Sunday, March 29, 2009

Obama’s Problem

I finally figured out what Obama’s economic policy problem is: He actually believes Treasury Secretary Geithner’s harebrained, cockamamie, welfare-for-wealthy-bankers scheme is going to work; is going to fix the economy, get America growing again.

In simplest terms (partly because I’m no professional economist) the banks made a lot of bad bets so now they feel really poor and don’t want to lend money. What we’ll do is take those pesky debts off of their hands and they’ll feel rich again (you would too if somebody threw tens of billions of dollars at you) and start to lend money again… just in case anybody actually wants to borrow it.

What we’ll do is ask the hedge fund guys (who, by the way, pay income taxes at the same rate, thanks to their good friends in government, as average Sam the roofer) to help us in these hard times. If they will so kindly put up their money to buy those toxic assets we’ll guarantee them against almost all losses. We taxpayers will also let them leverage their generous assistance and equal their paltry 6% investment.

In simplest terms, they put up small money for toxic assets, which actually do have some value (but it’s hard to tell exactly how much since they’re so complicated). If all goes according to theory and the economy turns around those assets will be worth a bundle. If it doesn’t, well then the US taxpayer takes the hit. Very convenient… for bankers.

Here’s an interesting scenario. The banks, even while they’ve been getting showered with public money, have been raising credit card interest rates, in some cases up to 40%; rates of nearly 30% are common. The ‘exotic financial instruments’ that’re giving the banks such big headaches don’t just include subprime mortgages, they also typically include credit card and other types of consumer debt.

So the bank raises credit card interest so high that a lot of people default on their payments. It then goes hat in hand to the government pleading poverty since so many of its credit card customers are in default. The government then, needless to mention, graciously and gratefully covers their losses. Very cool, if you’re a banker.

There are a couple reasons why this nutcase scheme is not likely to work. Firstly, the amount of toxic debt out there in financial netherland is far greater than the US government’s ability to cover.

Secondly, if it actually did work in the short run, the debt burden undertaken combined with a surge in commodity prices that would come with a strong recovery would cause far worse economic calamity than just letting the banks fail and starting from scratch with new banks.

If we did want to get the economy back on track and believed the blockage was based on lack of credit, then a small part of the $10,000,000,000,000 (trillion) the government has already spent or committed or guaranteed on the part of banks too big to fail could create a lot of new banks untainted by the greed and stupidity of the past. With ‘only’ $1 trillion we could capitalize 1000 new banks with 1 billion dollars each, or 10,000 new banks with $100 million each – still a substantial amount of money.

The only reason to pursue the present course is to save the asses of craven bankers. Individual depositors are already covered, it’s only the fat cats that stand to lose if the banks are allowed to fail.

If we really care about stimulating the economy then put money in the hands of the millions of unemployed people who are not eligible for unemployment benefits. Increase social security payments since many recipients are living in or on the edge of poverty. Reform welfare ‘as we know it’ so millions aren’t left hungry and homeless. Put money into keeping people from having their homes foreclosed. Cap usurious credit card rates so debtors can have more money for their survival instead of giving a large part of their income to the banks.

Start universal health care now: that would allow employers to put more workers on short weeks to share the work and let the government cover the loss of income. That’s what Germany does. Employers can put workers on half time with the government covering two/thirds of their income loss.

There are any number of better things that can be done with ten trillion dollars than spoon feeding wealthy bankers.

While we’re at it we should place heavy taxes on the corporations and wealthy. As I’ve been saying for years they have too much money to play with. That is the root of today’s economic problems: too much of the country and world’s resources going into non-productive financial chicanery, not enough into the things needed for healthy lifestyles. Besides, that tax revenue is needed: huge deficits can bring huge unintended consequences.

Sunday, March 22, 2009

A Trillion Here, A Trillion There…

And pretty soon you are talking about real money. What I’m concerned about is an economic reinforcing feedback loop similar to the climate change loop that is accelerating warming. For instance, as warming melts ice and snow which reflects the sun, dark colored earth or sea, which absorb more heat, become exposed, thus intensifying the cycle.

Now we have the figurative printing presses of the fed and treasury running full speed making more than two trillion dollars of new money. Part of it is being used to buy treasury bonds with the purpose of increasing liquidity; that is, there’ll be more cash to lend in case anybody wants to borrow it. The other half will be used to exchange good (though somewhat depreciated) cash for toxic trash investments. The purpose of that is to relieve the banks of responsibility for stupid decisions and incidentally give them a lot more leeway to reward fantastic bonuses for spectacular failure. Without their ‘best and brightest’ where would the banks be today?

By the way, the US government, which owns 80% of AIG stock through $170 billion of bailout cash, considers AIG’s contracts to pay bonuses to its execs inviolable, but required GM’s employees to forego their contract benefits in order for GM to get only $14 billion. Do I see a double standard here?

The money press run immediately caused the dollar to slide 4% against the Yen and Euro. When the value of the dollar goes down, the cost of imported commodities - food, industrials – goes up to compensate. This also causes the trade deficit to go up requiring the US to borrow (print?) more money. The US already needs to borrow nearly two trillion dollars to pay for this year’s budget deficit. This will essentially flood the market, further cheapening the dollar and causing interest rates to rise. Rising interest rates means higher cost for servicing America’s ten trillion dollar debt.

Either way, printing money or borrowing, inflation will be the result. Inflation combined with today’s very low interest rates are bad for savers: saving needs to replace borrowing and spending if the US economy is ever to right itself.

While it’s true that some people understand the severity of the present downturn as equal to the Great Depression, the general feel for tackling the problem relies on thinking of it as just one more recession, albeit a grave one. That thinking allows the pundits, including some I have a lot of respect for, to use statistics like debt as a percentage of GDP to justify these great public expenditures, saying the US debt was much worse, for instance, right after WWII.

Yes, but the population of the US was less than half what it is today and the population of the world an even smaller percentage of today’s. Yes, but natural resources then were virtually, or seemingly, unlimited and thus very cheap; and besides people lived in much smaller houses and lived a much simpler, less acquisitive life. Yes, but there was no consciousness of climate change, no need to consider water shortages or fret over the world approaching - with the impacts of climate change factored in - the limits of food production.

Yes, but the US owes its senior citizens nearly three trillion dollars because it’s been borrowing from the Social Security Trust Fund for the past 25 years, using the excess received from payroll taxes to pad its general budget; funding, for instance, it’s wars and tax cuts for the wealthy. Very soon the extra 200 billion dollars a year from payroll taxes it has had access to will reverse and the government will have to start paying that back further stressing the budget.

A perfect storm is brewing for the US economy and society. Meanwhile, Europe seems relatively unconcerned. American policymakers have been pushing Europe hard to spend more money on stimulus packages to little avail. The answer can be found in Europe’s generous social safety nets. In America, barely half the unemployed are eligible for unemployment benefits, meaning the potential of widespread destitution when jobs vanish. Across the Atlantic, in contrast, all are generously covered so there is no great push to run massive budget deficits to ‘jump start’ the economy. People don’t lose their health care when they are no longer working. All in all, the crisis is seen in much less stark terms. They will not face the same crushing debts.

Prevailing wisdom says don’t worry about the debt, all we have to do is get the economy back on track and tax revenues will increase to cover it. But what if the economy isn’t resusitatable? What if it stays in the doldrums and then food prices spike? There are a lot of conditions that could bring that about. What happens if commodities like oil rise again? It’s still a limited resource and we’re still using it up at a fast pace, even if not as fast as during boom times.

I fear Obama, as smart and well-intentioned as a president can be, is making all the wrong moves. The only consolation is that everyone else who might’ve occupied that office in his stead would’ve reacted at least as poorly. Still, not much consolation when the perfect storm hits.

Tuesday, March 10, 2009

A Bottomless Pit

American Insurance Group has now been showered with a total of $180 billion of public money, supposedly because it’s too big to fail. If a natural course were taken; that is, if AIG, which is basically insolvent, were allowed to go bankrupt we are told there will be terrible consequences for the economy. It’s hard to know for sure because, though it’s public money that has kept it alive, the public is not privy to where the money is going. And while the public’s investment is far greater than the value of the company, the public seemingly has no control over its actions. Or understanding of how deeply it’s sunk in the mire.

Moreover, the mere fact that it has come back, begging bowl in hand, four times in just six months seems a clear indicator that it really has no idea how badly off it is, or what it will take to right it.

There’s no doubt it will be dire, but mostly for the bankers, investors and all-around scammers who, through their unbridled greed and concurrent belief in the tooth fairy, or its equivalent, that property values never go down, have helped to bring the world economy to its knees.

AIG’s ordinary insurance business is not in trouble. The problem is the insurance, aka, credit default swaps, it sold on (now toxic) mortgage backed securities and other ‘exotic’ investment vehicles. What do I care or you care if the high-rollers who bought insurance on their wild speculative purchases don’t have their asses covered by AIG?

The biggest problem is that many of those investments were highly leveraged; that is, as little as $3 was put up to purchase $100 worth of securities. That is how the value of exotic securities out there got to be such an astronomical number. As mentioned previously, while the total US mortgage market is (or was until recently) around $10 trillion, the derivative market based on mortgages was $45 trillion. Eighty percent of that money was imaginary, created from thin air. They gambled on derivatives and then gambled that AIG would cover them in case of loss. Fine, sometimes gamblers loose: so be it.

It’s a bottomless pit. Instead of trying to fill it with public dollars it should be filled with the bodies of the ‘financial wizards’ who created the mess. AIG’s traditional insurance function should be separated out and the remaining stakeholders let loose to fight over the remains. There’s no way the US government can make good on all those bad bets, and no reason to reward those who made them by continuing to gift them with such ungodly amounts of money.

In any other context 180 billion dollars would seem immense: for instance, it would buy an extensive new light rail system for 30 to 40 mid-sized American cities.

And what is the motivation behind not letting them fail? Otherwise, we are led to believe, we won’t be able to regenerate the old system of prosperity based on borrowing and spending.

On the contrary, we should be giving the reckless and profligate past a decent burial, not trying to bring it back from the dead. Especially since every additional billion thrown into the abyss will reduce the resources we have to create a new economy, one based on sustainability, community and a healthy environment.

The consumerism of the past was never a good idea, no matter how much seeming prosperity it engendered. It was based on trying to get people to buy things they didn’t need; to shop as an end in itself. I came across an amazing statistic recently; that there is six times as much retail space per capita in America than in Europe. Vast retail areas will become redundant, and should.

Just in the past few weeks I’ve come across predictions, supposedly from those in the know, that recovery could be right around the corner… by the end of the year, 2010 at the latest. Only one more bailout and we’re over the hump. This one will work for sure. If we only show that we are acting, tackling the problem with gusto, confidence will return and we’ll be back on track.

If only. This is a wreck of a fast train in a tsunami of historic proportions in the core of a category five storm. The economy is not going to look tidy for a long time. No amount of wishful thinking is going to change that imperative.

The only way to ease the increasing hardship of the next few years is to share available work. Slow down, work less, spend less, enjoy life more. Whatever resources the government possesses should be used to keep people from destitution and prop up education and the social part of life. If a lot of people lose their fortunes, well, tough luck. Let the chips fall where they may. We’ll pick up the pieces and start over. Meanwhile we’ll be consuming less and giving the planet a welcome breather.

Ever additional attempt to protect the fat cats will only make the transition that much more difficult by burdening the people of the future with massive and unnecessary debt.