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.

No comments: