Economic and political analysis-Window on culture-Media criticism

Thursday, December 01, 2011

Money pushers profit from growing debt

Big rally on Tuesday, the 30th. On the surface, the markets look to be building momentum. I couldn't help but think back to the "green shoots" theme of spring two years ago, in 2009.

At that time, we were told to expect a growing economy. Yes, things were bad but they're getting better, so on and so forth.

In the media, we were painted a rosy future. We were told to expect a quick rebound from the dark days during the height of the crisis. This after being told that the world end was neigh, or at least not if financial companies were bailed out.

The crisis really was an opportunity to profit through crisis. Banks were able to get through Paulson and Geithner everything they could imagine. Bank of America for instance, got over $80 billion in a single day! See the activistpost link here, complete with a link to this Bloomberg article.

Media company Bloomberg sued the Federal Reserve successfully under the Freedom of Information Act (FOIA). You may remember the initial findings of Bloomberg's report on the illicit (or at least previously unreported) loans by the Federal Reserve to banks of all kinds.

This I commented in OpEdNews.com:

Bloomberg deserves credit for forcing--through court action--the Federal Reserve to divulge a list of recipients of its discount lending. Among these was the Central Bank of Libya. Deutschebank and other non-US lenders (but major holders of US mortgage debt) got billions.

The Federal Reserve's lending to companies of all kinds is a major story.
People need to know what was done by the Central Bank during the 2008-9 crisis because it affects us today. The solvency of the US Treasury has been put in jeopardy by the unaudited, illicit activities of the Fed and the toxic debt they've accumulated in swapping our Treasuries for their banker friends' falling mortgage securities and derivatives. [link]

The media plays a role in disguising the true aims of the new paradigm, one which relies on public ignorance and apathy. Baring some direct intervention like Occupy, the American public will remain docile until such time as their nation's credit has been depleted and that further borrowing becomes impossible: a juncture that grows closer every day and will lead to massive inflation.

The Federal Reserve and its for-profit member banks will buy Treasuries, but I'm firmly in the camp that believes our monetary system is a Ponzi scheme where early investors get paid off by new ones. Theoretically, the Fed can buy the government's debt forever but the more they own, the more interest will have to be paid to the holders of the debt (who are, not by coincidence, the recipients of Fed lending!)

It's the accumulation of interest payments (alongside higher interest rates) that presents the greatest threat to our fiscal solvency, no matter what the size of the national debt. Such payments are projected to grow to 20% of the federal budget by the end of the decade.

Japan all over again

The Japanese have a word for it--kikai. The kanji, or character, for kikai uses one ideogram (or representation) meaning problems, and another representing opportunity. The lingual takeaway is that, as Rahm Emanuel once said, "to let no opportunity go to waste." Emmanuel, Obama's former chief of staff, is now mayor of Chicago.

The idea is that someone else's problem represent another's potential windfall. Naomi Klein calls the practice disaster capitalism. Create the conditions for failure--by deregulating the banks so they could speculate wildly--and which a massive intervention--the bailout--becomes inevitable. In this way, private sector failures (the trouble element in the kanji) are shifted into the public domain in a process NYU economist Roubini calls "lemon socialism." For the private sector, the inability of the Federal government to cope presents the opportunity--for a bailout, contracts, whatever.

As Michael Moore summed it up so well in his Wisconsin speech in March, "we bought it." We fell for the whole act. Our representatives in Congress voted for the massive unprecedented bailout, at least the one they knowingly authorized. Moore didn't know then what we know now: that the TARP bailout was dwarfed by the size of secret Fed lending.

We can't assume that our government was operating in a vacuum at the time. Its priorities reflected the consensus of corporation with the most influence. The bailout (at least the one made public) plan was designed by government insiders with deep ties to the banks. We know Treasury Secretary Paulson was working behind the scenes with the bankers, in constant telephone contact with Goldman's Sach's Blankfein. Who's telling who what to do?

The more transparency, the more damage done to the Establishment. As I say in my OpEdNews.com comment:

"Like the movie "The Usual Suspects" says, the Devil's primary job is to get people to believe he doesn't exist. Expose the cronyism, the connection between politicians and corporate campaign contributors, and the truth threatens the status quo, which they can't afford to have happen (or more support for Occupy.)"

Our political problems can't be remedied by dimming transparency, by corporatizing the Fourth Estate which plays a vital role in preserving our democracy. We're in an information war. The Powers That Be don't want the true scope of cronyism, favoritism known. The masquerade, with all its accompanying rhetoric and feel-good speeches by politicians and squawking is just for show.

Can you handle the purple pill?

My take is that our economic problems are systemic. Therefore no amount of variable-tweaking will solve our nation's financial and economic woes.

Identifying our problems as systemic is important part of a critical thinking. To craft an effective solution, it's necessary to understand the problem.

If we're looking at a war, for instance, as winnable by formula, it's easy to think we can alter the outcome simply by adding more of one variable.

Take the number of soldiers, N, for example. We may think that an increase in the number of soldiers will assure victory. But Iraq and Afghanistan show us adding more (money, N, or whatever) won't necessarily achieve a favorable outcome.

Much as we might throw more money at a problem, it doesn't necessarily produce the desired outcome. In a similar way, creating more fiat money (or making it available to banks) doesn't stimulate the economy. Just as more soldiers doesn't determine a favorable outcome in war, so too adding money automatically make everyone rich.

Monetary policy alone can't produce the desired outcome because it's only one variable in the recipe for economic success. It's not just the quantity of money out there--it's the amount of money available to those who need it. We're a consumer economy, which means people must borrow in order to spend more, unless their incomes are rising or they tap their savings.

One distinct trait of our current economic times is the availability of credit for those who use it well, and a scarcity of credit for those who abuse it. Our economy has been "financialized" for this purpose: burden income-earners with enough debt and they will suffer the interest burden.

It's a Machiavellian notion: the wealthy so enslave the many. Such a crass environment stinks of undue influence wielded upon the political system by the owners of the means of production: Marx's 1%ers.

I've cited many times Dr. Martenson's analysis of the pyramidal imperial economy, as per Renaissance 2.0. Under this interpretation of how the economy works, those at the top of the pyramid (the owners of the means of production, the 1%) receive taxes and interest payments from below.

In a quid pro quo, politicians whore themselves out to rack up campaign contributions. In the Guardian, Naomi Wolf offers an interesting take on the opportunities inherent in acting as the puppets of industry:
...in recent years, members of Congress have started entering the system as members of the middle class (or upper middle class) – but they are leaving DC privy to vast personal wealth, as we see from the "scandal" of presidential contender Newt Gingrich's having been paid $1.8m for a few hours' "consulting" to special interests. The inflated fees to lawmakers who turn lobbyists are common knowledge, but the notion that congressmen and women are legislating their own companies' profitsis less widely known – and if the books were to be opened, they would surely reveal corruption on a Wall Street spectrum. Indeed, we do already know that congresspeople are massively profiting from trading on non-public information they have on companies about which they are legislating – a form of insider trading that sent Martha Stewart to jail.[link.]
Eisenhower's Military Industrial Complex is one of the industries that shapes our nation's budgetary priorities. Alongside it are the many outstretched palms dependent on government discretion, from the Medical Establishment, Insurance, Pharmaceuticals, etc..

With so many industries and their friends in the media world, it's no wonder how we hear about how great the free market is, but not about how corporate fealty and cronyism are killing our budget. Few in power these days would accept Jefferson's statement that:
“It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world."

I like the second part of that statement because of the tight bond between wars, imperial overstretch and hubris, the "Emperor has no clothes" syndrome. If one constituency, the MIC, can slurp endlessly from the government trough, why not another? And another, until eventually the trough runs dry. The last pigs standing will be the fattest, made so by their gluttonous appetites and their well anchored position at the start of the trough.

The young have the most to lose from a tax-starved government. Already the projected amount needed by our government to pay its obligations to Freddie/Fannie, Medicare/Medicaid, help for states, etc. reaches over $60 trillion, not counting whatever else the Federal Reserve has gotten us into.

Social Security funds--real Treasuries held by the trustee--were stolen under Clinton, and replaced by IOUs to the point the program must depend entirely on new money (from taxes or, more likely, additional borrowings.) With no new taxes, borrowing becomes the only way to keep the program running.

The goal is and has been to starve the beast. It's a strategy that will force Democrats to choose between funding our "social programs" or defense. Defunding the latter will of course make them look weak on terror. You can bet any subsequent terror attack would be blamed for our failure to build enough submarines and new weapon systems, despite their questionable effectiveness in fighting terror.

We're hooked on debt. Without increases in Federal spending, our economy is doomed. Federal spending contributes over 30% of the economy now. The average wage for a Federal employee recently surpasses twice that of private sector workers. A sustainable bureaucracy? Not without lots more taxes at least. Our nation's political leaders lack the political will to achieve that, as the SuperCommittee showed.

The failure to cut just $100 billion a year shows just how politically influential the favored industries are on the Hill. And the hypocrisy on Europe! The Greeks cut 8% of their budget yet the market fundamentalists prattle on about the Europeans' need to cut more--an inadequacy no doubt fostered by the comparative efficacy of their retirement and health care systems, compared to ours. Public services need to be eviscerated, so the neoliberals and market fundamentalists believe.

I'm sick of hearing about the "Europe" problem. While problems there are extreme, they're eerily reminiscent of the same risky practices that our banks engaged in, leveraging themselves 35- to 40-1, using their access to cheap capital not to lend back out in the consumer (real) economy but to speculate, to gamble in the financial economy.

"Europe's" downfall has been hyped in the mainstream financial media, despite the fact that the damage has mostly occurred with PIGS debt (and the position held by many Germans who don't support a bailout there.

A stream of editorial genuflexions on "Europe" allows our media to avoid mention of our own problems. The desire to ignore our own failings isn't a surprise; those most susceptible to free market dogma are also equally deluded by the concept of American exceptionalism. It can't happen here, they think, despite our vast war budget, swelling entitlements, and utter inability to restrain spending. Expressed as a percentage of GDP, our annual budget deficit (at 9%) is worse than any country in the E.U., except Greece's (source: The Economist magazine, back page.)

"Europe's" supposed failure masks our own. By focusing attention on the other side of the Atlantic, the vast and obvious failures of our own nation to keep its fiscal house in order can be ignored. I guess the thinking goes that postponing the consequences of inadequate regulations and enforcement can wait until after the next political cycle. Such short-term thinking is hardly the path to devising a long-term solution to our budgetary woes.

There are hard limits to the impact politics can make on the economy. In some ways, those in authority can only screw things up. Obama isn't at the center of our economy, so nothing the White House does can solve our problems (plus they're systemic in nature.) Republicans clearly have no interest in seeing a recovery blossom, which it could given spending on real things like infrastructure.

Perhaps we forget too easily how ineffective central planning fails, like the Soviet example. Interesting I mention the Soviets because I'm theorizing that we may be entering a period similar to Russia's. Privatization is in place. Look no farther than Chicago. Goldman Sachs came in and bought public parking throughout the city's downtown. Rates skyrocketed.

In Russia during the Nineties, pensioners (read Social Security and public sector retirees here) were stripped of benefits and made to live humbly even as Russian oligarchs swept up and sold off the best performing industries as they were privatized.

According to Peter Schiff, the hidden, or under-story, is S&P's downgrade of credit rating of many major banks. Despite the political influence it wields, Goldman Sachs was one of the companies downgrade. I've railed on the company repeatedly in the past. Maybe all their political shenanigans aren't so lucrative after all.


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