The Way Forward
reprinted from dailykos.com
Sun Sep 21, 2008 at 09:45:17 AM PDT
Let us speak of rights and reason. Of rights
we have to begin from the final humiliation against
a free people a
proposal to grant dictatorial powers to
an outgoing administration. In effect, the ability
to hide all of the financial wrong doing of the
last 8 years. It would give Paulson not only
the power to buy assets, but put terms in place
which would make legal investigation of those
arrangements impossible, and these contracts
could not be questioned in a court of law. It
is the Authorization for Use of Military Force,
Protect America Act, and war spending votes all
rolled into one. Having seen that it cannot assume
the unitary
executive since the Supreme Court rejected
it, they are now turning to Article III to get
a trembling Congress to accept it. There is a
crisis, but there is no catastrophe. Even when
the physical nexus of the financial world was
directly attacked, there was no need for this
kind of unlimited spending power.
However, what is important now is a solution.
What we need now, is reason in action, as we
already have reason to act.
The outlines of that solution are beginning
to be accepted. It is a simpler, and broader,
solution than has yet penetrated the minds of
the interiors of power, because it is not about
how to pay for a clean up within a functioning
system, but how to change the system itself.
This is not a financial crisis in the end, as
the Paulson Proposal shows, but a constitutional
moment, where the very mandate of government
is in play. Paulson wants the tax payer to be
the fool of last resort, the group of people
stupid enough to buy things that no one else
on the planet is stupid enough to buy. We
have reached the currency crisis which the election
of 2000 implied would come. If we do not
solve it now, it will only recur, in a worse
form, soon enough.
The gut reaction on the Paulson proposal is
a resounding Hell
No. The word reviled is
not to strong.
Even the University of Chicago's finance department cannot
swallow the monster that has crawled from the
cabinet. However Luigi Zingales mentions
the key point. What is clogging the restructuring
of debt are lynch pins that tie speculative
money to ultimately scarce assets that cannot
grow any farther. In the case of the Great
Depression, that asset was gold. Gold could
no longer grow as fast as the economy, debts
pegged to gold hobbled the global economy.
FDR dispensed with this, and the Supreme Court
agreed. Ultimately the government must enforce
contracts, and contracts which bring an end
to government itself, must, therefore fall.
It is self-evident, or at least has been to
Americans since we were Americans and not British
subjects in America, that government is instituted
by the people, however construed, for the good
of the people. There have been three long struggles
since that moment. The first has been to acknowledge
that all people are members of The People , the
second is to establish broadly the good which
they have a right to expect, and the third
is to provide more perfect instruments for the
first to pursue the second.
Governments then have a basic mandate to enact
the good, they have mechanisms to effect that
mandate, one of which is money, and they have
a relationship to the people which constitutes
the meaning of government. The Paulson Proposal
is, in effect, an amendment to the Constitution,
which states that the executive, in its sole
discretion, has a mandate to prop up the financial
sector at whatever cost, without review. It states
that it has the mechanism of unlimited and unfettered
spending power. It asserts a meaning which is
foreign to virtually every part of the political
spectrum, libertarians, conservatives, centrists,
liberals, and socialists alike have balked at
this vast grab of power which violates separation
of powers, accountability, and virtually every
other principle advanced for the protection of
a Democracy. This much is obvious, and is obvious
to millions of people. The Paulson Proposal is
a demand for economic servitude.
However, it is not enough to reject the wrong.
It is important to assert the right, as, in the
famous words of perhaps our greatest president,
God gives us the grace to know the right. It
is not enough to reject the Paulson proposal,
but to assert that there is a clearer and better
way forward.
The Red Queen's Race
The first step to doing this is to explain the
present crisis clearly. This is because people
are often aware of the lesser crimes that were
instrumental to the greater crime, but not their
meaning. It would be like banning shifting into
reverse, because that is what the get away car
did to escape from the mafia paid homicide. Many
of the individual actions which have led here
are neutral, or if not neutral, incidental, to
the problems themselves. If not these mechanisms,
then some others would have been taken. It is
not wrong to ban some of the particulars, but
only if, importantly, the root cause is also
addressed.
The particular financial crisis began, so it
is said, from sub-prime mortgages going wrong.
This is in correct, in that those mortgages existed
because of inflated money supply. That inflated
money supply existed because of ultra-low interest
rates produced by the Fed. Those interest rates
existed because of the necessity of using them
to pay for the Iraq war without increasing taxes
on the wealthy.
However the Iraq war was not a individualized
lurch rightward, nor were many of the actions
which have led to this crisis taken by Bush.
Glass-Stengall was repealed by Clinton, not Bush.
Much of the financial system deregulation was
written by Bob Rubin, not Hank Paulson. From
this it has been theorized that there is a conspiracy
of bankers out to suck the life out of the ordinary
people. If only it were that simple.
The reality is that the reason people of both
reactionary and progressive impulses alike have
walked the road of perpetual consolidation, we
are now down to two major investment banks from
five, is that there has been an underlying necessity
that has pushed them forward. There were other
solutions, but once this one was chosen, there
was no political will, nor any political capital
for a different one. Here is what happened and
why.
In the 1930's America abolished the gold standard
for individual debts, and instead dollars were
issued based on loans made on good assets in
banks. A system of insuring and examining and
regulating those banks was created, and investment
banking and retail banking were separated, this
was not done all at once, it was not done by
design, it was however, within a paradigm or
design pattern. Once the idea of stabilizing
the anchors of the economy was come upon, and
using promises of the people as the foundation
for that stability, each additional step became
easier and clearer. The feverish activity of
the first week of what was to become the "Hundred
Days," gave way to long and protracted political
battles.
The new basis then, was the value of developed
land. The incentive was for Americans to develop
their cities and towns, and reap the rewards
of increased home values and stability of their
communities. This, in turn, created the ability
of the government to print more dollars, relatively
confident that if there was a dollar, then somewhere
there was economic activity underneath it. There
was, at least, someone with an address who could
be taxed.
The model that we used for development was the
automobile, and we saw the rise of the automobile
city, which was far more sprawled out than the
old industrial city. Old industrial cities have
population densities of around 7000 to 10000
per square mile, where as automobile cities peak
at around 3000 per square mile and often have
as little as 750 per square mile. In short, the
use a great deal more land, and a great deal
more gasoline per capita to create and support.
Suburban sprawl reaches a particular density,
and then it sprawls outward farther.
As long as all the oil came from the US, it
was not much of a problem. There were fights
over who got to be part of the truly personal
mechanized society, there were even more brutal
fights over those on the margins of that society.
Civil Rights were, at basis, the right to be
part of the new age that was spreading across
America.
However, in the late 1960's American oil production
slowed. This was exacerbated by the Vietnam War,
which created spending on activities that did
not aid America, but the same wall was coming
with or without the Gulf of Tonkin Resolution.
At first there were attempts to stave this off,
but, in the early 1970's the Arab oil producers
enforced their role as the swing producer in
the world, by using an embargo. Later there would
be a war between Iran and Iraq. The intermediate
steps, such as abandoning Bretton-Woods and creating
a floating currency regime, deregulating the
airlines, attempts to save gasoline, were all
stopgaps until a new basis for the global economy
came into being. That basis was the paper for
oil economy. In this economy the United States
generated paper based on development arbitrage
and technology, which Arabs bought, and in return
they sold us oil for that paper which we were
to turn around and use to create more paper.
It served, in a way, both interests. First it
gave the oil to the old sprawl system, and for
the Arabs it provided an umbrella of protection
and stability, as well as assets for the time
when their oil no longer commanded the same premium
that it did then. The internal response in the
US was to create a Red Queen's Race, where it
was made harder and harder to own the assets
of America, at the same time, the Arab states
grew socially conservative, and attempted to
thwart the rise of a middle class that would
demand imports and capitalization. It was an
agreement by the conservative forces in both
systems, and in turn both used it to drive their
respective political systems to the right, even
though underlying technological and social trends
were for greater liberalization and freedom.
It is this dynamic, and not any of its subsidiary
moves, that is important. The implementation
of trade, banking deregulation, tax policy are
all means by which the United States and the
West tried to stay one step ahead of oil. The
roots of this crisis are then the demand to keep
the sprawlconomy going, the decision to engage
in the paper for oil economy, and the de facto
result of making it so that the wealthy, rather
than the society as a whole, would hold the paper.
In short, our rich, had to stay ahead of their
rich. This created the most important race to
the bottom: of top tax rates. It is impossible
to tax our wealthy more than their wealthy taxed
themselves.
The 1% Solution
The death of this system was that it worked
too well, in that with the coming of the internet
bubble it seemed as if the "New Economy" would
replace "Bricks and Mortar." Oil prices plunged
to their lowest real value since the coming of
the petroleum age. Arab nations bled dollars,
and were under pressure. The Clinton-Rubin dollar
drought nearly capsized the conservative economies
of Saudi Arabia and other oil states. Many responded,
not by liberalizing, but by creating even more
radical anti-Western ideologies, to hold of the
wave of liberalization that would inevitably
come should the become consumer states.
This dynamic threatened the very basis of the
reactionary coalition in America. They had always
assumed that they had stacked the deck for a
permanent Republican majority and hold on power.
Thwarted over and over again by Clinton in their
attempts to secure power in the 1990's, it became
evident that the left could play the paper for
oil game better than the right could. This is
because the left, not the right, had become the
party of free markets, and since the left had
much less concern over who got rich, it was able
to open more opportunities. Free Trade, the dotconomy,
a reduction in military spending and corresponding
increase in civilian investment all altered the
very composition of the small club of the Republican
Party.
The dot bust that followed the dot boom was,
to some extent, timed. Greenspan's rate raising
campaign of 1999 and 2000 was not outside of
the bounds of discretion as Fed chairman, but
it was more aggressive than he had been with
a Republican President in trouble, and was much
less accommodating than he would be with a later
Republican. In other words, what he did wasn't
obviously manipulation of the election, but it
was out of character.
It was in this environment that the election
of 2000 occurred, American was on the cusp of,
but not yet in, recession. It had had a brief
period of broad prosperity, but not yet completely
taken hold. It was also facing a massive crash
in speculative equities. Enter George W. Bush.
His overt promise was to bail the wealthy out
of their dot crash with tax cuts. These tax cuts
satisfy the need of the Red Queen's Race, in
that they gave money back to Americans, and much
less to others. Thus preventing a situation where
assets would be bought up cheaply while illiquid.
However, the response of the oilarchies, at the
bottom of the crash, was to sell. This was the
brutal climax of a three year long bear market,
which occurred in the summer
of 2002 . The plan had been to lower interest
rates through the floor, pressure the yield curve
to favor mortgages over industrial output, and
buffer industry with a war. When the bubble popped,
the insolvent banking system would be bailed
out by ordinary people, leading to a frozen in
place economy. This process I labelled Japanification .
It would lead to a long period of stagnation,
where the majority people would not live that
badly, but they would have little hope of improvement,
and face increasing pressures personally and
financially.
Thus, it was not enough to bail out our rich,
it was necessary for Bush, if he and others wanted
a permanent reactionary state, to control a flow
of oil to pour into their version of the sprawlconomy.
This was the Iraq War, and the ultra-low interest
rates that Greenspan provided, by his own admission,
had two purposes. One was to get as many people
to own homes as possible, the other was to finance
the war. Both policy results were failures. The
costs of the failure in Iraq are not necessary
to go over here. What is more important is the
housing bubble caused by the failure of the Fed
to accept in 2005 that the Bush economy had failed,
and take the economy into recession then, ending
the building boom, and force the fiscal reckoning
in Congress. Instead we received horse
hockey hokum from Greenspan , even as the
numbers he presented showed that almost all of
the increase in debt was going to fuel short
term consumption.
The 1% solution to the Red Queen's race was
to allow our top 1% to pile up asset inflation
to match the petro-dollar acquisition of assets.
The Iraq war was a recognition that, to keep
the Republican base, oil was needed, and to keep
control of the top, it had to be in American
hands.
"Financial Genius is Leverage and a Rising Market."
John Kenneth Galbraith quipped that financial
genius is leverage, and a rising market. It is
for this reason. among others that he had a suspicion
of the "dubious magic of monetary policy." Monetary
policy means that those who have, get. Monetary
policy means that those first in line at the
bank window, get to sell at a profit to those
farther down that line. It is not a neutral market
stimulus, but, in fact, a very specific one.
In our case leverage was provided not only by
low interest rates, but by the SEC relaxing
leverage ratios, the failure of various regulatory
agencies to enforce laws already on the books,
let alone new laws that might have been desirable
being passed.
The reason that mortgages were the basis for
this vast mountain of instruments is relatively
simple. The United States partially liberalized
it's economy. Some people competed very directly
against the rest of the world, while others did
not. People naturally fled from competitive exporting,
to non-competitive non-tradeables. One can't
go to Singapore for a Big Mac tonight. One can't
buy a house in Ireland to commute to a job in
Topeka. One can't go to a hospital in Mumbai.
And we don't let people build our aircraft carriers,
such as the Ronald Reagan, George Herbert Walker
Bush, or Gerald Ford.
As with many things, what we got was socialism,
protectionism, Keynesianism and liberalism -
for the Republican Coalition. This was the practical
political realization of the post-Reagan Republican
Party. They couldn't afford to buy landslides
any more, but they could afford to buy enough
of the cheap states to control Congress and the
Presidency. With the occasional assist from the
Supreme Court.
But mortgages had another magical property,
and that is that they were the heart of the sprawlconomy,
and no political party could be allowed to have
them fail. Thus the bet was that if everything
went wrong, there would be a massive bailout.
The British fretted over the lack of "moral hazard." In
finance terms, almost any position is better
if you don't have to protect against the downside.
In the circles I travelled in, this was known
as the "eating babies" case. "Well if that happens
the world has gone to hell and we are all
eating babies, so it doesn't matter." For example
the effects of global thermonuclear war can be
discounted, because we will have other things
on our mind than the value of our Intel shares.
However, the trick was to systematically create
investments which would all go wrong at once,
and then proclaim that they could not. The catalog
of financial games, for example, packaging sub-prime
loans valued at the face value of the loan, which
was highly unlikely to be paid, while at the
same time packaging good loans at the default
value of the house, which was virtually impossible
to occur, because if the owner defaulted it would
be because of a massive economic downturn, were
just two of the tricks used in creating Collateralized
Debt Obligations and derivatives that had no
relation to reality.
The truth about finance is that it is about
giving people permission to do things they otherwise
would not be allowed to do. It is, therefore,
a social utility. The key to controlling finance
is not regulation per se, but in having a social
project to which it is directed. Regulation then,
is the way we tell that institutions are following
the socially and politically agreed upon course.
If the course is wrong, no amount of regulation
will work, because even if it is still on the
books, it is dead letter.
Thus with Greenspan, Bernanke, and others who
were part of - not merely the broadly agreed
upon paper for oil project, which both Democrats
and Republicans signed on to - the project for
a permanent Republican and reactionary order,
regulations and indeed economic sobriety were
out the window.
The reason Greenspan got the nick name "bubbles" was
for his practice of finding a way to inflate
the top level money supply, called M3, without
it becoming consumer demand. Inflation was defined
as "inflation of consumer goods." This is the
inflation that our foreign bond holders care
about, because it is their buying power from
us. Thus, a simple policy measure was in place:
make the broades measure of money supply, called
M3, go up, without inflation in what America
sells, called "core inflation" rising beyond
a comfort zone. All this sounds bloodless and
analytical, until you realize that it is impossible
to sustain. This is because core inflation can
only be contained by monetary policy if the money
ordinary people have access to is expensive and
scarce. A good measure of this money is called "M1." But
M3 is just M1 on quaaludes. All of the bets made
that are in M3, have to be paid back by M1. Now
you can do this for a little while by two expedients.
One is to make it so people who buy assets accept
less return on their investment, as measured
by say "Price to Earnings Ratio" or interest
rates. The other is to drain the savings rate
of ordinary people, so that money is flying around
faster and faster. This is called "the velocity
of money."
However, both of these have limits. At a certain
point buyers are getting the lowest returns they
can accept, and consumers are not saving. In
fact, by the marginal theory of utility, it will
go on a bit longer than it should go on, because
it takes a while for people to realize that no
only are they losing money, they aren't going
to make money. In this decade, the total annualized
real return on the S&P 500 has been - negative.
That's right, money put into the S&P, including
dividends, has been behind inflation. And that's
just in dollars. In this decade the US savings
rate has turned - negative. That's right, we
are spending down. In this decade American wages
have been, in real terms, negative. And that's
before we count in the housing bubble.
This then was the state of affairs at the time
when Daniel Altman labelled this a revolutionary
gamble to create a neoconomy
The Adventures of Captain Carnage
Benjamin Bernanke is an academic expert. Specifically,
he is an expert in how to manage a crash in assets,
without creating a situation where the rich will
require a bail out from the public, and the public,
in turn, demands real control over the society.
His thesis was that the Federal Reserve in the
Great Depression could have printed money to
prevent deflation, and then used extra-ordinary
means to prevent inflation. His argument was
that FDR, in though not in so many words, could
be prevented if only the right macroëconomic
policies had been taken, followed up by using
gaps in the system if need be.
Bernanke was, thus, obviously, the choice for
Fed Chief after Greenspan. He has the misfortune
of having had his policies put into practice,
to borrow a quip from John Kenneth Galbraith.
His failure was the attempt to impose microëconomic
manipulation and market failure on macroëconomics.
His papers do not hold together even as they
are written, and I am happy to say I was busy
calling him a fraud before it was fashionable.
It will be a lot more fashionable very soon.
But for practical purposes, it is enough to
note that starting in 2007, when the various
positions began what Krugman labelled "The Great
Unravelling". In financial terms, a position
unravels when it's parts no longer work together.
A sophisticated investment is not merely picking
stocks you like, but in putting together different
possible futures, and having something that will
do well in all of them. A position unravels when
the future doesn't coöperate.
The assumption that mortgages would not be allowed
to unravel met head on with the assumption
that unlimited amounts of money could be created,
so long as that money did not become demand for
real things. This is the contradiction mentioned
above. It is impossible for financial instruments
to expand for ever, and for wages to stay flat
forever, without bringing new people in to the
system. It is impossible to do this with a basically
constant amount of oil.
This problem is known to engineers as the problem
of "scaleability." Can a solution be expanded,
and if so what happens. Unlimited amounts of
money cannot rest on limited amounts of oil.
Even the total amount of oil is not important
so much as the peak bandwidth of cheap oil. Oil
at 140 dollars a barrel is not cheap enough for
people run the sprawlconomy on.
Bernanke's attempts at bail outs failed, because
with each failure, the financial people next
in line could either accept the loses, or fail
in turn. This is why each bail out has lead to
another, bigger, bail out. From loans, to debt
swaps, to outright guarantees, to the Freddie
and Fannie bail out, to the Paulson Proposal,
each bail out has gotten bigger, and been attached
to money that is less and less likely to ever
be seen again by the tax payer. The cost of 100
billion in loans is really the cost of the returns
could have been done with that money for a few
months. This is a few billion at most. The cost
of 100 billion dollars in buying toxic assets,
is probably 100 billion dollars give or take
a few cups of coffee.
In July the plug was pulled on Captain Carnage's
printing press, because the cost of oil was threatening
to rattle apart the entire Republican coalition.
North Dakota and South Dakota were in play on
the Presidential level, with Montana leaning
Democratic. The Republicans wanted liberalism
on the cheap, and expensive gasoline put it out
of reach. Thus, the plug was pulled. M3 began
contracting rapidly, and oil fell as rapidly.
This was expected, the cost of oil was not a
problem of oil undersupply in particular, that's
the chronic problem, but a problem of acute dollar
oversupply. As soon as the dollars went away,
so too did the inflation. Since then you have
not heard much from Ben Bernanke, because he
tried and failed.
Instead Paulson has come to the front, and he
has presented a more traditional, bare knuckles,
solution to the panic, one that would not have
been unfamiliar to bankers of old: get the government
to buy up the worst assets, send a few people
out to pasture, and have life go on. It is thus
Pauslon who has gotten the ball here. You can
also bet that there will be no money left in
the till by the election, because otherwise what
would have happened is that Bernanke would have
resigned as Fed Chair, Paulson would have been
appointed, and the Fed, not the Treasury, would
be given the blank check. The Fed has taken on
hundreds of billions of toxic debt already, it
could be empowered to take on even more.
Thus the book on Bernanke is that he printed
dollars, polluted the Fed balance sheet, and
could neither stop the financial crisis, nor
prevent inflation, nor stop the one thing which
he said needed to be stopped: the contraction
of the money supply in the face of an economic
downturn. Remember this is what right wing academics
say was the cause of the Great Depression: the
fed allowing the "great contraction" of money
supply going into a down turn. We are now in
a position to judge this theory and say that
it is not the case, the Fed's actions of 1930
may have precipitated the economic crisis, but
had they done differently the result would have
been to pull the Fed chairman and put in someone
in charge who would do the same thing in attempting
to bail out the wealthy and stick everyone else
with the bill.
Small Steps are not enough
In March of this year, economist Peter
Davidson proposed that two agencies be used
to solve the growing fiscal crisis . His
proposal was to use a Home Owner's Loan Corporation
model, a depression era program where the government
bought unstable loans at a discount, and then
cut the interest rate and the face value, allowing
the homeowner to stay in the house. This is
a "foreclosure in place" plan along the lines
proposed in general by Larry
Summers in February. By
March the idea received attention in the press. From
a fellow at the American Enterprise Institute.
Now think on this. This late this winter and
early spring and respected academics were already
clear on the need for debt relief - academics
from the left Post-Keynesian Economics school
of thought to the ultra-rightist American Enterprise
Institute. In fact proposals for the return of
an HOLC have
been offered for sometime from the margins.
This idea has flowered in recent days, from
Nouriel Roubini, and other writers. Hillary Clinton
has taken
up the HOLC banner.
The HOLC proposal would do two things. First
it would offer a floor
to the market. Second it would prevent homes
from being dumped on the market just as this
would create a contagion even for good loans.
But it is not enough. Even after there is debt
relief, that still leaves a host of other people
in a great deal of trouble, For example, the
people who do not qualify for debt relief, but
are going to be even more upside down in their
homes than they were before. It also means that
some loans are going to unravel, since it is
absolutely certain that an HOLC price for loans
will be lower than what is offered.
In short the HOLC is not nearly radical enough.
Instead, with the US already committed to stabilizing
half of all mortgages in the US, it is only one
small piece of what must be a wider restructuring
of the financial markets.
But this gets us back to a very simple question,
in a crisis of liquidity, the question is how
to put money into the system, and then pull it
out once the crisis has passed. In a financial
crisis such as this one was some time ago, the
question is how to borrow money to clean up the
mess, and then impose regulations to prevent
the exploitation of both the bail out, and the
flaws in the system. However, we are not faced
with either of these two smaller problems.
The problem is what, exactly, are we going to
pay these loans off in? Remember the reason this
is a crisis, and we can't just walk away, is
that our money is based to no small extent on
mortgages. We buy oil and import goods with this
money. If the total money supply cannot expand,
then it must mean that American living standards
must drop dramatically in order to pay back the
mortgages. The American people, in 2000 and 2004
were sold "a pig in a poke." They were not told
what the differences were, nor were they told
what the consequences could be. While it will
be impossible to avoid having the penalties fall
on the American public for what they bought and
voted for - "You don't know what it is, and you're
voting for it." - the greater blame must fall
on elites. However, as long as elites can stay
in power promising that the land casino will
re-open after some clean up from the last party,
there will be no such change.
A Constitutional Crisis
As Paulson's little demand for dictatorial powers
makes clear, this is not really a financial crisis.
Instead, it is a political and constitutional
crisis. Paulson told Barney Frank that putting
in an amendment to cap executive pay would be
a "poison pill." If this were really a catastrophe
in the making, one where the American public's
money was needed right now, or else, then Paulson
would have accepted almost any conditions, even
if he intended to renege on them in practice.
After all, with 700 billion to spend, it would
have been trivial to make sure that a few billion
sloshed to the people whose golden parachutes
he took away. The defense department loses track vast
sums of money. It would not have been hard
to do that here. Clearly we are not in the moment
of true catastrophic financial failure. Hence
there is no reason to not make this as hard a
bargaining process as possible.
The key to the constitutionality of this is
that in order to pay back the massive sums of
debt taken on by the failed Bush executive, which
will probably amount to some 8 trillion dollars
when all of the dust is finally cleared out of
the air and everything is accounted for - some
new source of value must be created. There is
no way, with current rates of oil production,
the global expansion of the middle class, and
current rates of oil consumption, for the US
to ever produce enough houses, at high enough
prices, to print enough money to grow our way
out of this debt. It is physically impossible,
just as there ever being enough physical gold
to pay off the debts of the First World War and
its aftermath, because interest multiplies like
rabbits, and gold does not.
Thus it is necessary, not merely to shift money
around, but to change the very definition of
money. This is why the "cram down" model is also
wrong. There is no reason for the Arabs to accept
a cram down, they can just raise the price of
oil to the point where all of the surplus value
created in the global economy flows to them.
This gets them effectively what they paid for,
even if the numbers are not correct. It would
also mean that the center of the financial world
would be Dubai, not New York, London, or even
Shanghai.
This means that while HOLC/RTC proposals are
useful the most important step right now is to
meet the demands of the Treasury Secretary for
arbitrary powers head on, and select a different
entity to manage any bail out, and to forbid
bailing out of specific securities, but only
of whole entities. In short, before the public
will by any more toxic assets, the public will
have the authority to remove the people who bought,
created, and sold those assets.
There is already an entity whose purpose it
is to evaluate failed institutions, collect insurance,
and merge institutions into healthy ones. That
entity as Robert Reich correctly observed in
a recent radio interview, is the Federal Deposit
Insurance Corporation. Since we have, effectively,
taken responsibility for the global financial
system, it is time to accept that the principle
of insurance, direction, and regulation is required.
This process has been going on for some time,
since, in fact, the response to the crash of
1987, when circuit brakers were put in place
to prevent wide swings of the stock market. However,
as of this year, with the US having taken on
the losses for the markets world wide, effectively,
the solution must be that the financial system
must pay for access and insurance in good times,
so as to have funds in moments like this. That
this principle has escaped 20 years of executive
and legislative leaders is a sign of how far
down the wrong road we have come.
This means that the FDIC needs to be expanded
to have a reach not just for banks, but for securities
as well, and for all funds held as securities.
Since people already pay fees to mutual funds,
it will not be difficult to shift some of this
revenue from money managers, where it is buying
brass nameplates and vacations, to an insurance
fund. That insurance fund can be used to retire
foreign debt as its means of accumulating interest.
After the FDIC has finished taking over entities,
then individual mortgages can be assigned for
debt relief to an HOLC, and individual assets
which are saleable, but entangled in financial
instruments, can be offloaded to an RTC to be
run for some period of time and then sold when
market conditions improve. However the lynchpin
is the acceptance that the US Dollar is now based
on all equities, securities, and assets which
are in the wider financial system denominated
in dollars, and the expansion of the total capital
system, and not just the suburban sprawl system,
will be what the dollar is backed by. Since it
has been true in effect, there will be no macroëconomic
consequence to making it true in practice. The
difference will be that it will be the public,
and Wall Street and Riyadh, which will direct
the use of the financial system.
In the very short term, then, what is necessary
is to prevent American assets from being bought
up cheaply by foreigners, and to radically reduce
the value of current dollars without capsizing
the economy. Fortunately there are several ways
this can be done.
Part of the problem is that we have an executive
which is illegally in place. This cannot be gotten
around in coming up with proposals. If we had
a legal President acting in good faith, as opposed
to one who just sent a note to the Congress demanding
a 700 billion dollar bribe or the economy will
get it, then this would be a rather easy situation
to deal with. The President could use the powers
under the trading
with the enemy act and the declaration of
a national
emergency to prevent US assets from being
bought up by foreign entities. The strategic
reserve would be tapped, rationing imposed on
oil imports, and the market allowed to fall to
a discovery point where only US national liquidity
could be used to purchase assets. This would
be done in the context of a promise to repeal
the Bush revenue reductions retroactively by
the new Congress, and the additional revenue
devoted to back the bonds.
In short, if we had a President, as opposed
to an illegal executive, there would be mechanisms
in place by which a Congress could delegate sufficient
authority to both bail out the financial system
and prevent a short term fall in equities from
becoming a permanent entrenchment. The public
will, in a matter of weeks, be able to correct
this problem, and in a matter of months an new
government could be inaugurated. Thus all the
Congress needs to do for now, is get to Zero
Hour of the inauguration of a new President,
and it will have the chance of doing so with
the new Congres in January to authorize other
short term measures as is necessary. While it
is better to deal with the problem early, the
problem is George W. Bush, and he is not going
away until next year.
Thus the centerpieces of a counter congressional
bill are:
- Expansion of the FDIC to include money market
funds, brokerages, and other financial funds.
Institutions which are out of this expansion,
if any, will be allowed to fail as a class.
Assign the CBO as the Congressional means of
oversight and give the CBO authorization to
extend credit to the FDIC, which can be waived
if, after Congressional review, the money is
justified. Basically, anything that Bush does
on the way out the door must be subject to
review by the incoming Congress and Administration.
- Authorization of an HOLC type cram down
of mortgages with government liens, the profits
of which are split between home owners and
the mortgage system, now in taxpayer hands
anyway. Place this process in the hands of
the FHA, and have the CBO assigned to continuous
oversight. Authorize some 20 billion dollars
in stock to be purchased by the government.
- Declaration of a national emergency, without
expansion of the debt ceiling, and also with
explicit judicial review. In the national emergency
specific authorization can be given to review
any transfer of effective control of banks
or other financial entites. In this declaration
can be rationing of gasoline, imposition of
conservation and other austerity measures.
- Dramatically expand safety net programs
for the inevitable economic shock: food stamps,
unemployment insurance, suspension of interest
on student loans, loans to the government by
members of the National Guard, active Military,
or Reserve and so on.
That's all that is needed for today. For later?
Yes, progressive taxation, green relief, federal
debt restructuring and so on. But for today,
that is all that is needed to stem the tide.
When a new executive is in place, then Bernanke
can be removed, the Fed restructured to be part
of a joint Executive-Congressional control of
monetary policy, green relief put in place, and
a massive conservation drive funded.
But that is for tomorrow. Today what we need
to do is to authorize the government to be the
insurer of last resort and not the idiot of last
resort. The short term problem is that interbank
lending came to a near halt because banks didn't
know which other banks were infected to what
degree, and the fear that the money market funds
would come unravelled. These can be provided
for by the means above. If the Federal Government
begins stepping and a dealing with problem banks,
and buffers the inflationary hit, then we can
go forward and deal with the larger crisis.
Summary
These events are not a short term bump on the
road, but the culmination of the decision a generation
ago to use paper to buy oil, to inflate that
paper by allowing those at the very highest reaches
of a social elite to engage in a "race to the
top" with the suppliers of oil. This system was
accepted by both parties, and it created a neo-liberal
era where any restriction to creating paper wealth
had to be removed. This was not a matter of left
or right, everyone was a neo-conservative, and
every one was a neo-liberal.
The failure of this system has been widely predicted,
but there was neither a holistic replacement,
nor the political will to replace it. Criticism
of it was outside of the mainstream, or channelled
into the form of arguing over the margins of
the benefits of it. It accumulated massive debt,
and that debt is the heart of the financial pressure.
In 2000 Bush entered office with the plan of
bailing out those in the US who had bet badly
on the stock market, and invading Iraq to break
the impasse over control of oil. Both of these
policies failed. The back stop for failure was
the Greenspan/Bernanke plan of creating a housing
bubble, and then when the burst came, to inflict
the costs on the American public. This is "Japanification."
We are now at the point where Japanification
is the question, and Paulson is trying to enforce
it at gun point: do this or I will do nothing
and let everything fall apart. Since the result
of this will be a political catastrophe for the
Republicans, the Democrats should propose an
alternate bill, make no compromises, and let
the Republicans Hooverize the name of George
W. Bush.
The correct response is to expand the FDIC,
begin taking over institutions as a whole, providing
immediate debt relief through an HOLC, and declare
a national emergency to enforce austerity and
prevent any short term attempts to profit from
the financial chaos. A windfall profits tax on
oil companies isn't a bad idea either, since
it would bring in tens of billions of dollars
right when they are needed the most.
This solution, or some version of it, is in
line with proposals from economists and political
figures such as Robert Reich, Peter Davidson,
Nouriel Roubini and others. It also leads to
the correct solution to the larger fiscal crisis,
which is removing the oil bottleneck to the growth
of wealth, and therefore the growth of wages
to pay financial instruments, and the cramming
down of instruments which claimed the profits
of a new economy, while at the same time tried
to prevent it.
In that future come a great drive to reduce
consumption, increase savings, increase exports,
globalize opportunity for all and not just for
some, and create a very different system of work.
But that is another day. Today's purpose is to
say no to dictatorship, and to craft a counter
which is yes to insurance and accountability.
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