Sunday, November 14, 2010

The New Economic Cycly

Chart above: By Gordon T. Long

I thought I had figured out what to write about today, because I saw a long line of articles the past few days that all basically have the same theme: US banks that are doing so bad, nationalization must once again be seriously considered. But then I read Professor Morgan Kelly's great, and greatly alarming, article in the Irish Times today:

If you thought the Irish bank bailout was bad, wait until the mortgage defaults hit home

Sad news just in from Our Lady of the Eurozone Hospital: After a sudden worsening in her condition, the Irish Patient, formerly known as the Irish Republic, has been moved into intensive care and put on artificial ventilation. While a hospital spokesman, Jean-Claude Trichet, tried to sound upbeat, there is no prospect that the Patient will recover. [..]

With the Irish Patient now clinically dead, her grieving European relatives face the melancholy task of deciding when to remove her from life support, and how to deal with the extraordinary debts she ran up in the last months of her life. [..]

Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers.

Yeah, the European problems will yet come back to bite us all. Ireland is gone as an independent nation in all but ceremonial terms. Greece is not far behind, with Portugal snapping at its heels. Think the US dollar is going to plunge? Think again.

Still, that didn't make as today's theme either, even though I know we have many Irish readers, and Stoneleigh received a great welcome there this summer; we’ll get to talk about Ireland - and Europe- again soon.

It's just that I read an article Ashvin Pandurangi, our by now greatly valued roving reporter, sent me, entitled "Plutocracy Now". Ashvin writes about that first notion I was pondering: the nationalization of US banks, though for him it’s not about Bank of America, but the Fed. He concludes it can't be done, not even an audit will be achieved. And I think that goes for Wall Street banks as well. We can't nationalize the banks, because they have long since "bankalized the nation".

Not that I don't find the efforts and arguments interesting. I just don't think the authors necessarily place sufficient emphasis on the amount and level of political clout and power the financial industry has accumulated over the past few decades. Or indeed the past 100 years for that matter. Seeing them celebrate the birth of the Fed, and do so on Jekyll Island to boot, it makes me think the US is surely as far gone as Ireland is; it's just that fewer people seem to realize it, but that's not too comforting, is it?

Ashvin Pandurangi closes with a very insightful statement, one that every American should take to heart, and many Europeans too:

The reality is that there is only one way back to a true democratic system now, and this path will require nothing less of us than the courage of our forefathers.

Here are some of the articles I was reading:

James K. Galbraith at Common Dreams:

Obama's Problem Simply Defined: It Was The Banks

[..] .. one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.

Team Obama did none of these things. Instead they announced "stress tests," plainly designed so as to obscure the banks' true condition. They pressured the Federal Accounting Standards Board to permit the banks to ignore the market value of their toxic assets. Management stayed in place. They prosecuted no one. The Fed cut the cost of funds to zero. The President justified all this by repeating, many times, that the goal of policy was "to get credit flowing again."

The banks threw a party. Reported profits soared, as did bonuses. With free funds, the banks could make money with no risk, by lending back to the Treasury. They could boom the stock market. They could make a mint on proprietary trading.

Will Henley at Global Financial Strategy:

Battered Obama took part in a 'cover up', says ex-regulator Bill Black

In a last campaign pitch to voters, US President Barack Obama justified his response to the Great Recession by contrasting it to "S&L", a 1980s and early 1990s crisis which saw nearly 800 savings and loans institutions go bust amid a disastrous commercial real estate bubble.

Yet for Bill Black - a former Federal Home Loan Bank Board litigation director who as deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement contributed to a major 1993 report on S&L - it's an analogy which sticks in the throat.

"It's a terrible comparison," says Black. In his reasoning, Obama noted that while George Bush Senior's efforts to stabilise the financial system cost two and a half per cent of gross domestic product (or $125m), his own administration's actions have cost as little as one per cent.

"In the savings and loans crisis, for 2.5 per cent of GDP we actually resolved the problem," Black guffaws. "In this case, they have resolved none of the problems."[..]

While stopping short of asking for a Stalinist purge of executives, he is adamant that it was a mistake for the regulators to not launch more investigations. Without such action, he says there is a danger that white collar criminals may turn into recidivists.

"If they have already destroyed their institutions then they are likely to continue as crooks."

Ellen Brown at Truthout:

ForeclosureGate Could Force Bank Nationalization

For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw. The megabanks are too big to fail, but they aren't too big to reorganize as federal institutions serving the public interest.[..]

For our newly-elected Congress, the only alternative may be to start budgeting for TARP II.

Jonathan Weil for Bloomberg:

Bank of America Edges Closer to Tipping Point

You wouldn’t know there’s anything wrong with Bank of America by an initial look at its balance sheet. The company showed common shareholder equity, or book value, of $212.4 billion as of Sept. 30. And its regulatory capital ratios have risen steadily throughout the year.

Judging by its shrinking stock price, though, investors are acting as if Bank of America is near a tipping point. Its market capitalization stands at $115.6 billion, or 54 percent of book value. That’s the second-lowest price-to-book ratio among the 24 companies in the KBW Bank Index, and well below the 76 percent ratio the company was at in October 2008 when it landed its first round of TARP dough.

Put another way, the market is saying there’s a $96.8 billion hole in Bank of America’s balance sheet.

And again, pitbulls William K. Black and L. Randall Wray in the Huffington Post:

Let's Set the Record Straight on Bank of America, Part 2: Eliminating Foreclosure Fraud

Out of [..] millions of fraudulent mortgages, Bank of America claims to have modified 700,000; of these, 85,000 are under HAMP. Still, the Treasury says that the bank has another 375,000 mortgages that already meet HAMP terms.[..]

Treasury could be wrong about the mortgages; Bank of America may be refusing to modify mortgages for homeowners who appear to qualify for the HAMP terms because it knows the data Treasury relied upon is false. Their unusually low rate of HAMP modifications could be the result of the extraordinarily high rate of mortgage fraud at Countrywide.

Bank of America has admitted that HAMP's "implicit" purpose is to help the banks that made the fraudulent loans -- not the borrowers. That goal was the same goal underlying the decision to extort FASB to gimmick the accounting rules -- delaying loss recognition.

Bank of America expects to receive billions of dollars for its participation in HAMP. The top three banks (JPMorgan Chase and Wells Fargo being the others) will share $17 billion because HAMP pays servicers, investors and lenders for restructuring. These top 3 banks service $5.4 trillion in mortgages, or half of all outstanding home mortgage loans. Yet, as Phyllis Caldwell, Treasury's housing rescue chief has testified, there is no proof that these banks have any legal title to the loans they are modifying and foreclosing.

It’ll take a whole lot more than attempts at regulation or legislation. The only "representatives of the people" [sic] who have any say are those in the bankers' pockets. The nation has been bankalized, something we've only figured out after it was too late. That means the road to taking over the banks is closed; we’ll be pumping money into them for quite a while to come.

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