Don't Fear The Reaper, Or, Enjoy Democracy While It Lasts
Everyone also knows the mortgage-backed securities that are at the heart of the current emergency are worth far less than their 'estimated' value because the mortgages in the 'pools' are either bad, or going bad as more and more people lose their jobs and foreclosures rise. If the true value of the CDO's was determined, the banks and financial institutions holding them would collectively lose Trillions of dollars, around the world.
Unfortunately, all this unacknowledged debt is an unacknowledged, badly fouled diaper everyone can smell. The MBS's and CDO's, worth pennies on the dollar, are like a grenade with the pin out being held by a drunk, standing in a room up to his waist in gasoline, who won't be able to stay awake forever. Everyone, I feel, knows the 'crisis', the 'Recession' that was supposed to have ended in 2009, is far from over.
The balance is so delicate, that the odds are good some confluence of events will occur (possibly a 'Black Swan' moment, a thing that appears unconnected and unanticipated) to trigger another massive drop in world stock markets, and another cycle of job loses, business failures... And because the Banksters will squeal and say, We've Got The Money!! We're The Glue Holding The World Together! We're Too Big To Be Allowed To Fail!, governments will be forced to step in, again, and bail out these freaks and cretins.
Only, governments can't take on another few Trillions in debt, without political repercussions -- as in Greece. As in France. As in Portugal, and now Ireland: Massive cutbacks in government spending, loss of public institutions and programs we thought would last forever; even the sale of Federal assets to investors and sovereign funds from foreign governments. These Fire Sales benefit some Oligarchs, the Chinese and Arab Emirates, and a few individuals and families here at home, like the Kochs' and Coors', and the rest of that layer of filth floating at the top.
But you and I and everyone else will live with less, and "bear the burden; pay the price" in a lowered standard of living, lower expectations; and in politicians who screech and squeal and move farther and farther to the Right both in rhetoric and actions.
The Banksters are trying to find something, anything to forestall that reckoning as long as possible, but even they know it's a zero-sum game: At some point, the debt everyone is holding will have to be paid, and it cannot be hidden forever.
Failing The The Greatest Test Of A Generation
...and the real bitter pill is, it absolutely did not have to end this way.
Our government's essentially handing money to the U.S. investment sector -- first, the TARP giveaway, and then the Obama subsidies to Wall Street, the major banks and insurance companies -- has only temporarily shored up the continuing corrupt thuggery, the rot and collapse of these same corporate banks.
The opportunity was available to President Obama to do what FDR had done, and rein in the power of the financial sector for the next fifty years: The institutions which created and profited from all this should have been allowed to fail. The FDIC would have done what it could; shareholders would have taken a bath and gotten pennies on the dollar -- business Darwinism, baby; red in tooth and claw, and the sociopathic greedheads who created this crisis would have had a comeuppance. Some might have ended up in jail.
More important, punishing the kind of behavior that destabilizes the largest economy on the planet would have taught our banking and investment community not to do this again, and follow it with New-Deal-style banking reforms. This would have found enormous public support. The Rethugs Right would have had to jump on the bandwagon or pound sand. The Democrats had control of both Houses of Congress -- all that was needed was the political balls to do so.
That this didn't happen, not even a variation of it, guaranteed the Recession will become a Depression, continue for at least another decade, and will become much worse (That's just One Dog's opinion, by the way. You may have your own, but we'll see). That it didn't happen has been the greatest single failure of Obama and his administration.
There are a huge chorus of voices, primarily on the Right, saying But you couldn't have done that! It would have triggered a complete financial catastrophe! Ragnarok! Armageddon! Government interferring in private industry!! The nation would have been bankrupted overnight; Teh Confidence of Teh Markets!! Teh MARKETTTTS!! Blah blah buh, uh, buh buh buh buh!!!
Not true. Barry Ritzholz' recently noted at The Big Picture ("Too Bad The Banks Didn't Get The GM Treatment") that GM -- a company badly-managed for decades, had to accept bankruptcy, reorganization, and a huge loan from the government -- meaning, the Taxpayers owned a huge chunk of GM.
... Uncle Sam’s involvement was to provide Debtor-in-Possession financing. The bankruptcy plan was obvious: Wipe out shareholders, give bond holders a haircut, fire management, pare the company down to a sustainable size without sentiment.
This was what was done. A turnaround plan was created and executed. If the company met its milestones, the firm would be taken public, which would allow the government to significantly reduce its stake and exposure to GM. The Fed also helped, keeping financing rates at ultra low levels... The long term stock sale plan would lead to the taxpayers being made nearly whole. All told, it was a wild success.
Rtizholz goes on to say that the same process should have been used against the Banskers -- but it wasn't, and as a result...
Currently, the United States has a weakened financial sector. Many of the largest Banks are technically insolvent, but thanks to an accounting rule change, are not required to admit this ... They are carrying an enormous amount of bad loans on their books. They are sitting on several million ... bank owned foreclosures for which there is essentially no market... not mentioning the depressing effect the excess supply will have on [Housing] prices.
The reckless lending of the 2000s was merely the tip of the iceberg... we have learned about how poorly the banks not only made these loans, but also administered, securitized, serviced, and foreclosed on them. The entire process was reckless, it was done on the cheap, riddled with errors, fraud and felonious behavior...
The bank bailout plan was ill conceived and poorly executed. Trillions were thrown at them before Uncle Sam had any idea as to how much debt was actually on the books. What were once considered decent holdings were eventually revealed to be highly toxic assets.
Recapitalizing the banks is a huge priority. But after the first round of trillions were given away to the banks, the public was disgusted... But the banks were still under-capitalized, their balance sheets were still laden with junk. [Giving the Banks More] taxpayer monies was out of the question.
An easy backdoor was found: Arbitrage the Fed and Treasury. [Lowering the interest rate on Fed loans to banks to Zero] and [Qualitative Easing] allowed giant Wall Street banks to borrow at no cost from the Fed, and then turn around and lend this same zero cost money back to the Treasury at 3% or so.
Do this for another 10 years or so, and the banks would be recapitalized. By then, maybe there might even be a market for all those [Foreclosed Homes]. Sure, that would mire the nation in a decade long Japanese-like slump. Hey, at least the bonuses would be paid on time...
The results should not be surprising. The banks remain in a weakened condition, perilously at risk for additional problems in [Real Estate]. Despite the massive liquidity, Credit still remains tight. If financing is the fuel that drives the economy, the US is running on fumes.
(Graphic: Mr Fish; Harper's Online)
Rather than listen to Nobel Prize-winning economists like Joseph Stiglitz, or Paul Krugman, and former Fed Chairman Paul Volker, Obama made a political decision to please the Banksters: He hired Larry Summers (who would turn out his mother to Turkish bikers if there was a percentage in it for him) as his chief economic advisor; listens to Ben Bernanke (who, given his knowledge of the history of the Great Depression, should know better), and chose Timmeh! Geithner as his Secretary of the Treasury.
So, nothing is different; the same creatures who created this disaster are still in control. As James K. Galibraith recently wrote [emphasis added],
.. one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the [FDIC]. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.
Team Obama did none of these things. Instead they announced "stress tests," plainly designed so as to obscure the banks' true condition. They pressured the Federal Accounting Standards Board to permit the banks to ignore the market value of their toxic assets. Management stayed in place. They prosecuted no one. The Fed cut the cost of funds to zero. The President justified all this by repeating, many times, that the goal of policy was "to get credit flowing again."
The banks threw a party. Reported profits soared, as did bonuses... They could boom the stock market. They could make a mint on proprietary trading.
And they have. They've continued to party like it's April 2005, and Alan Greenspan has just said
Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country...
Take a look at the chart at the top of the first installment of this post: Gordon T. Long, an investment analyst, believes we're in the first third of another cycle of crisis (Note: Long believe that the very bad things he predicts may happen sooner than the 2011 - 2013 timeframe he indicates in the chart).
Quo What The Fuck Vadis, Dude?
The Too-Big-To-Fail Banks hold some $1 to 2 Trillion dollars in overvalued securities and bad mortgage loans (the fraudclosure industry is a topic for another time). They also hold at least as much exposure in the U.S. commercial real estate market, and analysts I've been reading have said for at least two years that this market will drop, hard.
This could lead to another round of bailouts: Banks, Too-Big-To-Fail. More private debt by stupid, greedy people becomes your responsibility, and mine.
What to do? Well, history is going to come to live with us. We won't be able to escape it -- it's Weimar Time, my friends. Our leaders chose to save the Banksters and their institutions, which have doomed the way of life we currently have -- but save them temporarily, giving them an opportunity to crawl down the cargo rope and off the ship with as much wealth as their little Rat paws can carry.
And there will be other ramifications, as Mike Kelly's Irish Times article observes about his own country's situation,
As ordinary people start to realize that this thing is not only happening, it is happening to them, we can see anxiety giving way to the first upwellings of an inchoate rage and despair that will transform Irish politics along the lines of the Tea Party in America...
Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.
And, I offer a comment from the site, The Automatic Earth:
...I read an article by Ashvin Pandurangi... entitled "Plutocracy Now" [about possible] nationalization of... the Fed.
He concludes it can't be done, not even an audit will be achieved. And I think that goes for Wall Street banks as well. We can't nationalize the banks, because they have long since "bankalized the nation".
... [People underestimate the] level of political clout and power the financial industry has accumulated over the past few decades... Seeing them celebrate the birth of the Fed, and do so on Jekyll Island to boot, it makes me think the US is surely as far gone as Ireland is; it's just that fewer people seem to realize it, but that's not too comforting, is it?
... Pandurangi closes with a very insightful statement, one that every American should take to heart, and many Europeans too:
The reality is that there is only one way back to a true democratic system now, and this path will require nothing less of us than the courage of our forefathers.