GREAT DEPRESSION III.

 

AND SOME STEPS TO GET OUT OF IT. PLUS EDUCATING OBAMA ON  NATIONALIZATIONS OF BANKS DURING FINANCIAL CRISES.
***

Overview: Brandishing a new definition and an observation, we claim that the USA is in a Great Depression. The entire US economy had become a paper contraption (25% of the market capitalization was financials, now it’s gone below 10%). This economy was built with too much paper (money, and abusive contracts, derivatives, etc.). It went up in smoke under the free market conditions of  high energy prices, due  to its enormous inefficiency. The incapacity of the US economy to sustain high energy prices caused the catastrophic failure of the credit bubble. Underlying this was over use (and abuse!) of credit (as I detailed in other essays, the plutocratic machine over-exploited with credit).

To build a sustainable capitalist (let alone green) economy, the first thing to do is to get rid of the highly leveraged paper economy hiding below the TARP.

Unfortunately that was the main contribution of the Rubin-Summers-Geithner plutocratic cabal during the Clinton administration. Behind it were plutocratic conspiracies from the likes of Goldman-Sachs (both Rubin and Paulson were CEOs of Goldman, and, as the business channel CNBC puts it “they have their minions all over the government” Feb. 16). Many prestigious economists: Krugman, Stiglizt, etc., vociferously disagree with the followers of Goldman-Sachs, Rubin, and their paper economy.

The economy needs to made more efficient.  So it needs to be built around strong civilizational, energy and employment multipliers. Examples of such multipliers: the efficient economy and the knowledge economy. In the later, the wealth creating multiplier effect can be as high as 8, and probably much more.

We are in an excellent position to reflate, because we have a situation of war with planetary heating (known by the euphemism of “climate change”). It’s an excellent occasion to create a command economy in some crucial sectors (without having to go to war against other people).

Not that there is a choice in the banking sector. The banking and financial crisis of the USA is incomparably more severe than the Scandinavian and Japanese crises of the 1990s. So the least the Obama administration could do is to apply swiftly the traditional, one and only, remedy, to such a crisis. It’s technically accomplished by a technique called “receivership” in the USA. And “nationalization” anywhere else. (Americans get easily afraid of that word, because the reigning plutocratic oligarchy frowns on it!) A nationalization is temporary, and saves all the essential functions of a bank. The later point is why to nationalize. As long as this does not happen, the economy will keep on plunging.

In the addendum, we deconstruct part of a strange interview Obama gave about nationalization of banks and financial crises. The aim is not to make fun of Obama, but to gently improve his mental performance. There is no greater economic multiplier than correct knowledge. Obama is unfortunately surrounded by economic advisers that contributed to the problem to start with, so it’s hard for him to know any better.
***

***

Paul Krugman (New York Times, Monday, February 15, 2009) notices that: “Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.”

Another, probably even more striking downward sloping fact has been the inflation adjusted median income. It has been going down since 1998, after Rubin’s silly attempt at building the economy with money alone, to make more money alone. That ultimate bridge to nowhere, made entirely of paper fell apart. Dutifully, Alan Greenspan papered it over by a succession of bubbles.

I would propose the downward sloping median income on the scale of a decade, as the definition of a GREAT DEPRESSION. Thus, the USA is in its Third Great Depression since the Civil War. It has been going on for more than ten years. Our chief Obama has celebrated this by putting back in charge the Rubin-Summers-Geithner team that organized that disaster more than a decade ago. A funny illustration that, even confronted to its own dismal record, the elite does not lose its cool, knowing full well, that the bigger the lie, the bigger it has a chance to work.

To reflate, one cannot reflate with bridges to nowhere. The nature of the reflation has to be the building of an infrastructure that is a CIVILIZATION MULTIPLIER. And also an efficiency multiplier: the efficient GDP per hour would have to augment as a result of the stimulus (train lines, light rail or high speed, in the right places, are a typical such multiplier, because their efficiency is enormous, so they augment the efficiency of the entire economy). As it is, I read that two-third of the stimulus consists in not-long-term stimulative, low multiplier tax rebates, and emergency payments to compensate for the already ongoing catastrophic collapse of the budgets of the states. The real stimulus, once the Alternative Minimum Tax is removed, cannot be more than 200 billions. And even then.

In relative size this is like the French stimulus, but that one consists of 1,000 public work projects, including no less than four extremely efficient and profitable 250 miles per hour electric high speed train lines. As I was just implying, the CO2 emission of high speed electric trains is negligible relative to that of cars and planes. The US average in electric production from coal (50%) is higher than the planetary average (40%).

The USA got in enormous debt, private and public, to build a non sense economy, highly inequitable, a castle in the sky on top of a cloud. That cloud economy is so highly inefficient, that it cannot function under world free market conditions. Then it evaporates. What happens is that the price of oil is so high that the US economy seizes, as was demonstrated last summer (suddenly having to choose between fueling their car to go to work, and shopping, or having a roof, forced millions of US citizens to become delinquent on their mortgages).

Now capital, human, financial and intellectual, is needed to create an American economy that makes more sense, and is as sustainable, at least as a capitalist system, as those of France, Germany and a few other Western European countries.

The British model, long celebrated by the plutocrats, was a curious half way house between European welfare, and the usual general deindustrialization, born of delocalization and laissez faire, “compensated” by financialization of everything. It, too, is collapsing spectacularly.

Building a sustainable economy, let alone a green one, is not going to be easy. Time, thus energy, is being presently wasted (as the Rubin-Summers-Geithner team searches desperately inside the viscera of the financial system for a sign from the gods, as superstitious Romans used to).

At some point the American financial system (the banks and hedge funds) created an unregulated derivative market worth half a dozen times more than the value of the entire world combined, the result of astronomical leverage. Now this has collapsed, thus the median institution involved in this is insolvent. That means the median big bank and median big hedge fund have got to be insolvent (we do not need a detailed proof; big bank executives have claimed we do not have a detailed proof, so we do not know what we are talking about; but a non existence proof in mathematics typically gloss over the details).

Whereas hedge funds are basically useless, the basic functions of the banks and other credit markets are crucial to the real economy. But they have lost all their capital, and more, in the derivatives’ collapse. In all probability. Hence, contrarily to what the Obama administration, and its falsely naive Treasury Secretary claims, there is not enough private capital ready to jump in (and even if there were, which there is not, why would it?).

An imminent solution is to put the large banks in “RECEIVERSHIP” (“nationalization”, in layman’s terms), and institute a COMMAND ECONOMY around the core functions of the capitalist system (since there is not enough capital, nor the will to use the little there is). This is nothing new: the USA, like other top capitalist countries, has many pieces of its economy that are mandated (defense, air traffic control, even doctors’ duties, etc.). Contrarily to what some have implied, this is not to destroy the capitalist system, but to bury the previous one, presently trashing around and bouncing wildly, in its agony, put it out of its misery, and replace it by a much better one: the king is dead, long live the king!

Another imminent decision should be to remove from financial and economic decision making all and any persons that caused most of the problem in the first place (from upper managements of banks “too big to exist ” as Volcker put it, to past Treasury Secretaries, and their assistants that cling to the past). Those “experts” caused a Great Depression. Great Depression is what they are expert at. Why should they be in charge, again, and be rewarded, and be called “outstanding”? Because they have all the money? And because once those who crave for power are done with political power, money is all what’s left for them to crave for?

Now, of course, it may be crafty to force the Rubin-Summers-Geithner team clean up its own mess. After they are done, they can be fired, and a serious economy be build up by real thinkers.
***

Patrice Ayme.
***

Addendum: OBAMA STRUGGLING WITH THE CONCEPT OF NATIONALIZATION: Obama came up with a strange interview on ABC news, that was going all over the place about nationalizations and the financial crisis. It was self contradictory on the largest scale, and misinformed. It may have been a Trojan Horse (as a suspicious Paul Krugman pointed out cogently in his blog). Namely by making so badly the case against nationalizations, that they can become the only logical solution. A good tactic for the Machiavellian politician is to make the worst possible case for what one intents to demolish in the apparent guise of supporting it.

In the interview, Obama berated Japan for its “lost decade”. He forgets to tell us what was “lost”. During the so called “lost decade”, the real, inflation adjusted GDP per person was going up in Japan. By that measure the USA is in recession since sometimes in 2007.

Obama has a strange interpretation of the crisis: “Well, you know, Wall Street, I think, is hoping for an easy out on this thing and there is no easy out. Essentially, what you’ve got are a set a banks that have not been as transparent as we need to be in terms of what their books look like.”

In truth, what you have, essentially is 14 large American banks, so big that they have been manipulating minds and markets, and they are all insolvent, because twenty-million people have decided not to be their serfs anymore.

Then Obama goes metaphysical: “And we’re going to have to hold out the Band-Aid a little bit and go ahead and just be clear about some of the losses that have been made because until we do that, we’re not going to be able to attract private capital into the marketplace. And so, you know, I think that you have two choices in this situation: You can prolong the agony and shareholders will be happy until they’re not happy, and that could be a year from now or two years from now, or, in the case of Japan, eight years later. Or you can just go ahead and acknowledge that, yeah, there’s a lot of work that has to be done to put these banks back on a firmer footing.”

Hold out the “Band-Aid” a little bit? What does that mean? It sounds all very measured and cool, but meaning what? Time is of the essence, and it’s not about “Band-Aid”. Why would shareholders be happy as it is now? Has Obama been following the financial news? The S&P financial sector market capitalization has dropped by well in excess of eighty percent. Nor were the Japanese shareholders happy as their own stocks fell more than eighty percent too, during the period he speaks of.

Terry Moran of ABC News: “Can you say how much, ballpark figure, that will cost the American taxpayer? A trillion, a trillion-five, two trillion?

Obama: I can’t say the ballpark figure. What I can say is —

Terry Moran: Why not?

Obama: Well, because ultimately, what happens is going to depend on how the markets respond over the long term, not today or the next day but a month from now or two months from now. How effective we are in actually cleaning out some of these bad assets out of these banks.”

The time span of Obama is interesting: months. But this is hinged on a housing crisis, and this sort of crisis is decade long. Overall the banks nationalized during the Scandinavian banking crisis were profitable to the taxpayers, but, twenty years later, some are still partially nationalized. 

After Tim Geithner’s uninspired and uninspiring act, Barack Obama tried another stab at questions about nationalization. As Paul Krugman put it kindly, his answers were “not very good”. Actually it was way worse: foreigners were deprecated, although they underwent what the USA will surely have to undergo, the only final solution to an enormous financial crisis. Despising Sweden in 2009 about banks is like despising France in 2003 about Iraq. And Obama becomes all hot, just because he does not know the semantics of “receivership” and “nationalization”. They are the same. “Receivership” is how the USA nationalizes banks, and the USA does this to several banks all and any week of all and any year, since ever and ever. The Rubin-Summers-Geithner crowd does not want to do it because it’s their own banks and that of their friends, and family and future employers one is talking about.

Terry Moran: There are a lot of economists who look at these banks and they say all that garbage that’s in them renders them essentially insolvent. Why not just nationalize the banks?

President Obama: “Well, you know, it’s interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade.” They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.

And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.”

 

Actually there were more than two countries that have gone through some big financial crises. There have been 124 “systemic” banking crises since 1970 (bad debts soared and much of the banking sector was insolvent). Most were in emerging countries. But the list also includes half a dozen crashes in rich countries, from Japan’s slump after its property bubble burst in the late 1980s, to the Scandinavian bank crises in the early 1990s. All involved deep recessions, required massive government intervention to clean up bust banks, and led to big increases in public debt as economies shrank while government spending soared. The speeds of recovery differed dramatically: Japan endured what Obama calls the “lost decade”, whereas South Korea returned to strong growth within two years of its 1997 banking disaster. Sweden acted swiftly. Non performing loans in Sweden were 13% of GDP at the peak, 35% at the peak in Japan. They are already 40% of GDP in the USA, and we are not at the peak. The USA is the world biggest debtor. Japan got into its crisis as one of the world’s greatest creditors having the largest savings.

Obama makes fun of Sweden. We will see how long that lasts. Even after years of mergers and acquisition and concentration of the banking sector, Sweden had 130 banks, not “five”.

Also the crisis was all over Scandinavia. Finland was hit twice harder than Norway and Sweden. Interestingly, Sweden imitated to a great extent the USA’s own RTC, the Resolution Trust Corporation, with the aim of getting the creditworthiness of the real economy restarted ASAP.  

In similar circumstances, Mexico used a different resolution, more discriminative, quite clever, but slower. Obama, though, should find out that he does not have time. The very size of the US economy does not allow for procrastination: differently from Scandinavia, or Mexico, no big wide world out there will pull it out of its dive. So Obama’s reasoning -or should we say Summer’s, or Rubin’s- is upside down. Precisely because the US economy is huge it needs a huge, swift solution right away, before the collapse gathers more momentum.

Obama evokes tradition, to justify doing nothing effective, as if it were the national religion, and he were the president of Yemen. Indeed, the USA has become a very conservative country. It is the only one in the world to still use a system of units from the Middle Ages. Even North Korea, Saudi Arabia and Zimbabwe are not that mentally retarded. 

Making fun of foreigners is not necessarily a good way to learn one’s lessons, looking forward. What we are in danger of observing here, once again, is American arrogance. What we should be observing, instead, is American humility. The main philosophical drive of the US economy in the last 40 years has proven to be a lot of dangerously hot air.

***

(For much more details please consult the Feb. 12, 2009, issue of The Economist, in particular the article: “Worse than Japan? [Look carefully and the answer could be yes].” (page 81.)

http://www.economist.com/finance/displaystory.cfm?story_id=13110352)).