Thursday, January 15, 2009

Tax payers lost 700 billion in one drunken pull of the roulette wheel...

I was skeptical, and indeed, horrified at the thought of giving $700 billion dollars to the banks, but it turned out even worse than anyone thought...

National Public Radio's Tom Ashbrook discusses today how the billions disappeared into bank vaults; no one knows where the money went (some say it went to the Saudis who had invested in the banks) not a dime went for home owners,

Jim Hightower is even harsher. Bankers used the money to buy up small banks, which isn't good for consumers because it reduces competition and means bank fees will be higher than ever. The following is from Hightower's report. Paid subscription needed to read the full thing, so let me excerpt extensively.

Lawmakers meekly rushed out $700 billion for them, a taxpayer gimmie nearly 30 times larger than the one Detroit was seeking. What plan did the bankers present? What explanation did they give of how they'd spend our money?

None. They simply dispatched their designated consigliere, Treasury Secretary Hank Paulson (formerly the reigning prince of Goldman Sachs), to hand Congress a three-page ultimatum. It contained not a single specific or promise of results. It was, in effect, a hold-up note.

But that $700 billion was just for openers. It has not been widely reported, but the total Wall Street bailout--counting government loans, stock purchases, debt guarantees, and backdoor handouts by the Treasury and the Federal Reserve--is nearly $8 trillion. That's eight followed by 12 zeroes!

What have we gotten for this gargantuan giveaway? Zip. The rationale for indiscriminately pouring public funds into big banks, investment houses, insurance giants, hedge funds, and the like was that our money would "unclog" the financial markets, allowing credit to flow again to businesses and consumers-as though America is having a plumbing problem and our national treasury is a bottomless vat of Liquid Plumr.

But, guess what? It didn't work. Credit is still not flowing. As a result, an economic crisis has swiftly spread across the country, including a rash of business bankruptcies, construction shutdowns, massive job losses--and, yes, a credit crunch that is crushing auto sales, auto dealers and suppliers, auto makers, auto workers...and Detroit.

The reason that the Wall Street bailout has not worked is quite elementary: Congress and the White House attached no requirement whatsoever that the recipients of our money use it to make loans! It seems that Washington didn't feel that it should "interfere" in the decisions of the financial deities.

Country rubes attending their first carnival sideshow are not this gullible.

With no conditions put on the phenomenal taxpayer windfall they received, the wizards of Wall Street have chosen to spend it selfishly, rather than for any public purpose. They've already used billions to buy out some of their competitors, a perverted use of bailout funds that will reduce our banking choices and raise the bank fees we're charged. Other billions have gone to the banks' big investors, to executive pay, to pad the bottom line, or simply into bank vaults to be hoarded--while America remains starved for capital.

Even more amazing, the very same Congress that harrumphed about trusting Detroit automakers with taxpayer money was not even told where most of the $8 trillion Wall Street bailout went. Which banks got government backing, and how much did each get? That's a secret, Congress was told by the Bushites. What are they doing with the money? We can't tell you, say those who doled out the cash.

Moving from amazing to reckless audacity, Secretary Paulson has even taken the law into his own hands. Last September, he unilaterally, secretly, and illegally nullified a federal law because it was in the way of his unauthorized plan to help big banks take over smaller ones. Hank's autocratic decree allows banks to use offshore tax dodges that Congress banned 23 years ago. This executive maneuver provides an under-the-table tax subsidy for predatory banks wanting public financing to absorb their rivals--a subsidy that will cost our national treasury upwards of $140 billion even as it reduces bank competition.

This is a flagrant usurpation of Congress's constitutional power and a kleptocratic transfer of public wealth by executive fiat. Yet it was met with barely a meow from lawmakers.

Callers to the NPR show are topping each other with their eye-popping accounts of what can be done with $700 billion -- build a high-way across American 4 miles wide, connect every city by mag-lev trains. (Yes, and pay for universal health care? That can be done with a mere 50 billion...)


Dan said...

Indeed, it is discouraging that there isn't more transparency. The powers-that-be say it's because, if they were to tell you who needed the money, that would create a panic and people would pull out money from those institutions, more than undoing the benefit of the money that was just put in. Makes sense to me.

The biggest misunderstanding is that the money was given away. It wasn't: it was lent. Sure, if you were to lend Mr. Madoff $700 billion, you may not see it back. Hopefully Bank of America, for example, is run a little better (it does have America in the name, you know). If you were to build your highway, it wouldn't be a loan to the construction companies. If you're paying for healthcare, it's not a loan to the doctors and hospitals.

The way bankers think about loans is that there's a chance some of it won't be paid back. To the extent that loss exceeds the interest others are paying, you have a net loss. The interest collected is supposed to make up for the institutions that can't repay, so the whole $700 billion gets paid back. In that case the government loses nothing, so in the end no money spent. It's a liquidity crisis tool, not credit support, as they say.

Now, there's some more complications when Treasury lends money, and what that means to the money supply, etc., but that's beyond me. But yeah, feel free to vote for a congressman who will promise to spend the next $700 billion on mag-lev trains.

On the other hand, the $825 million economic stimulus being put forward now is not loans, it's actually government spending and tax cuts (which will all have to be paid back later with tax raises, no? Unless we screw the Chinese, see below).

The Jim Hightower comment is missing the forest for the trees (someone paid to read this??? And then violated his copyright by quoting it. Nice). OK, fees go higher. That's the least of your problems. The alternative? You can't take any of your money out of these smaller banks, it's all gone. Which do you pick?

8 followed by 12 zeros. Is that worse than 9 zeros? What does it mean? At some point giving money out like that loses its meaning. Certainly in the trillions, you're not really giving money out, you're changing the economic playing field. Will you be taxed for $8 trillion? That's, what, $30,000 per US taxpayer? Don't worry, you won't have to pay for it. First, it's loans, not spending, second, the Chinese will cover it (see below :-).

And the Tom Ashbrook comment, that's just racist rabble rousing. Read your comment again: the Saudis invested in our banks, and now they're getting money. OK, they put money in, and now they're getting their money out, most likely at a fraction of their investment. What's so evil about that? We should encourage all foreign countries to invest in America, and pay them back years later at a fraction of their investment. That's how we can afford to pay those banker bonuses and buy flat-screen TVs. It's how the Japanese lost their shirts on Rockefeller Center, and how the Chinese are going to go bust on American government bonds. But if they didn't do it, we wouldn't have the money to spend on the stuff they make, which pays for their workers, so they can buy things, and save, and create money that they can use to buy Rockefeller Center again, etc.. In the meantime every American has a nice car, and is looking forward to that 4-mile-wide highway. Surprised NPR is doing the FOX thing.

HumanProject said...

There are some really helpful points here, thanks. I am actually not as nervous about impending doom as I was after being jacked up by Hightower's over-the-top screed.

Re: "that would create a panic and people would pull out money from those institutions"

--> I agree, it would have been helpful for Hightower to make a nod in this direction.

"The interest collected is supposed to make up for the institutions that can't repay.... In that case the government loses nothing, so in the end no money spent."

--> I thought interest is collected to "service the loan," because the US government also has to pay interest on loans that it has taken out, so it is losing if it doesn't collect the interest on money it lends.

"paid to read this??? And then violated his copyright"

--> Oh, but Jim's so fun. I discussed the issue with my conscience and decided that I've been helping Hightower as a loyal annual paid subscriber for several years now, so he wouldn't grudge me *one* post which serves to extend his message. If he sends me a cease and desist letter, a post is easily deleted.

"Certainly in the trillions, you're not really giving money out, you're changing the economic playing field."

--> Its a difficult game for me (and others?) to wrap our brains around. Maybe growing up playing economic simulation games (e.g., SimCity) can help the current generation of economists (and you?) to readily perceive sophisticated patterns in this complex dynamical system.

"The Tom Ashbrook comment, that's just racist rabble rousing...Surprised NPR is doing the FOX thing"

--> Yeah, you're right. He didn't think through all the implications. Ashbrook has a hard job (2 hour-long shows a day, 5 days a week).

Dan said...

I can't believe you read all that! When do you have the time??? Are you sure you're not a MachineProject? :-)

Seriously though, how long before the Google Translator gets adapted into a blog comment answerer? Then people like me who have less-than-soul-nurturing jobs will have a nice, continuous outlet.

Anyway, you're right about the interest and the servicing of the loans. The trick is to lend at a higher rate than you borrow, and you use the excess interest to cover losses. Which is why credit cards have a high interest rate (lots of losses to cover) and yacht loans have a low rate (almost no losses, believe it or not).

My macroeconomic training consists of playing the old sim game where you were the king and you decided how many crops to plant and how much to tax the villagers. What was that called? Now that you know this, you may stop reading...