It’s the Bank’s Problem

There’s a saying about banks and borrowing: If I borrow $10,000 from the bank and subsequently default, it’s my problem. If I borrow $10 billion from the ban, and default, it’s the bank’s problem.


Greece is on the edge of default. All the money thrown at the country in recent times has been expended in the fervent hope that some miracle will happen to make the country’s debt sustainable. European and international financial institutions are in denial of the inevitable default so are merely delaying the day of reckoning.


They are deathly afraid that Greece’s default will drag several large European banks down with them, because that’ll mean ‘recapitalization’, in other words, another bailout. If they can stave off default by loaning the country lots of money (which it’s very unlikely to ever be able to pay back under any circumstances) then they won’t have to give away lots of money to their too-big-to-fail banks. Either way a lot of good money will be thrown after bad and the citizens of the more frugal northern countries called upon to bail Greece out will be just as irate as the Greeks who are being called on to make sacrifices.


There are three basic reasons why default is inevitable. First is that the country’s debt level is just too high. All of the austerity measures taken and demanded so far by the international financial institutions and Eurozone countries who are loaning the money are only reducing the annual deficit, not balancing the budget, so under the most optimistic scenario, Greece’s debt will continue to rise to even more stratospheric and unsustainable levels. Secondly, many, if not most of the measures undertaken to reduce the deficit are slowing the economy, thus raising unemployment, which then increases social costs and reduces revenue and so turns out to be counterproductive; the more austerity that’s enforced or attempted, the closer the country comes to default.


Finally, the people won’t stand for additional austerity regardless of any consequences that might befall the country. Maybe they truly do not understand the seriousness of the situation or maybe they do, but either way they are fighting back to the point where the government will be powerless to act. Maybe the Greek people think default will be better than trying to meet the country’s crushing debt obligations or maybe not, but either way it won’t be pretty. At least under default the slate will be wiped clean, or at least reduced to a manageable level.


Greece’s economic problems, along with those of Ireland, Portugal, Spain, Italy, UK, US and many more countries, goes back to the fundamental ethos of neo-liberal economics that’s held sway in the financial world since Reagan and Thatcher.


Neo-liberalism has three basic tenets. First is the obsession with growth in all situations regardless of the existential circumstances of each country. Second is the insistence on low taxes on corporations and the wealthy. Third is the demand that the actions of the economic establishment be unregulated.


Japan provides the best example of the absurdity and idiocy of the all-growth-all-the-time paradigm. Economists the world over have lamented Japan’s ‘lost decades’ of stagnant economic growth. But Japan is already a wealthy country and it not only has a declining population but also an aging one. If population as a whole is declining and the proportion of the elderly, who typically have less need or desire to consume, is growing then the economy should be declining, not growing. Moreover, if the economy is ‘stagnant’(I prefer the word, stable) in a declining population then its per capita income is actually growing: shouldn’t that be enough? And yet, in a frantic and ultimately futile attempt to adhere to neo-liberal economics the country has amassed the world’s highest debt to GDP ratio - 220% - building lots of bridges to nowhere. If they hadn’t accepted the obsessive growth paradigm they could’ve shared the available work and taken lots of vacations instead of continuing to work the longest hours of any industrial society. They could’ve rested on their laurels, been content with their already wealthy status and started to enjoy life.


The insistence on low taxes for corporations and the wealthy has two major impacts. One is the excessive and destructive speculation that arises from the wealthy having too much money on their hands. The other is the debt that governments accumulate because tax receipts are insufficient when the fat cats are lightly taxed.


Finally, the demand that the activities of society’s economic controllers be unregulated combined with them having more money than they know what to do with brings wild economic swings with inevitable and debilitating busts coming after giddy and unsustainable booms. It doesn’t have to be that disastrous for an economy or a people. Germany experienced a downturn equal to America’s but its unemployment rate grew only minimally. They accomplished that by setting up a program that encouraged companies to put people on short hours with the government making up the difference.


If we were going for sustainability, the good life, spiritual growth instead of blind, mindless consumerism, there’d be neither booms, nor busts. There’d be neither high unemployment, nor widespread poverty. It wouldn’t take much in the way of income redistribution to insure that no American needed to be hungry or homeless. Meanwhile, the poor and middle classes are called upon to sacrifice so that the wealthy can have more tax breaks. And the Repuglicans call it class warfare when the masses object.


Every tax law is a political statement; one way or another somebody is going to have to pay. Since nobody likes taxes and governments are therefore reluctant to levy them, they’ve relied on huge levels of borrowing to make up the difference in the fervent hope that economies will grow enough to make the additional debt payments tolerable. That works until the burdens get too large for governments to sustain and/or inevitable downturns happen because of deregulation and speculation. Either way you’re in a pickle.


Now Obama, our very own Manchurian candidate, is starting to talk tough about raising taxes on the wealthy. Ah, yes, the campaign is beginning and since raising taxes on the wealthy is supported by more than 70% of the American people, it sure won’t hurt his chances for reelection to throw a little red meat to the angry electorate. However, he also made sure to keep his overseers happy by agreeing to cuts in Medicare and Medicaid, saying he wouldn’t accept cuts in those programs without (minimal) tax rises for the wealthy. In other words, slash away wingnut congress, your dream of starting the evisceration hated social programs has been answered.


The world is slouching towards economic disaster because nothing has changed since the 2008 blowout to rein in out-of-control banksters. Witness a ‘rogue’ trader at Swiss bank UBS losing the bank more than $2 billion. You’d think they’d be watching a little more closely or investing a little more conservatively. The certainty of another crash is also indicated by a recent news announcement from the UK that retail banks, where people have their checking accounts, etc., were going to be separated from investment banking, which is no more or less than speculation, a.k.a., gambling. Separation is an absolutely essential change if future bailouts are to be avoided. The problem is that the UK’s new rule is not programmed to take effect until 2019, giving the banksters all the time they need to create another, even multiple, banking meltdowns. Why 2019? Why not 2050? Sure wouldn’t want to unnecessarily rush the banks, would we?


Anyway, there’s always more money in the coffers for bankster welfare… until there isn’t. There will be until the people rise up and say, No more!, regardless of the consequences.

Reservoir Going Dry

Regarding the ‘reservoir of wealth’ statement I made in my last article a reader asked a question via email which I will respond to.

There is a positive aspect to the immense reservoir of wealth I referred to in the sense of their being a large tranche of money in the hands of many Americans to help keep the economy afloat (even if just barely). However, on the negative side it will merely prolong the day of reckoning.

Another point that maybe wasn’t clear was that the mother of all bubbles refers to inflation and the crash of the dollar.

The US has been living way beyond its means because the dollar’s status as the world’s reserve currency exempts it from the hard choices that every other country has to make under the same spendthrift conditions. Every other country has to raise taxes, cut expenditures and generally tighten its belt. The US only has to print more dollars.

That exemption is soon to be sorely tested since the other countries who’ve been financing America’s debt are beginning to balk. China in particular has begun to fear for the safety of its trillion and a half dollars worth of US investments and rightly so since America’s debt binge is only intensifying in the desperate attempt to restore the old economy.

What a travesty, an embarrassment to see Obama and Geithner obsequiously reassuring China that it’s investments were safe, that America was interested in a strong dollar.

A lot of countries are talking of switching their assets, or parts of them, to more stable and possibly more universal currencies, once again presenting a great challenge to the dollar and the American economy.

A big part of the run up of oil prices last summer was the corresponding fall in the dollar, it hit a low of $1.60 to the Euro. The dollar then, almost counterintuitively, rose in value last winter. With economies crashing everywhere, the dollar seemed a relatively safe bet to many people and it went up to 1.25 to the Euro. That also corresponded to a fall in oil prices down to a low of about $35 per barrel.

Now the dollar is back down to $1.40 against the Euro and still falling and oil prices have surged back to near $70 per barrel. Oil’s rise is based on two other basic reasons besides the fall in the dollar.

One is the inexorable decline in reserves. The fact that oil is currently being used up at a slower pace than during the boom doesn’t change the reality that it’s being used up. China is still growing at 8%, India at 6%. Added together they have about 40% of world population. Since transitioning to a sustainable energy world is today 99% words and 1% deeds, they are doing their best to take up the slack in consumption (and resource depletion) created by the fall in demand in the developed world.

Finally the matter of speculation rears its ugly head. As long as the wealthy are flush they have to find somewhere to play with their money. As long as those types of transactions aren’t taxed, they can play to their heart’s content: to no one’s benefit but their own. If taxed, they would be more cautious and circumspect.

The stage is set for a steep rise in oil prices in the next two or three years.

First a very short description of monetarism; the guiding principal of American economic governance for decades now. Simply put: Inflation means the economy is growing too fast so you raise interest rates to slow it down and thus dampen inflation. High unemployment, which means the economy is in the doldrums, is countered by lowering rates.

The fact that the theory has failed miserably to describe actual events has not deterred its proponents one iota. The Clinton years were characterized by low inflation and low unemployment – wasn’t supposed to happen that way.

Before that during the Carter years there was high inflation and high unemployment, but that 1970’s inflation was caused by a spike in oil prices, not a roaring economy. One way the theory falls down is not recognizing that scarcity completely changes the price paradigm. If a time of inflation is not based in any way on an overheated economy, then raising interest rates can only make it worse.

Interest rates under Carter went up to 17% to counter soaring inflation, but the high rates were themselves fueling same. Maybe interest rates fluctuating between 2 and 6% would not have an effect on underlying inflation, but 17%, for sure.

So here’s the scenario: oil prices spike, triggering inflation, which in turn calls for high interest rates to counter it, which in turn batters the economy further. Meanwhile, the US government will need to raise fantastic amounts of money on the bond market to pay for monster deficits, as well as raise large amounts for bonds that have to be redeemed and refinanced.

To do that it will have to raise the rates it pays in order to entice buyers. They are already wary, so the rates may have to go relatively high. Higher rates also mean a lot more of the budget will need to be devoted to servicing debt. The only other alternative is to print money; either way a surefire recipe for inflation.

To begin to right the budget and the nation’s priorities, the first step has to be higher taxes, including heavy taxes on the wealthy and corporations. This will curb speculation and get the debt onto a manageable level.

It’d be perfectly ok to increase debt if it were going for alternative energies, electric vehicles and fast trains because those types of investments would shield the nation somewhat from higher fossil fuel prices to come.

Raising taxes as high as necessary to insure food, shelter and health care for all should also be a no-brainer. In real life the bankers get their trillions while homeowners facing bankruptcy get almost nothing.

So sorry, but America is addicted to the cheap fix of devil-may-care debt. There’s literally no chance the political establishment would even understand the imperative of raising taxes to tackle the budget deficit, let alone actually make it happen.

So what’s the prognosis? The US will muddle along doing its best to avoid reality until the next crisis, which will be of mega proportions. It will haughtily, arrogantly depend on belief in its own exceptionalism to imagine that it has a cosmic dispensation to be irresponsible without the burden of consequences. Bumpy ride ahead, folks.

The Root Cause

What Should Obama Do? The above question, referring to the economic crisis, was posed to me by a friend who often comments, especially lately, on my commentaries. I would have a very difficult time answering that question because what Obama should do is radically different from what I would do.

Nonetheless, there are several areas in which I am in substantial agreement with the President. (My god, what a great relief it is to write about an American President without feeling compelled to be derisive, derogatory, caustic and spiteful.) For sure, massive investment in infrastructure, especially focusing on electric transportation, is something that cries out for happening regardless, so now’s a perfect time to tackle those needs. Increased unemployment benefits, food stamps, assistance to state and local government are obvious responses to the hardship that is/will be felt across a wide spectrum of society. Renegotiation of mortgage loans under foreclosure is another obvious no-brainer (though equally obviously, there can’t be many brains in Washington or it’d already be happening).

There’s an additional factor that desperately needs action that we might agree on, but for different reasons. That is America’s rotten health care system. While we both would concur on the social and ethical reasons for reform, there is an equally important economic reason, which we wouldn’t agree on; that is, the need for job flexibility and short work weeks.

Obama has totally bought into corporate-oriented conventional wisdom that requires manic pursuit of a return to growth by any means possible – bailouts, borrowing, income tax cuts, lower interest rates. Any straw in the wind is being grasped to try to rescue and reinvigorate that fundamentally destructive and bankrupt world view.

People are cutting back on consumption because they have less to spend based on declining wealth – falling asset values - or loss of employment or because they wisely understand the need to save for trying times ahead. Economic activity is thus declining sharply which is good for the world, bad for the old economy. If unemployment spikes as a result and you believe, as I do, that contraction is a good idea, then the only solution is sharing the available work. Stimulus packages will keep the economy from crumbling but won’t bring full employment.

Besides, people need to work less as a matter of principle – more leisure, more time for social life, less money for consumption. This can not happen as long as America has an employer-based health care system which encourages employers to work their staffs longer hours. Thus, single-payer health care is an absolute prerequisite for the purpose of slowing life down and improving its quality. A single-payer bill was submitted to Congress with 93 co-signers but hasn’t received a single hearing so don’t hold your breath; nobody in power wants to upset the insurance, pharmaceutical and health care industries.

The US is projected to have a trillion dollar budget deficit this year as a result of reduced revenues because of the downturn and the cost of stimulus packages and bailouts. The addition to the national debt as a result should not be taken lightly: these are perilous times to take on massive new debts. We are hearing a lot of talk lately of the renowned economist of the 30’s, John Maynard Keynes. In response to Hoover cutting back on government spending to reflect a downturn in revenues caused by the 1929 economic crash, he suggested that government should do the opposite and increase spending to get the economy moving again. He argued that deficits could be made up later on upon recovery.

The problem with invoking him now is that he advocated building up surpluses during good times to balance the deficits of the bad whereas we are beginning this economic meltdown after a string of massive deficits. It can be argued that those large government deficits, along with obscene levels of personal debt are what had kept the economy from stagnation since the start of the Bush disaster. America was essentially on a compulsive borrowing binge.

Therefore, I’m totally opposed to any form of tax breaks except those relating to the least fortunate members of society. The average doctor earns $265,000 per year, so that nearly half would receive a tax break under Obama’s tax cut plans for those earning less than $250,000. They undoubtedly have everything they truly need in life so whatever they would spend the money on would be bad for the world and should not be produced.

As I’ve ranted and railed about ad nauseum recently, the last thing we need to do is rescue the old economy of profligacy, waste and mindless debt-fueled consumption. To that end, the wealthy and corporations should absolutely be reined in.

While I wouldn’t advocate a return to the 91% personal income tax rate of the fifties and sixties, taxes on the wealthiest should be raised to at least 50 or 60%, not only to raise money but also to curb unnecessary consumption. Corporate tax rates should also return to rates of the past sufficient to restore the fifty-fifty ratio of income taxes once paid by corporations and individuals.

Corporations are creatures of the state and must be tightly supervised. For more than a century they have enjoyed the privileges of personhood with none of the responsibilities. When a person commits a crime they are taken out of circulation, when a corporation does, they are slapped with a small fine and thus encouraged to be on their merry thieving ways.

There are several ways the corporations have of controlling the American agenda. The most important and insidious is advertising; it is the root of corporate evil. It’s worth reiterating the stunning conclusion of a study done on the effects of advertising on pre-school 3 to 5-year-old kids. When served mcdonald’s burgers in plain and company wrappers, 80% said the burger in the corporate-logoed wrapper tasted better. America’s children are being educated for the corporate bottom line before their personal health. For the need for luxuries before the health of the planet. Americans are told it is their duty to buy things they don’t need and often can’t afford, thus building mountains of debt, for the sake of the economy.

I would remove advertising from deductible business expenses, except for a reasonable amount needed by a small local business, maybe $25,000 per year. People don’t need to be encouraged to consume, it’s already a natural response: old things wear out, new innovations come on the market. People will continue to consume without the encouragement of advertising, just not so much of the mindless sort. Let corporations compete based on producing quality instead of slick marketing.

Slowing consumption requires reining in credit. Even as Citigroup is showered with $320 billion in public welfare, it charges nearly 30% interest on credit card debt, for many people making it difficult to ever clear their debt. Thanks to a corporate funded Congress, bankruptcy laws were changed recently to make it harder to erase those debts, even putting credit cards on an equal footing with child support.

Credit has its importance; easy credit is a mistake. People need to be encouraged to save. I got turned off to credit with my first experience. I bought an article - don’t remember what, it was nearly 50 years ago – on a six month payment plan. After 2 months the article broke, but I had to keep paying on it and I thought, this is nuts. In the fifties, you could buy a car with 20% down and two years to pay. If you had to sell before the term was up, you had some equity in the vehicle. Today, with no down and 7 years to pay, you have to take large sums out of your pocket to sell within the first two years: that is crazy.

Tightening credit is a good idea. Let homebuyers bring a 20% down payment with them and let the government subsidize mortgages for the bottom half of society. Anybody with a solid history of work and responsibility should have access to their own home. In recent years they’ve been excluded from home ownership by artificially high prices. Prices which only could’ve risen with the help of ‘innovative’ subprime mortgages.

The Root Cause of the current economic meltdown is too much money in the hands of the wealthy and powerful. They have time on their hands, they are obsessed with making money and often have no scruples. With money to burn they have created an economic bubble, a Ponzi scheme of epic proportions; one that is bringing hardship to people all over the world.

Therefore, excessive wealth must be curbed and all forms of speculation taxed. Even a small stock transaction tax would discourage short term speculation. Let investment be for something more than pursuit of a quick buck; something that embodies lasting value. International currency transactions should be taxed and the proceeds used for development aid to the world’s poor.

Unfortunately, Obama’s picks for his economic team do not leave much room for confidence since they are uniformly on the corporate bailout side. They helped to create the deregulation that is responsible for the current crisis and most likely have no other idea how to fix the system than repeat the mistakes of the past.

Repeating the mistakes of the past will only dig the hole deeper with debt that will have to be paid eventually, and paid with even more pain than it would take to start to work it down now.

I realize my economic prescription involves a severe deflation with serious consequences, but, I would argue, no more serious than the impacts of propping up the old economy. At least, we would come out with a sustainable, well-being oriented lifestyle designed to benefit the majority who’ve been left out in these past decades of conservative trickle-down economic thinking.

Economic Meltdown Next

Alan Greenspan now says nobody could’ve predicted the scale of the current banking meltdown. Meanwhile, the Maestro, as he once was called, who guided the economy with a “magic touch” during his long tenure blithely ignored every indicator that trouble was brewing. He is correct, of course; nothing like this has happened since 1929, and moreover, probably wouldn’t have happened if the banking reforms put into place in response to that calamity hadn’t been eviscerated ten years ago under Clinton’s watch.

For certain, everybody who didn’t have a personal vested interest in being optimistic, was pointing out extreme imbalances and deficiencies in the economy that were likely to have serious, if not necessarily catastrophic, consequences. People involved in reporting on and opining about the business news invariably own stocks and are totally sold into the conventional wisdom so unconsciously project optimism in their reporting. You know: “All we need is a few trillion dollars to bail out the banks and they’ll start trusting each other and then they’ll start lending as before and people will be borrowing just as in the past and in a couple of quarters the world economy will be back on track.”

They also assure us that we can’t have another Great Depression because we ‘responded’ quickly with huge bailouts and because there are now programs in place to protect individuals from the extreme deprivations of the thirties. As to the latter: Thank God for small miracles; people will at least have something, small as it may be – I get $600 month in Social Security; how far will that get you in America? - to help negotiate the hard times.

The bailout may have led bankers to feel a lot better about themselves and the security of their exorbitant pay, but even if it was enough to get them loaning money again, not many will want to borrow.

Let’s face it, anybody with half a working brain cell who isn’t part of the wealthy elite, is hoarding their resources, saving for a rainy day, learning how to get by on less (if not yet, then soon). That being the case, industrial production will plummet, housing construction will grind to a halt, any business that depends on discretionary spending - restaurants, etc – will see their profit margins reduced to the bone, governments will be starved for revenue and be forced to cut back on services… you get the picture.

There’s no going back to bubble-like days of prosperity predicated on figmentary money created out of whole cloth or based on borrowing from the future. Recent precipitous falls on world stock markets show that investors are catching on that this is not a temporary detour on a strong upward economic path; a mere glitch in the endless growth paradigm.

This is going to hurt, as well it should. Americans, amongst all the world’s rich peoples, have been living beyond their means and the ability of the earth to provide for their insatiable appetites. It had to come to an end. For sure, it would’ve been a lot smarter and easier and more sensible to gradually transition to a more stable, sustainable lifestyle, but there’s nothing in the world, that is, no amount of reason or logic, that could’ve stopped this juggernaut from destroying itself in an orgy of excessiveness and exuberant irrationality.

Thankfully the entire neo-con, unfettered free market, trickle down economic regime is crashing and burning after a long and bruising binge… while also leaving a hangover that has created a monumental headache for the world.

Europe is closer to getting the message than the US. When the former bought stakes in tottering banks they took voting power, in some cases, voting control of the institutions. America purposely took no voting rights: I guess that would be too much like socialism to take control over institutions that you’ve just showered with Joe Sixpack’s money. Bush and the Democratic Congress wanted to preserve the ‘Free Market’.

The American economy is going to languish in the doldrums for a long time. I’m hoping against hope it’ll emerge in an entirely new and sustainable context. With oil prices hitting rock bottom this is our last chance to convert at a reasonable cost. Petroleum won’t stay cheap for long. World population is growing along with their aspirations. If China’s growth slows to half last year’s pace there’ll still be millions of new cars on their roads every year. Electricity demand in lowly Cambodia, currently supplied 90% by fossil fuel, is growing at 25% a year in spite of 80% of its people not even being connected yet.

There’ll need to be massive New Deal type public works programs and welfare – that dirty word - for the destitute and people simply experiencing hard times. There’ll need to be a sharing of available private-sector jobs else unemployment really will approach Depression era levels. There’ll need to be publicly financed mortgages for low income people. And there’ll need to be higher taxes on everyone but the poorest else public debt become an unsustainable burden and public works be impossible to finance. Let’s not forget that America experienced some of its most prosperous times during the fifties and sixties when income tax rates on the wealthy stood at 91%.

As most of you reading this I’m hopeful that Obama will rise to the occasion. That he will bring the country together in a way that takes the hardest edge off of hardscrabble times. In no manner will it be easy, but at least he won’t emulate Hoover saying giving food to hungry Americans will hurt their self-reliance.

For certain, dynamic and fascinating times are ahead.