Abstract: The entire financial system has to be nationalized right away. Then many of its rules have to be changed, so that the tail will not wag the dog ever again. Delaying either nationalization or extensive regulation, is playing in the hands of plutocrats some more, as if they needed money some more, same as with the guys before. Both Mr. Reich and Mr. Krugman agree with me, and are extensively quoted. A question is asked as to who is really doing the thinking.

There is this small matter that hundreds of billions of dollars were sent, without supervision, to the plutocrats that caused the problems, and, lo and behold, the problem is still here. And has, hmmm, got worse. It was amazing: instead of acquiring what they paid for, the American People, after throwing money at it, gave it right back to those who had just destroyed it. And now they have destroyed it again, the always giving American people will throw money at it again, and give it back again to those who are ruining their country. 

People familiar with this blog will know that this eternal return of the same thievery was predicted and decried stridently, many months ago. This included in particular the essay called: “IF YOU WANT LEVERAGE, NATIONALIZE”. But “nationalize” is the new n-word. Little people in the USA are conditioned that way. They pay for it, and others own it.

What we have below our eyes is the greatest transfer of wealth from the poor to the rich since the Goths of Alaric sacked Rome (410 CE). That was meant to be funny.

In an essay on his blog, “How America Embraced Lemon Socialism” (Jan 23, 2009), Robert Reich observes that:”It’s called Lemon Socialism. Taxpayers support the lemons. Capitalism is reserved for the winners.”  Reich, an economics professor (UCB), was Clinton’s Labor Secretary, was, and is a partisan of real economics, with real infrastructure, and was the total enemy of Robert Rubin, one of the creators of Voodoo economics, a believer of money-knows-best, and the more money, the more knowledge. Rubin is apparently the esteemed godfather to the Obama economic team. Reich also observes that: “Put it all together and at this rate, the government — that is, taxpayers — will own much of the housing, auto, and financial sectors of the economy, those sectors that are failing fastest.” Reich does not insist on the fact that the old plutocrats are still left to profit from that stealthy nationalization, viewed as a gift, that leaves them on top, in command, and as…owners.

The Obama team, plus Congress, could find very little money for public transit (including light rail and high speed trains), while finding plenty for the Reaganophile method of cutting taxes (I am not against lowering income taxes, but I am for rising users’ taxes, especially the sins taxes on poisons such as CO2). It is true that Congress has not been helping. (As it is only 5% to 10% of the recovery plan is for infrastructure).

Simultaneously, in another excellent editorial [NYT, January 23, 2009], 2008 Nobel Laureate Krugman points out that: “Everyone hoped that President Obama’s Inaugural Address would offer some reassurance. But at least on matters economic, the speech was too conventional.”

Camping outside of the Obama administration, as Krugman does, has the obvious advantage of being able to choose a mountain top, with fresh and clear air, and to look down in the smoggy valleys where pathetic minds choke on power… We agree so much with our latest Nobel Laureate, that we will quote him more:

“Mr. Obama did what people in Washington do when they want to sound serious: he spoke, more or less in the abstract, of the need to make hard choices and stand up to special interests. That’s not enough. In fact, it’s not even right. Thus, in his speech Mr. Obama attributed the economic crisis in part to “our collective failure to make hard choices and prepare the nation for a new age” — but I have no idea what he meant. This is, first and foremost, a crisis brought on by a runaway financial industry. And if we failed to rein in that industry, it wasn’t because Americans “collectively” refused to make hard choices; the American public had no idea what was going on, and the people who did know what was going on mostly thought deregulation was a great idea.”

Then Paul Krugman quoted Obama some more, in a lofty passage that unfortunately: “was almost surely intended as a paraphrase of words that John Maynard Keynes wrote as the world was plunging into the Great Depression — and it was a great relief, after decades of knee-jerk denunciations of government, to hear a new president giving a shout-out to Keynes. “The resources of nature and men’s devices,” Keynes wrote, “are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life. … But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.”

“But”, pursues Krugman, “something was lost in translation. Mr. Obama and Keynes both assert that we’re failing to make use of our economic capacity. But Keynes’s insight — that we’re in a “muddle” that needs to be fixed — somehow was replaced with standard we’re-all-at-fault, let’s-get-tough-on-ourselves boilerplate.”

Yes, there was too much, in the economic part of Obama’s speech, of that old puritan tactic, that we sinned, it is all our fault, we did not beat our backs enough with chains. Instead, of course, the truth of what happened is that the plutocratic wolves have guarded the sheep, all too long, and now that they have run out of sheep, they howl to get more, and more sheep bleat, and come their way.

The sheep will only survive in the future if they understand that the wolves have been in charge, and still are, because only the wisdom they invented still rule the land, and their howling is all what the sheep listens to. The only safe only way out is something like the Resolution Trust Corporation, a total nationalization of the financial sector. One cannot just nationalize a piece, for competitive reasons. (Yes, in the Scandinavian financial crisis at least one giant private bank opted out of nationalization and survived, but this, now, is different.)

Nationalizing all of finance as it is, of course will not be enough. It would be a momentary measure, but the system needs to be changed long term. we cannot just fix the patient, and then let her get in the same accident all over again. New laws will have to prevent: 1) the malignant growth of derivatives [to demented proportions as now], 2) way too risky investing motivated by excessive personal greed of financial manipulators, 3) excessive trading and bonuses [which, besides sucking money from the real economy and leading to plenty of inefficiency, not to say outright fraud, give a very bad example and motivation for the whole socioeconomy, leading the later to excessive, greedy, useless behaviors, by mimicry]. A whole arsenal of new tools could allow to do this [detailed rules on derivatives, that should be restricted to those officially authorized, with tuned leverage, worldwide; a transaction tax; higher taxes on short term cap gains, lower on long term ones].

The future financial sector should be of assistance to the economy, but no more, and have a fiduciary duty of keeping capital in trust, and have some leeway to invest according to tight regulations [a system that basically used to exist in the thirty glorious years of economic expansion, 1945 to 1975]. The idea being that never again should the financial tail wag the economic dog. At the limit [see comrade Stalin], a powerful economy can operate without finance; but what we have here now is a situation where a rogue financial system is strangling the real economy. Rogue waves exist in the ocean, on a regular basis: they can be 100 feet tall, when other waves are only 15 feet tall [they sink hundreds of ships a year]. What we have here is a rogue wave so bad, we will have to change the ocean.

A last point about brain power. : most of Obama’s power will be into making speeches with great ideas, and he has to learn to trust the force of his intelligence. Instead as Krugman put it:”…one wishes that the speech writers had come up with something more inspiring than a call for an “era of responsibility” — which, not to put too fine a point on it, was the same thing former President George W. Bush called for eight years ago… The crisis will require the temporary nationalization of some major banks. So is Mr. Obama ready for that? Or were the platitudes in his Inaugural Address a sign that he’ll wait for the conventional wisdom to catch up with events? If so, his administration will find itself dangerously behind the curve.”

This leads us to question another American Institution, the “speech writers”. Who elected those? OK, it’s traditional to have little paid gnomes in the background doing the thinking while the US President dances and socializes. But there are limits, it’s a question of honesty, one cannot just regurgitate the thinking of an unelected twenty something, and make it into the word of the presidency. In the case above, as Krugman showed in his essay, clearly, the speech writers fell on Keynes and half regurgitated him, and that was passed along, to be regurgitated some more, while losing the main economic message on the way.

The professional speech writers of the American presidency allow a traditional, but unfortunate canning of the mind. Professional speech writers are like lobbyists for the common mind, rewarded with money to think common thoughts. Nothing that a soaring imagination can blossom from.

Patrice Ayme

P/S 1: Some well conditioned US citizens are bound to declare that there is no reason to trust the government to be able to run the banks better than the banks themselves run the banks. But that is confusing banks and their management and owners. British PM Gordon Brown was “angry” this week because he discovered that the Royal bank of Scotland had invested in one dangerous little subprime outfit in the USA in a leveraged fashion, losing an enormous amount of capital. That sort of mistake was done by only a very few individuals at the top of an otherwise excellent establishment. So, when the government fully nationalizes banks, it takes momentary possession, but it does not “run the banks”. Government cannot do that. What the government does in cases like that is to FIRE the old, corrupt, decadent, erroneous upper management, and replace it by other, more honest, prudent and capable bankers with lower salaries, watched by public servants specialized in financial matters. Also, another thing that happens is what is done in Venture Capital funding rounds, namely the old shareholders get wiped out.

P/S 2: At the peak of the latest financial madness, the total of all derivatives, worldwide, was valued at 600 trillions. BUT the total value of the world [all real estate, plus all market caps, etc…] is only around 100 trillions. That is why those who are talking about buying the “toxic waste”, piecemeal, are talking complete insanity here. The US GDP is less than 15 trillions, so it would take 40 years to just equate the derivatives with GDP. It’s useless to keep on throwing good money in the 500 trillion dollar hole of values that obviously do not exist. The only hope is to wipe the entire slate clean, otherwise the real economy will die from lack of a functioning banking sectors doing the basic things banks have to do so that we can have an economy.

Ah yes, because you see, many of the banks are bound to have “invested” in this 600 trillion dollar black hole of money that does NOT exist [60 trillions of them are “credit default swap”, which are highly sensitive to the collapsing real estate market]. So many of the banks are probably highly insolvent [because from the “mark to market” rule, as some derivatives will be found to have no value whatsoever, some bank capital will disappear like snow on a lava flow].

Another amusing aside is that it is said that, once again scared of the “mark to market” rule, banks have been holding out of the real estate market about 70% of foreclosed homes [in the USA], and, thus, when they bring them to market, the real estate market will tank plenty more, depressing further whatever value may be left in some real estate connected derivatives. And that will kill banks’ capital some more.

In the second phase of resolution of the crisis, the nationalized banks will be separated from the toxic derivatives, and the government would be free to declare that the value of entire classes of derivatives will be reduced to zero.

Although some semantics and details can vary, all and any of the solutions pass by: 1) take out the managements; 2) wipe out share holder equity; 3) transform debt into equity at pathetic levels; 4) declare that the toxic assets are without value (and unlawful looking forward). Procrastinating will only augment the devastation of the global real economy.

(The Royal Bank of Scotland declared that Britain’s biggest banks were “technically insolvent”, probably from the mechanism described above: holding a bit of the monopoly money of the derivatives.)


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