward redistribution of wealth that is eviscerating the poor, the working class and middle class. If we are going to have a good old- fashioned, socialist-style bailout for some, why can’t we have it for all?

Tiny cogs in giant corporate machines whose business interests far outweigh ratings and news revenue

Blogging at FireDogLake, Eli charts a course from Dan Rather's lawsuit against CBS to Chet Koppel's characterization of Disney-owned ABC's News as "a pimple on the elephants behind" to emphasize a point:

This all speaks to a larger point that I've been making for the last seven months: News outlets are little tiny cogs in giant corporate machines whose business interests far outweigh ratings and news revenue, much less truth and objectivity. GE (NBC) is a defense contractor which benefits from endless war; Viacom (CBS) is a vast media empire which requires lax ownership rules to stay together; News Corp. (Fox) is another vast media empire, and (bonus!) is owned by a right-wing loon.

In short, Republican rule is far more profitable to the media's parent companies than the best and most exciting news programming on Earth could ever be, so that's what they strive for. Their primary objective is not good journalism, not even ratings, but simply to do all they can to get Republicans elected... without making it too obvious.

Prophetic Molly Ivins saw this coming nine years ago

I'm confident that Molly Ivins was the most "controversial" columnist the Chicago Tribune ever published, at least to its readership during the time she graced that papers' pages. She invoked STRONG emotional critical responses (from people I actually knew, and also knew to be of the republican persuasion) and strong defenses. Probably more negative responses were published, but that would reflect the Trib's readership.

I doubt that Molly would take any joy, delight, or comfort at being proven right on her insights into the consequences of the 1999 Gramm-Leach Act.

Lordy, Lordy, how I miss her. Here are some highlights from her 26 October, 1999 column:

Which is to say, the new banking bill is a thoroughly lousy idea, and the party most likely to regret it is us.

The 1999 Gramm-Leach Act is about to replace the 1933 Glass-Steagall Act, with the result that bankers, brokers and insurance companies can all get into one another's business. It's a done deal except for the final vote on the conference-committee agreement. The inevitable result will be a wave of mergers creating gigantic financial entities.

In a stupefying moment of pomposity, a New York Times editorial solemnly concluded: "The principle of freer competition is the economic engine of this era. But the other imperative is to demand openness, financial prudence and safeguards so that the vast new concentrations of wealth and power do not create new abuses." When was the last time you saw a vast concentration of wealth and power that DIDN'T create abuses?

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So much money has gone into getting this bill passed during the last 10 years that there is no hope of stopping it.

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Don't get me started on the evidence for my theory that bankers are among the stupidest people on God's green earth. These are the geniuses who loaned all that money to Latin America in the '80s and then had to write it off. This is the system that almost collapsed last year because one hedge fund spiraled out of control — and had to be bailed out by the Fed. These are the clever fellows who didn't notice their banks were being used to launder Russian mafia money.

"Too Big to Fail" will be the new order of the day. And guess who gets left holding the bag when they're too big to fail? One of these monsters goes down, and it will cost as much as the whole S&L debacle.

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Phil Gramm promises us that increased competition will bring about a wonderful world of dandy new services at lower prices. Not a single soul thinks this bill will do anything but cause a tidal wave of mergers and acquisitions, leaving us with fewer options than ever. We'll get fewer and more powerful institutions with the ability to overcharge for products because of their market share.

An ironic reversal of a strategic equation

The keen eye of Jeff Huber peers at the present US financial crisis through through the kaleidoscopic lens of nearly a century's worth of overseas military interventions.

What we're actually observing now is an ironic reversal of the strategic equation that led America to the status of global hegemon. Beginning with World War I (and arguably before that), military intervention overseas both enhanced America's position in the balance of global military power and fueled its economic engine. American has essentially maintained a wartime economy since World War II, the conflict that made the United States the military and economic leader of the free world. Throughout most of that period we have maintained a full time professional force and augmented it with reservists, militiamen, conscripts, and mercenaries. We have also maintained permanent deterrence and first response forces in Europe and Asia as a cornerstone of our Soviet containment strategy.

Ah yes, our Soviet containment strategy. As if the Soviets were ever going to invade the U.S.? Oh, wait. That was before. Back in the days when they were commies.

Oh, and that leader of the free world status? That's what happens when war is not waged on a nation's own soil. But war was waged quite fiercely in Europe (especially in Russia). We didn't have to rebuild anything, merely retool somewhat -- but certainly not retool entirely. The wartime economy has morphed into the Military-Industrial-Congressional-Infotainment-Prison economy, where our major exports are weapons, pot and porn. Oh, and maybe complicated financial schemes.

Meanwhile, on another continent:

The Chinese are keen students of the entirely scrutable history of western civilization and know full well that the Middle East is the traditional graveyard of occidental superpowers. They have been delighted by our folly in Iraq ...

China watched with amusement for decades as the Soviet Union, with its inferior economic model, tried to compete with us in an arms race. Now, the Chinese spectate from the skybox as we pursue an arms race with ourselves, pour national treasure down a sand dune, and continue to depend on a form of national power that has become antithetical to our national interest.

You'll listen to the nattering class babble on the infosphere about how our present economic woes came about as a result of deregulation, and to some extent they'll be correct.

But what you'll actually be hearing is what it sounds like when your country is losing the kind of war that takes place in the brave new world order it created.

Reversal of the historical norm with an overshoot

In another post at FireDogLake, Ian Welsh proposes lowering the "ceiling" to base the government's valuation for any mortgage bailout in order to avoid paying too much for the mortgages.

[A]s it stands the Dodd bill won't actually bail out the economy or the financial sector.

Why? Well, first of all it's paying too much for mortgages. 15% off current prices is less than most properties are going to drop. I know folks don't want to hear that, but a return to trend is more than that. 30% would be a reasonable number, but the proper way to do it is to figure out what housing prices in an area would have been without a bubble and pay slightly less than that, though that's slightly punitive. But then, why not be slightly punitive? No reason why the government shouldn't make a bit of a profit on bailing out banks. They already booked their profits and gave them to their executives, after all.

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The way a housing bubble works is a reversal of the historical norm, along with an overshoot. That's what the US government should be paying - pay for a mortgage what it would have been worth if there'd never been a bubble, minus about 10%. That's a fair price when you're buying what amounts to distressed property and it means you are setting a real floor that allows for a bounce afterwards.

Sounds reasonable. Still, some banks will go belly up. Institutions that have already made realistic write-downs of their "toxic" derivatives won't want to play. Good. They don't have to and thus a lot of the "big guys" who want in to this "bailout" won't be able to get their hands on the money. Even better.

From personal experience, getting 10 cents on the dollar when you sell your worldly possessions is a good deal, when you need the cash immediately. This proposal is a better deal than 10 cents on the dollar.

The only people with enough money to bail out the financial sector

Ian Welsh blogging at FiredogLake has a fascinating take for the abject terror of the politicians and wall street executives. This too makes more than a little sense in attempting to explain the the reasons for the necessity of doing something (anything) quickly.

If the US doesn't bail out its own financial sector (by borrowing money it doesn't have) then the only people with enough money are foreign sovereign funds and large investors. And they will bail it out for cents on the dollar at fire sale prices. The end result would be that New York is, definitively, no longer be the world's financial center. Odds on favourite to be the new one? Dubai. London doesn't want the job (they want to be middlemen). Tokyo can't quite do it. Shanghai isn't ready. But Dubai is raring to go.

And that's one real reason why Congressional leaders and Wall Street CEO's are panicking.

If Wall Street isn't bailed out by Congress, the executives will all be either working for Chinese and Arabs, or they'll be out on the street, drowning their sorrow in their 50 feet yachts drinking $100,000 dollar bottles of whine. Er, wine.

Partnership between kleptocratic insiders and the Treasury

Michael Hudson, writing at Counterpunch, offers another very useful insight into the nature of the present unraveling of the U.S. financial system.

Present discussions of the mortgage mess are lapsing into an unreal world. Advocates of the $700 [billion] bailout are now rounding up a choir of voices to proclaim that the problem is simply a lack of liquidity. This kind of problem, we are told, can be solved “cleanly” (that is, with no Congressional add-ons to protect anyone except the major Bush Administration campaign contributors) by the Federal reserve “pumping credit” into the system by buying securities that have no market when “liquidity dries up.”

What is wrong with this picture? The reality is that there is much too much liquidity in the system. That is why the yield on U.S. Treasury bills has fallen to just 0.16 percent – just one sixth of one percent! This is what happens when there is a flight to safety. By liquid investors. Many of which are now fleeing abroad, as shown by the dollar’s 3% plunge against the euro yesterday (Monday, Sept. 22).

The question that the media avoid asking is what people are trying to be safe from? The answer should be obvious to anyone who has been reading about the junk mortgage problem. Investors – especially in Germany, whose banks have been badly burned – are seeking to be safe from fraud and misrepresentation. U.S. banks and firms have lost the trust of large institutional investors here and abroad, because of year after year of misrepresentation as to the quality of the mortgages and other debts they were selling. This is Enron-style accounting with an exclamation point – fraud on an unparalleled scale.

How many tears should we shed for the victims? The Wall Street firms and banks stuck with junk mortgages are in the position of fences who believed that they had bought bona fide stolen money (“fallen off a truck”) from a bank-robbing gang, only to find that the bills they bought are counterfeit – with their serial numbers registered with the T-men to make spending the loot difficult. Their problem now is how to get this junk off their hands. The answer is to strike a deal with the T-men themselves, who helped them rob the bank in the first place.

There is a long pedigree for this kind of behavior. And it always seems to involve a partnership between kleptocratic insiders and the Treasury. Today’s twist is that the banksters have lined up complicit accomplices from the accounting industry and bond-rating companies as well. The gang’s all here.

A truth uniformly overlooked by kibitzers

James Kunstler has been writing about the unsustainability of the American way of life (massive suburban sprawl totally reliant on automotive transportation and cheap oil and the perpetual decline of industrial production) for a long time. He has issued dire warnings for a long time. His observations on the cultural and environmental landscapes have always been coherent, insightful, and logical. In addition, he is one hell of a writer.

Here are excerpts from Kunstler following the weekend of the Fannie Mae / Freddie Mac bailouts:

Since [2005], the US economy and the financial part of it ... has been held together with baling wire, duct tape, and band-aids. All the debt run up by all parties -- home-owners, credit-card holders, business, banks, hedge funds, government -- is not being paid back reliably, and all the leveraged arrangements that depend on it being paid back are coming apart. Thus, capital disappears. The wealth of a nation disappears. All that remains is the pretense that we are still a wealthy society.

Fannie and Freddie are near the center of this black hole of debt. So far, the black hole has been "papered over" by the old stage magician's trick of diverting the audience's attention. The systemic wound that Bear Stearns represented, was covered up with a band-aid applied by the Federal Reserve's exchange of loans for worthless securities. In fact, the capital of Bear Stearns actually did disappear -- a mere residue of it, a few cents on the dollar, was shifted to JP Morgan as payment for taking the wrapper off the band-aid. But, basically, the money is gone.

One thing this points to is a truth that is uniformly overlooked by kibitzers: that what we developed over the past decade in America was not an "information economy" or a "consumer economy" but a suburban sprawl building economy, meaning an economy dedicated to building a living arrangement with no future. The climax of the sprawl building economy occurred in absolute lockstep with the climax of peak oil. You can date it virtually to the month -- May, 2005. After that, the future asserted itself and all the financial expectations bound up with sprawl-building went up in a vapor -- including the value of mortgages on suburban houses. Everything that followed has been an attempt to cover up this basic reality: that the way we live in America can't continue.

The reason our energy debate is so hollow and idiotic is because we can't face this basic reality.

A mere week later, Lehman Brothers and Merrill Lynch had both exited the financial scene and Kunstler wrote:

[A]s our industrial base waned, and our factories got old and brittle, and our labor force was steeply under-bid by cheaper labor forces, we embarked on a quest for "the new economy." This was represented in successive turns as the information economy, the consumer economy, the high-tech economy, et cetera. They were all ruses, aimed at concealing the truth -- which was that we had become a society no longer producing things of value, no longer generating real wealth. The final act of this farce has been the so-called "financial industry."

That "industry" turned out to be most earnestly devoted to the production of complex swindles. They were so finely engineered that it took twenty years for the swindles to stand revealed, and they were cleverly hitched to the primary thing that the American public vested its identity in: house-and-home. Thus, much of the public finds itself in very real danger of becoming homeless and broke.

Some great questions to ask

Over at PoynterOnline, Jim Romenesko has posted some terrific questions posed by David Cay Johnston that need to be asked, and to which answers need to be DEMANDED from Paulson and the Cheney administration regarding the proposed $700 billion "bail out".

Is there a market solution to this? If so, why impose a government solution? If not what does that tell us about our entire economic theory?

Is there a less expensive solution?

How do we know this will not just be a downpayment on a much bigger bailout?

If AIG and others are too big to fail, what does that tell us about government anti-trust policy and regulatory policy and inaction?

Why have both Goldman Sachs and Morgan Stanley made clear that they want IN on this deal? Get skeptical and ask the basic questions -- who benefits, how much and what makes this plan so attractive that Goldman and MS want to participate? Ditto for GE. That they [and] others want to be included should prompt a great deal of skeptical questioning.

The problem with a one-trick pony

Caught this interesting NYT piece about Alan Greenspan:

Wall Street was initially skeptical that Mr. Greenspan could match the towering Mr. Volcker. But Mr. Greenspan won respect in responding to Black Monday, the stock market crash on Oct. 28, 1987. The Fed slashed short-term interest rates, pumping billions of dollars into the banking system. Within months, the stock market resumed its upward climb.

Lesson learned: decreasing short-term interest rates causes the stock market to go up. Perhaps, but maybe not.

But where did the billions of dollars that were pumped into the banking system come from? Did all these billions of dollars come from market investors who bailed the market before they lost everything?

John Williams Shadow Government Statistics web site suggests a slightly different interpretation of how Greenspan et. al. "solved" the 1987 stock market crash.

Systemic changes were introduced during the Reagan administration to boost reported GNP/GDP growth on a regular basis. The wildest manipulations, however, happened at the time of the 1987 liquidity panic. In addition to intervention in the futures markets by the New York Fed to help prop the stock market after the October 19th crash, direct and heavy manipulation of the trade deficit data, under the direction of the Federal Reserve and U.S. Treasury, was used in conjunction with massive currency intervention to help bottom the dollar and to contain the currency panic at year-end 1987.

Perhaps the wrong lessons were "learned." While reducing the interest rate and increasing the money supply appeared to "jump start the stock market," the Greenspan game plan merely propped it up. Reducing the interest rate by fiat, and increasing the money supply, again by fiat, failed to address any underlying systemic weaknesses.

The political lesson "learned" was that the financial system could be gamed to political advantage. Here are some more examples from John Williams:

As former Labor Secretary Bob Reich explained in his memoirs, the Clinton administration had found in its public polling that if the government inflated economic reporting, enough people would believe it to swing a close election. Accordingly, whatever integrity had survived in the economic reporting system disappeared during the Clinton years. Unemployment was redefined to eliminate five million discouraged workers and to lower the unemployment rate; methodologies were changed to reduce poverty reporting, to reduce reported CPI inflation, to inflate reported GDP growth, among others.

And of course, not to be outdone by Clinton:

The current Bush administration has expanded upon the Clinton era initiatives, particularly in setting the stage for the adoption of a new and lower-inflation CPI and in further redefining the GDP and the concept of seasonal adjustment.

All of which might well explain why, according to Richard Clarke, in Against All Enemies, President Bush's foremost concern after 9/11 was that the markets should open the next day.

So long as the health of the nation, and its financial well being is defined in terms of the DJIA (recently reconstituted to reflect the subtraction of AIG and the addition of Kraft), itself a fictitious number, and the GDP, another inflated figure, then we can all be happy because the "economy is growing" on some macro level.

Are you happy?

I'm not.

One big steaming dungheap that should be leveled

At Counterpunch, an outraged Mike Whitney writes:

Does it concern the members of congress at all, that the present financial crisis was brought on by the proliferation and sale of trillions of dollars of mortgage-banked garbage which were fraudulently represented as Triple A rated bonds by the very same people who now claim to need unprecedented and dictatorial powers to fix the problem? Or are they more worried that the steady torrent of contributions which flows from Wall Street to congressional campaign coffers will be inconveniently disrupted if they fail to ratify this latest assault on democratic governance? The House of Representatives is one big steaming dungheap that should be leveled and turned into an amusement park instead of a taxpayer-funded knocking shop. What a pathetic collection of cowards and scumbags.

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Paulson's plan to revive the banking system by buying up hundreds of billions of dollars of illiquid mortgage-backed securities (MBS) and other equally poisonous debt-instruments; ignores the fact these complex bonds have already been "marked to market" in the recent firesale by Merrill Lynch. Just weeks ago, Merrill sold $31 billion of these CDOs for roughly $.20 on the dollar and provided 75 percent of the financing, which means that the CDOs were really worth approximately $.06 on the dollar. If this is the settlement that Paulson has in mind, than the taxpayer will be well served. But this will not recapitalize the banks balance sheets or mop up the ocean of red ink which is flooding the financial system. No, Paulson intends to hand out lavish treats to his banker buddies, while interest rates soar, pension funds collapse, the housing market crashes, and the dollar does a last, looping swan-dive into a pool of molten lava.

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One minute everything is hunky-dory; the subprime meltdown is "contained" and "the fundamentals of our economy are strong".(Paulson) And, less than a week later, congress is forced to surrender their constitutionally-mandated right to oversee spending in order to forestall economic Armageddon. Which is it? Or is the real objective just to keep the country on an emotional teeter-totter long enough for all state-power to be subsumed by the Wall Street Politburo?