The horizon is not so far as we can see, but as far as we can imagine

Month: August 2009 Page 1 of 2

Um Yeah, TARP is “profitable”

Seriously, the idea that TARP is making money is overly narrow, and those who are claiming TARP is turning “profits” don’t understand how this works.

The FED has large special loan facilities to banks, in which it gives them money in exchange for underwater securities.  The FDIC has guaranteed huge amounts of debt issue by the banks.  The FED is letting banks keep bad securities on their books at whatever value they want to claim.  And they are loaning out money at concessionary rates while banks jack up interest rates to consumers, earning spreads of well over 20%.

So yes, the banks are making “profits” and so is TARP.  But not only wouldn’t they be making profits without massive subsidization and what amounts to accounting fraud, whether or not the government is making money overall, or will in the end, on its full panolpy of loans, guarantees and cheap cash is unclear.

Money is fungible.  Give money to one part of an entity, or enable it to borrow money cheaper than it should be able to (that’s what FDIC guarantees are about), or don’t make it recognize losses on its books, and it can take the “profits” it creates and send some of them to repay TARP loans.

TARP is making money because it was decided that it had to make money.  So instead of forcing banks to take losses, or withdrawing special loan facilities, or ending concessionary rates, or making banks retire guaranteed bond issues and reissue them  without the guarantee the banks were encouraged to “repay” TARP.

But if you think that means that the overall panolpy of government aid to banks was profitable, you aren’t looking at the whole picture. It’s like making 5 loans to your deadbeat cousin, and he pays back one while not being able to pay back the others and you say “I made a profit!”  Not yet.

But I’m sure Bernanke and Geithner are pleased that so many folks have fallen for their shell game.

The American Eagle Trap: Why a weak dollar won’t save America

Dollar Yuan peg from Carpe Diem

Dollar Yuan peg from Carpe Diem

Let’s deal with a common misunderstanding, that “dollar devaluation is going to save the US.” The idea supposes that if only the US dollar were low enough, the US would become competitive.

First, take a look at the charts to the left.  The US dollar under Bush took a nosedive versus the Euro (and most other currencies as far as that goes).  Note that the Yuan appreciates against the Euro, but not the dollar, during that same period.

Why is that?  Because China spends a huge chunk of money keeping the Yuan pegged to the dollar. In some years, as much as 10% of their entire GDP.

From Peakwatch

From Peakwatch

During the Bush administration we had a massive experiment in devaluation.  During the Bush administration ordinary people’s incomes went nowhere, and the era ended in a massive financial crisis.

Before that financial crisis something else interesting happened: there was a huge rise in the price of oil, up to $150 a barrel. (For much of the nineties it had been below $20/barrel.)

At the current time, if the dollar drops, the price of oil will rise.

China US trade deficity by Robert Scott

China US trade deficity by Robert Scott

An increase in the price of oil and other commodities will increases the trade deficit, because commodities need to be imported.

China is the largest source of the US trade deficit: between 2001 and 2009, China accounted for $1.58 trillion of the $3.81 trillion trade deficit (and the percentage increased throughout the period). China will make sure that there is no devaluation of the dollar relative to the Yuan.

Given that the Chinese proportion of the US non oil deficit is 83%, the effect of devaluing the dollar on trade deficits will be essentially zero.

The end effect of dollar devaluation, then, is an increase in the price of oil and other commodities which increases the trade deficit, but has no effect on imports from China.


From Lilith News

Given that devaluing the dollar will also lead to an increase in the price of oil, it is entirely likely that it’s net economic effect will be negative, rather than positive, as the US economy shakes apart under exorbitant oil prices.  In 2008 the economy shook apart at about $150/barrel.  Despite the current lousy economy, the price of oil is now over $70/barrel.

“Right then,” you say.  “Let’s force the Chinese to stop spending all that money keeping the Yuan overvalued relative to the dollar!  If they won’t, let’s slap countervailing tariffs on them!”

Great idea.  Except that China’s need to keep the Yuan overvalued against the dollar is why they buy up US treasuries and other US assets.  If they can’t keep the Yuan overvalued against the dollar, and therefore maintain access to the US consumer, then they have no need to inflate the value of US currency.  Or to put it another way, what happens if China says “Ok, we’ll stop buying US treasuries and other US assets to keep the Yuan up.”

From the Coucil on Foreign Relations

From the Coucil on Foreign Relations

Question: Who is funding the US government and agency deficit right now?

Answer: China and Japan.

Japan’s new government is very likely to start buying a lot less US debt, because Japan’s trade surplus with the US has been shrinking despite massive currency intervention. That leaves China.

The chart on the left only goes to 2007, since then the US government deficit has rocketed to the highest level in history.

What would happen if China decided to buy a lot less American debt, including US government debt?

  • US debt servicing costs would climb through the roof, massively increasing the deficit and putting even more pressure on domestic programs.
  • The US dollar would indeed collapse, and not just against the Yuan.  The Chinese ceasing to buy US assets (or even decreasing significantly their purchases) wouldn’t just effect Yuan/dollar rates.
  • The US trade deficit to China would drop, but it would still not be reversed. (China’s costs are legitimately lower than America’s, although China’s productivity is also lower.)
  • Inflation would increase significantly.  Cheap imported goods have been an engine of deflation for some time now; increasing their price could lead to inflation, especially if there were also a spike in oil prices at the same time.  The corollary to increased inflation is a decline in the US standard of living, even if there isn’t an inflation spike (because that would mean a reduction is goods being bought or an economic shock so severe it lead to a deflationary spiral).

If China let the Yuan appreciate to its natural value against the dollar, it would almost certainly throw the US, and the world, into another financial crisis.  It would also badly damage China’s economy, which would lead to more riots and instability in China.  The advantage to China would be that they could buy oil for much much less than before, and that oil prices for the US would rise (though such a rise might be choked off by a collapse in the world economy).  However, any real recovery in the world economy would leave the US with permanently higher oil prices and China with lower oil prices, in itself a competitive disadvantage for the US.

The results, in short, would likely be disastrous.  Maybe even catastrophic. On a global scale.

Right now,  devaluing the US dollar does nothing for the US.  A forced radical devaluation by making China end its peg would probably be disastrous for the US.

The route to prosperity does not run through a dollar devaluation.  Or rather it doesn’t run directly through a dollar devaluation.  There are things which need to be done first, before the dollar is allowed to float to its natural level.

  1. Radically reduce the US dependence on oil imports.
  2. Radically decrease unproductive spending, including military spending and health care spending (by which I don’t mean cutting medicare, I mean taking back the 5% of wasted GDP spent by the private medical industry) .
  3. Significantly increase progressive taxes  so that the US does not need as much foreign funding.

Since all of those things are third rails in American politics, as we’re seeing now in the health care debate, where a real restructuring of the industry is not even on the table, the US will not escape from the trap it’s in.

In part, the lack of effective and politically viable policy options is because the US political system is broken. (For example, most of the population is in favor of single payer health care, yet this option isn’t even on the table.)  In part, it is because America’s citizens want the status quo to continue.  After all radically progressive tax increases, cutting the military budget in half or enforcing 55 mile an hour speed limits and putting city cores off limits to most cars aren’t just unpopular with politicians, they’re unpopular with the population as a whole.

America, and Americans, want to live beyond their means.  They don’t want to make hard decisions.  And the political system doesn’t want to take money away from any powerful interests which benefit from the current system.  So the American eagle will remain trapped, dying by inches, because no one is willing to do what it takes to save America from itself.

What Japan’s Change In Government Means for the US

US China Japan Trade Deficit

US China Japan Trade Deficit

The new government has indicated it will move towards economic integration in the far east, and away from close economic integration with the US.  These two charts  tell you why, and what it’ll mean for the US.

Japan has spent a lot of money keeping the Yeb low against the dollar in order to export to the US.  Think Japan believes its getting its money worth, when China is eating its lunch on exports to the US?  The strategy worked for decades, but it isn’t working any more, indeed this year the Japanese had their first annual trade deficit in 28 years.  But unlike last time, this one comes when the “keep the Yuan low and export to the US” strategy has been in a multi year decline.

china-us-national-debt-holdings-by-lillith-newsJapan is going to be a lot less willing to finance US deficits and consumer spending than in the past, and economically it is going to be looking much more to other Asian nations.

In the long run this isn’t bad for the US.  In the short run, it’s going to hurt.

No Banks Means No Banking Crisis

Joseph Stiglitz, the Nobel Prize-winning economist, is suggesting we let banks fail.

This is a slightly more radical version of what I’ve been saying* for some time:

  • We don’t need the current banks.
  • If they won’t lend, let them go under.
  • If the Fed can lend to banks, it can lend directly to banks and consumers.

The following article was originally published Feb 2, 2009.  I am reprising it here because the reminder seems necessary.

No Banks Means No Banking Crisis

Banks exist to act as intermediaries between central banks and those who need credit.  Banks are given the ability to create (yes, create) money through fractional reserve money, and they also have the right to borrow money at rates that no one else can receive.

Image by Twolf

Image by Twolf

If you could take your money, multiply it by 10 (that’s not the exact number, but as an example) and lend it out, do you think you could make a profit?  If you could borrow money at 1- 5% and then lend it out for more than that, in some cases 15% more, do you think you could make money? That’s how banks operate.

Banks are thus given an incredibly valuable privilege by governments.  It’s really hard to overstate how easy it is to make steady returns as a bank as long as you don’t get greedy.

In exchange for the right to create money and borrow it at rates no one else gets, banks are expected to add some value to the equation.  Specifically, banks are expected to figure out who is a good credit risk, and where money should best be loaned and used.  There are two sides of this arrangement:

  1. Money should be loaned where it has a high return.
  2. It should also be loaned to people who can pay it back.  And it should be invested in the same way, return averaged with risk.

Banks have not been doing this.

Banks have been seeking out the highest return without taking risk into account .  Instead, they have been seeking out high risk for high returns.  They haven’t been adding value.  They also haven’t been performing the taks of getting money to the people who can use it best.  Banks took the money and invested in securities which were essentially fraudulent, in a bubble that any idiot could see would not last, in non-productive financial industries.  They didn’t invest in manufacturing, by and large, or new technologies or alternative energy, or anything particularly useful.  They didn’t use money to actually grow the economy—GDP was going up, and profits were going up, but the illusion of growth was based on multiple financial bubbles that weren’t sustainable and didn’t indicate any real prosperity underneath.

And when it came to loaning to ordinary people, in many cases, they were lending at usurious interest rates.  (What’s your credit card’s interest rate?)

In exchange for the very valuable privilege of creating money and borrowing at lower rates than anyone else get, banks weren’t creating value for the economy; they were destroying value.

Stiglitz is right.  There’s no reason to keep banks around, at least not this bunch of banks.  Let private investors take their losses, guarantee deposits, do a clean up as best you can and create new banks.  Or in the case of the US, maybe not…

Instead, what needs to be done is to just have the Fed lend directly to consumers and businesses.  Let everyone switch their credit card to a Fed card, and as a one time thing everyone can switch over up to a $10,000 balance.  The interest rate?  How about the top end of the Fed Funds rate +4%?  Right now, that would mean a 4.25% interest rate.  If people default, well, garnish their wages.  You’re the government.

Start lending to businesses.  Base lending it off credit ratings after you take over the ratings agencies, or force reform, because the rating agencies demonstrated they are worthless when they rated much of the junk that’s now imploded as great credit risks.

In time the central bank makes these loans conditional—you can borrow money from the Fed only for certain things:

  • Want to buy a house to live in?  Sure, you can borrow the money in one of 5 standard mortgage styles.
  • Want a vacation home or an investment home?  Go to a commercial lender.
  • On your credit card, want to buy food?  Great.
  • Want to put a vacation on your card?  Forget it.
  • Want to buy a fuel efficient car?  Sure.
  • Want to buy a gas guzzler? Get your financing somewhere else. (Not that this is much of an issue, given the low rates car companies give.)

Of course, the Fed may not want to be in the business of looking into too many things too deeply.  So something like banks is useful for when folks do want that vacation, or that second home, or to borrow money to start a business as opposed to just a credit line for one that’s ongoing.

Fortunately there is one group of financial institutions in the economy which has done a good job as banks, even though they aren’t called banks: America’s credit unions.

Help credit unions expand, offer them better credit, get them together to set up wide ranging ATMs so folks can get their money anywhere.  Use the one part of the system which, because they aren’t stock companies driven by quarterly results and don’t expect multi-million dollar bonuses, didn’t get involved very much in the greed driven stupidity of the last few decades.

As for the banks, if they can survive on their own, great.  If they can’t, nationalize the banks and slowly wind them down.  It may take years, but so be it.  Wipe out the shareholders completely (they took the money in the good years).  Give the creditors what they deserve, if there’s anything left for them.  Move the deposits over to healthy banks or credit unions.

Stop throwing good money after bad.  Something like $8 trillion has been spent, loaned and guaranteed so far and it hasn’t stopped the crisis.  Take the losses, find out where the bottom is and build a new system.

This will also lead to a more vibrant society in the long run.  Banks have been abusing the privileges they received and as a result credit for the things America really needs has dried up.  Wanted a loan for a hedge fund?  No problem.  Wanted a loan for a new company employing hundreds that would only make 5% to 8% a year?  Probably not.

But it was the hedge funds returns that were fake.  And it was the small businesses that never started because they could only make 5% a year which could have produced real value and lasting jobs.  If you want people to start new businesses, if you want consumers to spend, then giving them credit at reasonable rates, and making that credit available, is what has to be done.

At the same time, due diligence has to come back into the equation.  Everyone in America needs a credit card.  Might as well just give them one.  Without it you can’t rent a car, stay in a hotel or really interact in a modern society. But eveyone doesn’t need or deserve the same credit limit.  And everyone doesn’t need a home equity loan, in fact very few people do.  Let the Fed do the drop dead easy lending “you have an income of $50,000 a year, you want a mortgage where you will pay $10,000 a year, that’s under 30%, you can have it”.  Have the credit unions and the few remaining banks do the more speculative lending, but watch them like hawks.  And take the credit bureaus and the ratings agencies under government sway, and either nationalize them or regulate the heck out of them, so that the ratings they give mean something.

Add in some federal anti-usury laws (no interest rates above fed funds + 15%, on anything, including fees) and you’ve got yourself a full new banking system where credit is available to those who need it at reasonable rates, while reasonable oversight is occuring.  And because so many investors and lenders were wiped out, well, the lesson will have been learned, for a couple generations, that if you do really really stupid things, the government won’t just bail you out.

No more privatizing profits and socializing losses.

*For more on this topic

The Last Liberal Lion

kennediesTed Kennedy is dead.  Expected, but somehow surprising nonetheless, as for my generation he’s just someone who’s always been there.  His life in the Senate was a long battle against onrushing twilight.  He may have been the last old, New Deal style liberal still in the Senate, and it was his duty to try and hold the line against what must have seemed to be an endless right wing surge of politicians who believed government’s role was raise up the already rich and powerful and to crush under the heel the weak, poor and sick.

Many will speak of his lifelong desire to see universal health care passed, and what a pity it was that it didn’t occur before his death, but I don’t think it was yet time.  The HELP bill, from his comitee, is nothing like his own bill, which was Medicare-for-all.  Such a bill cannot pass in this Senate, a Senate corrupted by money and steeped in conservative ideology which despises helping ordinary people.  Instead his legacy is simply that he fought the conservatives and their selfish, destructive ideology to the end of his life.

None of us want to spend our lives watching the ongoing destruction of everything we believe in, and the endless battles, so often occasioned by yet another retreat, must have been demoralizing.  Yet nonetheless he kept fighting.  If it is in defeat, rather than victory, that man is measured, then Kennedy measured up well, and always regrouped to fight another day and even won many victories.  His legacy is what remains of liberalism, which he fought for all his life.

The standard has fallen from his hands.  It will be up to others to pick it up and continue the fight he lived his life for.  If there is existence after life, I hope he will find it a time and place of renewal and hope.

Let the old lion rest, and let us hope there are young lions to take his place.

When one of your loved ones goes out of your life, you think of what he might have done for a few more years, and you wonder what you are going to do with the rest of yours.

Then one day, because there is a world to be lived in, you find yourself a part of it, trying to accomplish something–something he did not have time to do. And, perhaps, that is the reason for it all. I hope so.

-Joseph Kennedy, Ted Kennedy’s father

Update: Mona Brooks has a good photo here from last year’s convention, but what struck me more was her title “Camelot loses another knight”.  I would say it is more that Camelot’s last knight has died, long after Camelot itself fell.  Of course, Camelot always falls, which only makes it more worth fighting for.

Road to Ruin: Bernanke’s Reappointment is just the status quo

I wasn’t sure whether to bother writing about Bernanke’s reappointment.  Why?  Because it’s just the status quo.  But perhaps it’s worth spelling out the status quo.

Bernanke bailed out the banks and the rich.  You know this, but what is not clear to many people is that bailing out the banks and fixing the banking system were not connected at the hip.  It was possible to fix what was wrong with the banks by taking the big banks into receivership and then using them to lend directly.  Wipe out the shareholders, write down the bondholders to the actual value of the banks, but keep lending to the real economy, and indeed increase lending and capital flows, by, say, deciding to refit every single building in America for energy efficiency and generation, and to take every clunker off the road.

The banking class, and the rich as a group, tanked the system.  They committed what amounted to systematic fraud, and earned billions of dollars of bonuses for themselves by crashing out the system and daring Bernanke and other politicians (and Ben is nothing if not a pol) to do something about it.  Bernanke folded, and threw trillions of dollars at them.

Despite what Bernanke’s, Paulson’s, Bush’s and yes, Obama’s, apologists say, this was not necessary.  It resulted from a deep confusion of banks with what banks do, and a deep desire to keep the same class of people in charge of the economy, despite their manifest failures.  Ben Bernanke, Paulson, Geithner, Bush, Obama and so on could not imagine taking out their friends—could not imagine letting them suffer the consequences of their results—could not even understand that their friends were parasites who were not necessary for the continuation of the system but were instead the people who had caused it to collapse.

The end result of this is going to be two things.

First – a lost decade or more, just like Japan (I prefer the phrase “bright depression”.)

Second – another collapse, even worse than this one.

The books have not been cleared, the garbage has been left on them, just like in Japan, but the US is not Japan, it is not a suprlus society which sells more than it consumes.  It is, itself, a parasitical society which needs blood from donors to survive.  Furthermore the American ruling elite left in place by this decision is much sicker and more shameless than the Japanese one (where people comitted suicide in shame over what had happened). Having gotten away with it once, they will do it again, indeed the huge bonuses they are paying themselves indicates they still think of themselves as the smartest people in the room, and they’re right in a sense.  They sold America a pig-in-a-poke, and took America for trillions of dollars.  Rule number one of running scams is never give a sucker (that’s you) an even break.  They aren’t going to, and the end result will be another crisis, which is even worse.

Japanification is not a stable solution set given the realities of America’s deep structural deficit and the essential con-artist nature of its elites.

All Bernanke’s reappointment tells you is that the game is still on. While Bernanke did save the rich, they still lost a lot of money.  They want it back.  And they’re going to get it back, even if it means they suck the last drop of America’s blood and the host drops dead.

Welcome the new American century.  Unless you’re in the charmed circle of con artists and grifters, you aren’t going to enjoy it much.

The moral case against a plan without a good public option

A friend asked for the case against a plan with no public option, a mandate, and regulations.

I assume he means a plan where companies may not rescind policies and they must accept everyone no matter what the pre-existing conditions they have.  No effective cost controls are put in place, subsidies exist, but cut out at a relatively low level 3* poverty level or less.  Without effective cost controls, costs will be expected to rise faster than inflation or wages.  Assume premiums of about 10K/year, with a deductible of about 5K.

Here’s the case, put as simply as possible.

Forcing people to pay money they don’t have for high deductible insurance they can’t afford to use is not moral.

Bloggers et al notice that Republicans can win in 2010 and 2012

Image by Admit One

Image by Admit One

Yes, it’s another of my tiresome “I told you so, next time listen” posts.  In January and April I warned that Republicans could use their skill at being in the opposition and Obama’s manifest failings  could lead to a Republican rebound in 2010 and 2012.  His failings were clearly visible back then and indeed in the primary campaign. He didn’t turn into a compromising milquetoast when he got to the White House, he was always one.  He didn’t turn into a conservative Democrat in the White House, he was always one. Likewise, we knew the Repubicans weren’t going to play ball with Obama’s delusional ideas of bipartisanship and the stimulus package told us he wasn’t interesting in passing effective policy.

And, of course, the mockery ensued.  The Republicans, I was told, were such a joke that Obama and the Democrats couldn’t possibly lose, and as for Obama, well, he was a genius with brilliant legislative strategies a dullard like myself couldn’t understand.

Yeah…  I found the kool-aid drinkers sad when they drank Bush’s kool-aid, and I find them pathetic now that they’re drinking Obama’s.  I understand that people need to feel some hope in Obama, because if he screws up, well, it’s Americans who get screwed.  We all want to believe things will get better, but one of the surest ways to not have them get better is to live in some sort of fantasyland.  Obama was very clear even in the primaries that he was a compromiser who believed that with a dose of his charisma the Republican would melt and join Democrats in linking hands and singing kumbaya around the bonfire.  All could be solved if reasonable people got together and just reasoned together.

He later made his fundamental agreement with basic Bush principles of civil rights by voting for warrantless wiretapping after promising to vote against it, then made clear that he’d serve financial interests before ordinary Americans when he forced through TARP.

And yet people believed he was going to be some sort of progressive president?  Granted, even I have been shocked at just how much his administration has violated progressive and liberal principles, but I was only surprised in degree, not kind, because I knew he didn’t believe in them.  This isn’t because I’m brilliant, I’m not.  It’s because I looked at the evidence and didn’t let “hope” and soaring rhetoric distract me from his actions and, to a large extent, what he was actually saying.  Certainly he lied about some things, but he was very honest about his fundamental governing philosophy.  Likewise, who his key advisers were, the fact that he had the right-most policy prescriptions of the late Democratic primary field, the way he fetishized tax cuts and so on, told anyone who was listening without “hope” clogging their ears who he was.

This is why I repeatedly advised people to give money to and work for liberal Congressional candidates rather than Obama.  It was at that level that the left could make a real difference, not at the Presidential level where such donations were drops in an ocean and plenty of volunteers were already available.

America’s problems are not going to get solved before a complete crash out (something which I believe is now more than even odds within the next 20 years) if Americans, and especially progressives and liberals, keep letting themselves be fooled.

The truth won’t make you happy, nor will it set you free, but absent the truth you’re only another sucker who is helping the very people who oppress you.

[See Peter Daou on the possibility of 2010 and 2012 being loss years.]

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