ONLY IN THE USA: TREASURY SECRETARY SAYS THAT IT IS NOT ENOUGH TO GIVE MONEY TO THE RICH, IT SHOULD BE DONE RESPECTFULLY.
… BUT THERE IS A BETTER WAY TO HANDLE MANY BAD ASSETS, WITH NO MONEY DOWN.
Abstract: Here is a bunch of entangled remarks and suggestions on the proposed Geithner plan. Why it has to be, why it is an outrageous give away to the plutocrats, why it will fail. And even why Obama is ready for its failure, and may even want it (if Obama is not Machiavellian, no one is!). I handle related issues, like Obama’s dismal subtracting and dividing skills (what about taking some private math lessons?). On a positive note, I propose my own mitigation to the crisis. It is international in character, and can be implemented right away (G20). I will start with this, so that I would not be viewed simply as the disparager I am.
Background: Giant bank holding companies in the USA have reasonably healthy cash flows, but they do not satisfy capital requirement because of crazy debts with “derivatives” that ought to have been unlawful. So they are scared of runs, and do not lend, strangling the economy. As the economy dives, capital and cash flows shrink, feeding a vicious circle.
TYRANOSOPHER’S BAD ASSETS MITIGATION THROUGH WORLDWIDE ABROGATION BY THE G20:
My way to extinguish many bad assets is very simple: create new international law to help, instead of just throwing money at the problem.
There are two ways out of insufferable debt: inflation, or default (inflation is actually default hidden in time). As Obama himself pointed out many of the activities prior that led to the crazy debt were “legal”. Or at least Summers said they were legal, and Summers made it so. Under Clinton, Summers, a faithful lapdog of the plutocracy, refused to regulate anything, as I pointed out in a previous essay [No Outrage Is High Enough, Patriceayme.wordpress.com, March 15, 2009]. Rubin, Summers, Geithner, Clinton, going along with the Republican Congress, enforced a system where: GREED IS GOOD, IT MAKES THE WORLD GO ROUND. So now, as Summers just pointed out, there is not enough greed, and the world does no go round anymore. The Geithner plan thus reintroduces greed to save that plutocracy the USA has become identified with.
In Europe, pride of work and the power it brings explains why the CEOs of giant extremely profitable banks make a small portion of what the propagandist heads on TV earn in the USA. [Although in France the unfolding drama of the CEO of Valeo SA, a failing auto parts company getting government help who decided to leave with a 4 million dollars golden parachute, is bringing violent reactions from the association of CEOs in France and from the government, which seems intent to pass a special law to prevent precisely this. So it is not as if the USA lived in a completely different universe!]
France and Germany are led by right wing, not obviously corrupt governments, watched by fierce public opinions that are ready to shut down the countries if severely provoked. So those conservative governments want to regulate firmly the financial markets. They will propose to outlaw many practices (including, I guess, Summers’ Credit Default Swaps without provisions). France and Germany are the heavy weights of Europe, having preserved their industry (differently from Britain) and having little financial debt (differently from Britain whose financial debt is apparently much higher than in the USA). It is usual to disparage them as welfare states, but the private French bank BNP could probably buy all the giant banks of the USA, all by itself (not that it wants to).
The USA should go along the proposal of the French and German leaders to crack down. The USA is increasingly less in a position to resist, because not only does the Franco-German attitude in this matters leads Europe, but the rest of the planet pretty much agrees with Europe. The USA has proven to be, financially, and may be economically, a giant Ponzi scheme (that’s all what the Geithner plan is, with the public holding the bag, by the way), a fraudulent racketeering organization. As Obama pointed out, some 40% of the miraculous growth of the USA in recent times was just in the financial sector, namely in that Ponzi scheme. So comparing French and American growths during those recent times is like comparing the tempting French apple to the drop dead American hemlock. [France is very happy not to have grown the way of the USA. France contented herself with simpler pleasures such as the tallest bridge in the shortest time, the biggest, most economical plane, the best, most reliable big rocket, the newest, safest, most recycling nuclear power plant, the fastest train, and the ability to contain thermonuclear fusion plasma for six minutes.]
After all countries at the G20 agree to crack down hard on financial insanity a la Summers, many practices that have bankrupted the top banks of the USA, and AIG, will be UNLAWFUL. Good. Free at last.
So, THEN, why should those debt and obligations be repaid, looking forward? If the practices are unlawful, they should be ABROGATED (a word Summers like, which means formally revoked; Summers does not understand that word, he made that clear. Summers just like to go around, and impress people with it). Why should one have to pay for a slave after slavery has been abrogated? If it’s unlawful, don’t do it anymore, that’s it. Thus a BIG PART OF THE FINANCIAL PROBLEM WOULD BE LEGISLATED AWAY.
All nations should simultaneously agree that these now unlawful debt and obligations are NOW NULL and VOID. End of the story. End of the story of transforming the USA into a society of serfs forever condemned, generation after generation, to pay for the debts their Lords Of Finance have incurred. Annihilating those obligations worldwide simultaneously will avoid imbalances. It’s like with the stimulus: if it’s deployed everywhere the same, no imbalances either.
Abrogation, annihilation of the market, is exactly how the Tulip Craze of the seventeenth century Netherlands ended: after the market disappeared, everybody went home and did other things. The economy was fine.
What is not fine now is that the self satisfied crowd at the top of the USA is repeating the mistake of the 1930s, just because, as it is in a slightly different guise, they cannot recognize it for what it is.
ARE THERE OTHER LEGAL REMEDIES?
Some say that the banks deposited back with the Fed all the TARP funds they got. So they did not need anything! Indeed, 97% of loans are said to be paid back in full, on time (and 98% pay some interest). So why all the panic? Well, the banks are refusing to lend, because they are afraid of runs.
So? Well, the Obama administration could do what has been done in France, namely insuring ALL deposits, independently of their amount. No more run potential, everybody relaxes.
Obama could also force the banks to lend new mortgages (although interests are low, few mortgages are lent).
It is curious that all the preceding remedies have not been tried, before suggesting to fork another trillion to the ultra-rich.
GREAT DEPRESSION OF THE 1930s REDUX?
Federal Central Bank chief Bernanke did a PhD thesis on the Great Depression, and has vowed not to repeat the same mistakes made then. (The mistake pertaining to liquidity and bank failures was made at the legislative level, by the way: the Fed could not lend money it did not have, at the time, by law. Now it can create all the money it wants, and do so secretly!]
That does not mean Bernanke will succeed to do what he wants. As it is, as far as I am concerned, the government is basically repeating the same fundamental mistake. I see what Bernanke does not see. Let me explain.
What went wrong in the Great Depression of the 1930s? The government created conditions for the collapse of industry, that collapsed the banks in turn, modulo enormous debts. During the Great Depression the REAL ECONOMY WAS DESTROYED because MONEY WAS SUCKED OUT OF IT [from the industrial and banking collapses]. The present government is doing the EXACT SAME MISTAKE. The mechanism is different, the effect is the same. Sending money to hedge funds will have the same effect. One can argue that the entire economy of the USA has been sucked dry by hedge funds (there are more than 9,000 of them, some multi billion). THE MONEY (“CREDIT”) THAT HEDGE FUNDS GRAB IS AS MUCH CREDIT THAT THE REAL ECONOMY DOES NOT HAVE. The Geithner plan does not see this, and that is its Achilles’ heel.
Money needed by the real economy is sent by the TARP, Geithner, etc. to the crafty wealthy investors. Unbelievable. An example is that taxpayers of the USA sent 12 billion dollars to the French giant bank Societe Generale, which made two (2) billion Euros of profits last year, 2008. There may be an excuse in making USA taxpayers pay giant overseas banks (as long as one can show that the overseas banks got in this honestly!). But there is little excuse when the payments go to AIG’s accomplice, Goldman-Sachs.
HOW MUCH TOTAL DEBT AND OBLIGATIONS ARE THERE?
We do not know how much there is, it’s as simple as that. Summers, in his incarnation as Clinton’s evil financial mind, allowed bank holding companies to use giant leverage (up to 45 times). Now Geithner was asked point blank in Congress on March 24, 2009, the size of the American financial industry. He answered with the obvious, namely that it was of the order of the GDP of the USA, 14 trillion dollars. Now this industry was allowed to use 40 times leverage for years, thanks to Summers. The international standards of the Bank of International Settlements (the bank of central banks) call for a leverage of 12. The giant banks of the USA would like to get down to that (now that they have been found out!). So we can assume the financial industry has to shrink to 5 trillions [(14) x (12/40) ~ 5 ]. Thus there should be a minimum of ten trillion dollars of losses incoming, ten times the Geithner plan, three times the emergency Federal budget Obama proposes for next year. Unbearable.
Is that all? Well, the Credit Default Swaps market got up to 64 trillions. So the total debt and obligations could be north of twenty trillions. Unbearable. With my G20 solution, a lot would be abrogated at the outset. [That would give the Geithner plan more bite, and perhaps allow a Swedish solution with the nationalization of very few giant banks: Sweden did just two.]
THE PATH NOT TAKEN BY OBAMA AND WHY:
The present author has been tough on Obama. But Obama’s task is not easy. He may not have a choice other than playing dumb on TV. He cannot do the right thing right away, because the American People, brainwashed by decades of plutocratic propaganda, is not ready for it. The simple word and concept of “nationalization” drives American into irrationality: they have been taught this, and know it well. But nationalization is the only solution (as explained on this site for more than 6 months). If Obama did the right thing right away, since Americans have been taught that it is the wrong thing, they would reason that whatever bad happens afterwards is Obama’s fault, because Obama, in their simple minds, would have done the wrong thing.
So, basically, Obama has to walk the path that will not work, first, so that most Americans will come to the conclusion that the path leads off the cliff, that the “market” cannot be the master. So Obama’s Geithner proposes to build a market subsidized by taxpayers, so that the wealthiest of the rich can stay in command. Indeed, someone needs to be in command, and it’s not the People, because the People is deeply persuaded that the People is incompetent, and only the “best and the brightest” can “lead”. Leading, being led, have become fundamental American reflexes.
Geithner’s market plan will not work because the debts owed cannot be repaid by the People (or anybody else). They are way too large (see reasoning above, which rests on evidence, and an admission of Geithner). The enormous debts, from giant (40 times) leverage can only be ABROGATED (judges abrogate debt routinely in bankruptcies; another thing “best and brightest” Summers is oblivious of). Because there are foreign entanglements, some have said that nationalizing the bankrupt giant banks of the USA will not be easy. Instead, I turned the later observation around, and made it into a solution.
Obama thus needs time. My solution will give him some, and increase enormously the power of the Geithner plan. The economy should then be able to muddle through, until such a time that American public opinion realizes that nationalization of the top four giant bankrupt banks is unavoidable. Nationalization can be many things, but its essence will be to let the existing bank holding companies fail, yank the banks out of them, let judges abrogate unbearable contracts saddling the banks, and recapitalize the banks. At that point the banks would be owned by the People of the USA and managed by some of the thousands of competent bank managers the USA has. The banks would be immediately very profitable, and could be sold back to eager investors (foreign or domestic). The G20 abrogation of unlawful derivatives will make things easier.
THE GEITHNER PLAN: JUST LIKE PAULSON, BUT WORSE:
Paulson wanted to buy the “toxic assets” from the banks, all by himself, with taxpayer money, repackage them, and then to put them to auction, with private investors bidding. A strong Secretary of the Treasury could always threaten the bank holding companies with bankruptcy and criminal prosecution if they did not give him the right price forthwith.
The Geithner plan instead first arms with a colossal 970 billion dollars of taxpayer money the richest of the rich, so that they can buy the same assets through an obscure process of the richest of the rich talking to the other richest of the rich. Then the richest of the rich will have a very high probability to make huge money. If that does not work, the richest of the rich can always walk away, and all the loss is for the taxpayers. Who will be free to repeat the same stupid process at a future date, in case they have enough money and stupidity left to do so.
The “Geithner plan” as Geithner himself calls it in a subtle touch of disinformation, is the Paulson plan, with a trillion dollars for the richest of the rich to play with added. The plan violates twice the equality clause of the republic, demonstrating, once again, that the USA is something else.
Paulson was going to buy the “toxic assets” of the banks himself, enriching the class to whom he belongs. Geithner decided that this was too socialist. As behooves a plutocracy, Geithner modified the plan so that the richest of the rich could get to the money TWICE. So Geithner gives to the richest of the rich the sum of a trillion dollars of public money to manage. The richest of the rich will then debate with their friends, the richest of the rich, while making bids to persuade their other rich friends, the bankers, to sell them some assets they are reluctant to sell.
Thus the USA government will play for private hedge funds that it will itself create with taxpayers’ money, the role the giant bankrupt banks used to play with hedge funds, with savers’ money. If this sounds opaque, mission accomplished! Opacity is the basic idea. Instead of stealing Peter to pay Paul, Geithner will steal the public to pay the rich to pay the banksters.
WHY THE ENTIRE CIRCUS? IS NOT THERE ALREADY A MARKET?
There is already a market for the bad assets. It is said that the average price of the “toxic assets”, aka “legacy assets” averages around thirty cents on the dollar.
So why does Geithner want to create again what already exist? Because he wants more of a market, a bigger market with more cash flowing, so he offers massive subsidies to both buyers and sellers. thus Geithner creates a fake market, government subsidized, because he is not satisfied with the free market as it is.
One of the reason the thirty cent on the dollar bad assets market is illiquid is that the giant banks do not like it. If they sold all their bad assets at this price, the giant banks would reveal themselves to be insolvent, hence their lack of enthusiasm. The upper managements of the bank holding companies are supposed to sell the rope with whom to hang themselves, and they are not too keen.
This situation will perdure, and Geithner will not solve it.
Except of course if, in the early deals, the participants can cheat so much that they enrich themselves personally so much, that they find irresistible to partake in this trillion dollar free for the ultra-rich distribution of riches. Cheating could happen in a myriad of ways: by being on all sides of all transactions, including failed transactions, selling short, going long: all the so called ‘private investors’ are enormous trading houses familiar with all and any investment method.
In other words, Geithner is trying to bribe the ultra-rich into buying and selling the bad assets. Later Obama could come on TV and say, as he already did: “the dirty little secret is that these methods were not unlawful.”
IS THE USA ON ANOTHER PLANET? NO!
Such an outrage, giving a trillion to the richest to “recover the economy”, would never fly in Europe. The entire Union would go on strike. But this is the USA. At this point US citizens do not have the mental equipment to see what is wrong with this picture. Wall Street knows this, and sees the trillions coming. Thus the national mood of the USA may well lift. How long? Well, the situation is complex. Real estate is at the root of the crisis. It is still, over all, overvalued by a minimum of 25% (from the deviance of the price/income ratio). That does not mean it cannot stay so (because interest rates are low). If real estate keeps on sinking, this “Geithner” plan, with this trillion dollars will not work, in the sense that taxpayers will lose their money. But that does not mean the Geithner plan will work anyway, in the sense of saving the economy.
What is Geithner trying to do, besides enriching his class, which is also Paulson’s and Summers’ class, the hedge fund class? To get the giant banks up to the capital ratios of the International Bank of Settlements. Why are the banks not up to these ratios? Because the managers of the bank holding companies took all the money in the banks, and made bets with them. Those bets were incredibly stupid. They depended on real estate value increasing exponentially forever. The “best and brightest” are either best and brightest idiots, or just addicted to money and power to the point of deep psychopathy.
Geithner proposes to make more of the same sort of bets, but this time with a sure loser, the government, that is the People itself. It may work, modulo at least a second Geithner plan: all knowledgeable individuals believe that the total bank losses are at least two trillion dollars. But many serious people and institutions have much higher estimates (As I said, up to twenty trillions; I personally would not be surprised if all the losses were more than twenty trillions).
So what next after Geithner’s plan has proven to be a bottomless pit enriching the rich? The Obama administration does not want to say it will nationalize the giant banks (but it will have to come to that when Americans want their credit system back!). It is true that it will not be easy to nationalize the four largest and most bankrupt banks: there are foreign entanglements of a type no one has nationalized before. So I propose a solution, or more exactly a preliminary mitigation. My plan is to use other countries and the needed future regulations to mitigate the extent of the future toxic assets. With my plan added, the Paulson-Geithner device could finish killing the problem. Ah, yes, since the Geithner plan as it is unconstitutional, I propose to open the investment participation to all. Thus the public could profit from the tremendous leverage of public money the Obama administration intents at this point to give to only the “best and brightest”.
SEMANTICS TO THE RESCUE:
This is getting tiring. The USA government uses chameleonic semantic shifting, renaming continually the main concepts. There was TARP, then TAFL. There were “investment banks”, then they are no more. “Bank holding companies” are systematically confused with “banks”. Illiquid, insolvent, bankrupt are systematically transmogrified into each other. The most relevant notion is not evoked. Now “toxic assets” are called “legacy assets”. The baffled taxpayers will be happy to pay for “legacy” instead of “toxicity”. This is disinformation, this opacity is part of the plan, and it should not be. I read Geithner in the Wall Street Journal. It is pretty obvious that he makes sentences which are meant to say things that cannot be understood. Some extent over five lines… (see addendum for an example)…
US GOVERNMENT TO RUN WORLD LARGEST HEDGE FUNDS FOR PRIVATE INVESTORS:
So Geithner has rolled out the Paulson-Bush (-Geithner) plan again, just like last time, this time with a private sugar coating and more details. The plan consists into lending a trillion dollars of PUBLIC MONEY (970 billion more exactly) to PRIVATE INVESTORS for them to PLAY WITH. The private investors will then manage five or so hedge funds and COMPETE WITH EACH OTHER to buy the “toxic assets” of the banks. Sorry the “legacy” assets.
What created the crisis in the past was tremendous leverage to buy over valued assets related to real estate. Where did the money come from? It came from the public, through the banks. The largest banks did this so much, they got BANKRUPT when real estate values went down. Why? Because some buyers defaulted (refused to pay mortgage). For any old fashion bank, that is not a problem: they foreclose, and take a manageable loss. but for the giant banks managed by, and profiting to plutocrats, it was a disaster, because they were highly leveraged.
The Obama administration wants to keep on going with the myth that the largest banks are not bankrupt. Still, they are, though, so money needs to be sent to them. Sending money directly to the bank holding companies is called TARP, but the public has had enough of the idea of sending money directly to the people who caused the problem.
So the Obama administration has come up with a more opaque way of doing the same thing exactly. The next slice of TARP funds, 150 billion dollars, is to be sent through the Paulson plan. [Now Geithner calls it "my plan", so we will know it thereafter as Geithner's plan.]
Before the money was sent to hedge funds indirectly, now it is going to be sent to them directly, and then, through the hedge funds, to the banks. It is the same as before, but this time, in reverse, hoping to baffle the public, whose money it is, grabbed by other hands.
THE MATHEMATICS OF OBAMA’S GIFT TO HEDGE FUNDS:
OK, I will put most of that in an appendix. Even extremely well educated doctors have complained when I slip equations in my discourse (Why? An equation is just a sentence!). Nevertheless, the ruse of the plan rests in its arithmetic, so it has to be evoked. The basic story is that the tremendous leverage with public money allows private investors to make tremendous money with very little risk. Say an asset price could be anywhere between 50 and 150, giving it an expected value of 100. In the average expected case, that of paying 100, the private friends of Geithner stand to make 50 for every 15 they risk. So they have as much chance to lose 15 as to gain 50. This is in the case when the government would lend 85 to the private investors. Overall though, the leverage should be higher, since Geithner proposes that the FDIC and Treasury mobilize 970 billion dollars while the private investors would bring in 30 billions.
This is of course grossly unfair to the public.
ARE OBAMA’S MATH SKILLS UP TO SNUFF?
Now the real question is this: do we expect Barack Obama to understand the arithmetic of the plan Geithner proposes? Not necessarily. Mr. Obama has the most charming giant smile he used all the time on “Sixty Minutes” and on the Leno Show, as the host evoked the calamity out there. But earlier in the week, he pointed out to an audience in California that, by raising the top bracket from 36% to 39.5%, he augmented taxes by only “3%” for taxpayers in the upper bracket of the working class.
In other words, according to Barack, the following equation is correct: [39.5% - 36%]/ 36 = 3%. Well, Barack went to law school, and he is now president, but it is not clear that his mastery of mathematics is enough for him to get a correct QUALITATIVE feeling about the world. Indeed: 39.5% – 36% = 3.5% . To complete his computation correctly, student Barack had now to divide 3.5% by 36. Oops, did student Barack forget to do that? Never mind, quick, send another 17,000 soldiers to kill and get killed in Afghanistan.
Completing his computation for him, we see that Barack augmented taxes of the working class enjoying the upper bracket by close to 10%, not 3%. (Meanwhile Obama leaves the hedge fund class with a low 15% bracket … but that is the same old underlying story: guys should take care of their own: with a ten million dollar fortune, Barack Obama does not belong to the working class anymore, he needs a break.)
Conclusion: THE PLUTOCRACY OF THE USA WILL DO WHATEVER IT WANTS:
In a non plutocracy, say in a democracy, nationalization of giant banks would proceed (if needed! It’s not even clear that it is needed, unbelievably!). With a trillion dollars, there is plenty enough to recapitalize all the large insolvent banks of the USA. Instead that trillion (and another one coming behind the administration has alluded to) is to be given to hedge funds to play with. Only in the USA.
The severity of Barack to normal people of the working class with good incomes compares poorly with his enormous generosity for hedge funds and the wealthiest of the wealthy. Not only those get taxed at a maximum of 15%, but now he gives them another TRILLION dollar to play with. Just a trillion, you may object? OK, it is not just a trillion above what was already given. More is to come. Entities as diverse as Goldman-Sachs and PIMCO puts the hole in the banks.
Obama has to work around the admiration and adulation the People of the USA has been conditioned to have for the richest of the rich. This shows up with the admiration and adulation for Barack’s “friend”, Warren Buffet. In Europe, Buffet would be in jail. In the USA, it’s everybody’s respected grand father. Just like Madoff before his fall.
It’s all psychoanalysis at this point. The USA is on the couch, all messed up in its self contradictory mind. The world is watching in disbelief. France and China are providing stern advice. But the Obama administration, his Geithner and his unbelievable Summers keep on giving to the richest of the rich, hoping to recover what never was, true prosperity from making the richest of the rich, richer. As I argued in another essay, this Great Depression started under Summers, ten years ago (Obama is now repeating that line, by mentioning “flat” incomes in the last decade; but the incomes were down, when measured against inflation).
In a debauch of hypocrisy, the USA is doing the exact opposite from what it has forced dozens of nations in identical financial crises to do. That was to cut spending, private and public, rise interest rates, get punished, and bear it.
Punch line addendum: Here is a typical quote from Geithner: “Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses — large and small — across this nation.” In other words, People, send money to the Rich in such a way that the Rich can trust you! You need the Rich! [Geithner from the Wall Street Journal, March 23, 2009, "My Plan for Bad Bank Assets".]