No, we can't

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switters's picture
switters
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No, we can't

A very worthwhile read.  Bottom line: Bloomberg estimates that the U.S. bailout and stimulus guarantees now amount to $11.6 trillion.  Of this money 90% has been directed or pledged toward "fixing" the broken banking system.  Of that 0.37% will be dedicated to clean energy efforts.

Original article here.

No, we can’t?

by Dave Cohen

The policeman isn’t there to create disorder, the policeman is there to preserve disorder
— Richard J. Daley

Quis custodiet ipsos custodes? (Who will guard the guardians?)
— Juvenal

What is the biggest impediment in 2009 to mitigating the harmful
effects of energy problems in the 21st century? The answer may surprise
you—it is insolvent zombie banks and our entrenched FIRE economy (Finance, Insurance, Real Estate). Allow me to explain.

Another Tragic Misallocation of Capital

Last week I took the long view of the climate and resource challenges
we face in coming decades. Common sense tells us that the longer we
wait to address those problems, the worse the consequences will be.
Replacing oil consumption with widespread adoption of plug-in electric
hybrids in 2020 after world oil production is already in permanent decline—provided this goal is actually possible—is like closing the barn door after
the horse has left. What we do now has stronger, longer-lasting effects
than anything we do in 2015, 2020 or beyond. There is not a moment to
lose.

On February 24 Bloomberg reported that U.S. bailout and stimulus guarantees
now amount to $11.6 trillion dollars ($11,600,000,000,000). Of this
money, about 90% has been directed or pledged toward “fixing” the
broken banking system.

Two clear and mutually exclusive paths lie before us in 2009. I am
sorry to report that as of March the Obama administration is going down
the wrong one. In my example below I will focus on energy investment,
but my remarks could just as easily pertain to health care,
manufacturing or education. I’ll use a round number to make my point—I
think $10 trillion dollars will do very nicely. We might ask how some
of this money would be best spent in the energy arena.

  • Yes, We Can! — spend the money on reducing oil
    consumption and transforming the power grid. This would include large
    expansion of public transit in metropolitan areas (electrified light
    rail, trolleys, buses), an expanded system of long-haul railroads for
    both freight and passengers, direct financial support for troubled American-built PHEVs and batteries,
    wind and thermal solar farms to replace coal-fired base-load capacity,
    long distance power transmission lines to hook those farms up to the
    grid, encouraging reorganization of work & living patterns to
    decrease energy consumption, etc.
  • No, We Can’t! — spend the money propping up
    insolvent banks like Citigroup or insolvent insurance companies like
    American International Group (AIG), the very institutions whose
    irresponsible risk-taking wrecked the global financial system. Merrill
    Lynch’s John Thain approved an “accelerated pool” of $4 billion
    in bonuses at the same time that Bank of America (which acquired
    Merrill) was in Washington begging for an additional $20 billion in
    bailout money. What energy-related projects could have been built with
    $24 billion in funding?

What about the stimulus package? That contained some useful energy spending, right? Of the $787 billion in the bill, only $43 billion
was spent on direct expenditures and tax breaks for “clean and
efficient” energy. That amounts to only 5.46% of the stimulus and 0.37%
of the grand total ($11.6 trillion) broken out by Bloomberg. That’s
next to nothing in view of the climate and resource catastrophes on the
farther horizon. We need to replace roads, not repair them.

Just today (March 2, 2009) the “federal government … is providing embattled insurer AIG with an additional $30 billion in capital on an as needed basis,
but also exposing U.S. taxpayers to additional risk.” The new money,
now added to the $150 billion already committed, comes from the
Troubled Asset Relief Program, or TARP. AIG lost a record $61.66
billion dollars in the fourth quarter of 2008.

The latest results [the quarterly loss] included the
restructuring charges and write-downs as the company continues to be
slammed by credit-market deterioration, especially in its exposure to
commercial mortgage-backed securities

“The company [A.I.G.] continues to face significant
challenges, driven by the rapid deterioration in certain financial
markets…. The additional resources will help stabilize the company, and
in doing so help to stabilize the financial system,” the Treasury and Federal Reserve said in a statement.

The AIG funding eclipses the $50 billion that Citigroup
Inc. has received from three Treasury programs, and the $45 billion
that Bank of America Corp.
has received, although each of those firms might receive additional
funding in coming months, if necessary. The two banks also have
commitments from the U.S. government to back potential losses down the
road, putting hundreds of billions of dollars in public funds on the
line.

The Federal Reserve (Chairman Ben Bernanke) and the Treasury
(Obama’s Secretary Tim Geithner) have the temerity to lecture—in
effect, threaten us—concerning why AIG is too big to fail.

Given the systemic risk A.I.G. continues to pose and the
fragility of markets today, the potential cost to the economy and the
taxpayer of government inaction would be extremely high. AIG provides
insurance protection to more than 100,000 entities, including small
businesses, municipalities, 401(k) plans, and Fortune 500 companies who
together employ over 100 million Americans. AIG has over 30 million
policyholders in the U.S. and is a major source of retirement insurance
for, among others, teachers and non-profit organizations. The company also is a significant counterparty to a number of major financial institutions. [emphasis added]

That last sentence looks almost like an afterthought, doesn’t it? On
the contrary, it is the primary motivation behind government policy,
not the threat to small businesses or 401(k) plans.

Under the inspired leadership of Maurice “Hank” Greenberg, the financial products division of AIG (AIGFP) sold credit default swaps
(default insurance) on mortgage-backed securities and other derivatives
to banks in the U.S. and all over the world, including many large
European banks. Those are the counterparties referred to in the joint
Fed/Treasury statement. The value of these derivatives went bust after
the Housing Bubble collapsed. Consequently—

AIG almost collapsed
in September, 2008 after ratings agency downgrades triggered demands
for billions of dollars in extra collateral from firms that had bought
derivative-based protection from the insurer on complex
mortgage-related products known as collateralized debt obligations, or
CDOs…

[firms making demands included Goldman Sachs, Merrill Lynch, UBS and Deutsche Bank]

By Nov. 5, the insurer had paid out $37.3 billion of that
money to counterparties who had purchased a certain type of
derivative-based protection from AIG called multi-sector credit-default
swaps…

Since then, AIG and the Federal Reserve Bank of New York1
have unwound most of these contracts. To do this, they offered to buy
the CDOs that were originally insured by the agreements. The
counterparties sold these assets at a discount, but were compensated in
full in return for allowing AIG to extricate itself from the
obligations. The counterparties also got to keep the $37.3 billion in
collateral…

Thus Joe Nocera explains why “a bailout of AIG is really a bailout of its trading partners—which essentially constitutes the entire Western banking system” (New York Times, February 27, 2009). Nocera exaggerates the situation. What about the healthy banks out there which were forced to take TARP money?

The $180 billion dollars committed to our charitable “AIG Relief
Fund”—so far—amounts to 419% of energy-related spending by the Congress
and the Obama administration to date. This astonishing, continuing
misallocation of capital is a great tragedy in the making for Barack
Obama. It is definitely not change we can believe in.

Will the broken banking system be Obama’s Vietnam, his Waterloo? Does Obama get it as he said in his State of the Union speech?

So I know how unpopular it is to be seen as helping banks
right now, especially when everyone is suffering in part from their bad
decisions. I promise you – I get it.

No, Mr. President, I don’t think you do. Most of us agree that Obama is among the best of men. So, what’s the problem?

Geithner Versus the American Oligarchs

Bill Moyers’ coverage of the financial crisis has been superb. On February 13, Moyers spoke to Simon Johnson,
former chief economist at the International Monetary Fund (IMF). He is
now teaching at MIT’s Sloan School. Moyers led off with a quote from
Johnson’s High Noon: Geithner vs. the American Oligarchs.

There comes a time in every economic crisis or, more
specifically, in every struggle to recover from a crisis, when someone
steps up to the podium to promise the policies that - they say - will
deliver you back to growth. The person has political support, a strong
track record, and every incentive to enter the history books. But one
nagging question remains.

Can this person, your new economic strategist, really break
with the vested elites that got you into this much trouble? The form of
these vested interests, of course, varies substantially across
situations, but they are always still strong, despite the downward
spiral which they did so much to bring about. And fully escaping the
grip of crisis

really means breaking their power.

Our new economic strategist is Tim Geithner, Obama’s Treasury Secretary. In a series of articles at Baseline Scenario, Johnson, along with two other respected economists, Peter Boone and James Kwak,
argues persuasively that powerful banking interests have hijacked our
political system. I am not going to belabor their point, which seems
obvious once you look at the situation. Rather, I will quote the Moyers
interview once more to provide examples of conflict of interest and
then give you a list of resources to consult if you would like to know
more.

I have provided some links to document sources in the text below. These links are not from ParanoidLeftWingNut.com. They are from ABC News and the New York Times. Geithner himself is the former head of the New York Fed.

Bill Moyers: Geithner has hired as his chief-of-staff, the lobbyist from Goldman Sachs. The new deputy secretary of state was, until last year, a CEO of Citigroup. Another CFO from Citigroup
is now assistant to the president, and deputy national security advisor
for International Economic Affairs. And one of his deputies also came
from Citigroup. One new member of the president’s Economic Recovery
Advisory Board comes from UBS,
which is being investigated for helping rich clients evade taxes.
You’re probably too young to remember that old song, “Sounds like the
Mack the Knife is back in town.” I mean, is that what you’re talking
about with this web of relationships?

Simon Johnson: Absolutely. I don’t
think you have enough time on your show to go through the full list of
people and all the positions they’ve taken.
I’m sure
these are good people. Don’t get me wrong. These are fine upstanding
citizens who have a certain perspective, and a certain kind of
interest, and they see the world a certain way
. [emphasis added]

There wasn’t enough time to list all the examples, but I would be remiss if I didn’t include this one from Frank Rich of the New York Times:

[Obama's chief economic adviser] Larry Summers and Geithner
are both protégés of another master of the universe, Robert Rubin. His
appearance in the photo op for Obama-transition economic advisers
three days after the election was, to put it mildly, disconcerting.
Ever since his acclaimed service as Treasury secretary in the Clinton
administration, Rubin has labored as a senior adviser and director at
Citigroup, now being bailed out by taxpayers to the potential tune of some $300 billion. Somehow the all-seeing Rubin didn’t notice the toxic mortgage-derivatives on Citi’s books until it was too late. The Citi may never sleep, but he snored.

[Rubin made $115 million at Citigroup over 9 years before leaving in January, 2009]

No conspiracy is required to explain the undue influence of former
Citi bankers holding key posts in the Obama administration. The problem
is that they can not think outside the FIRE economy box. They may
indeed be good people, but they are the wrong people to
oversee the dismantling of a banking system that benefited them. Thus
we are told that Citigroup and Bank of America are too big to fail.

Here are some additional resources to consult.

It gives me no great pleasure to report that Simon Johnson believes
United States financial policy is starting to resemble fiascoes in
emerging markets like “Russia or Indonesia or a Thailand type
situation, or Korea.”

A New Energy Regime?

Paul Krugman called the current policies voodoo
on January 18, 2009 before it became obvious that nothing changed when
Obama assumed power. Krugman suggested a way to fix things.

But recent news reports suggest that many influential
people, including Federal Reserve officials, bank regulators, and,
possibly [now definitely] members of the incoming Obama administration,
have become devotees of a new kind of voodoo: the belief that by
performing elaborate financial rituals we can keep dead banks walking…

A better approach would be to do what the government did with zombie
savings and loans at the end of the 1980s: it seized the defunct banks,
cleaning out the shareholders. Then it transferred their bad assets to
a special institution, the Resolution Trust Corporation; paid off
enough of the banks’ debts to make them solvent; and sold the fixed-up
banks to new owners.

By February 24, Krugman, a Nobel Prize winner in Economics, was referring to mysterious plans that made no sense.

I’m trying to be sympathetic to the various plans, or
rumors of plans, for bank aid; but I keep not being able to understand
either what the plans are, or why they’re supposed to work. And I don’t think it’s me. [the link is to Geithner's mysterious "stress test"]

The key difference between now and 1987 when the Resolution Trust
Corporation was implemented is the intervening 22 years in which FIRE
economy oligarchs like Robert Rubin and his protégés acquired great
political influence. Simon Johnson has also made suggestions for taking over Citigroup and other insolvent banks. For AIG, which is now 80% owned by we the taxpayers, the story would be the same.

… bankers may not have to worry about getting smacked
around by the White House. What bankers do fear is “pre-privatization.”
That’s a term MIT professor Simon Johnson applies to the Bush/Obama
approach to financial bailouts, as opposed to the painful restructuring
that real nationalization would bring. As Mr. Johnson put it on his
website, The Baseline Scenario, “We have state control of finance
without, well, much control over banks or anything else. Responsibility
without power sounds accurate.”

Responsibility with power would likely require AIG and
other financial wards of the state to write down their assets so good
assets could be separated from bad and sold off to new investors.
That’s a prospect that existing shareholders should fear, since their
holdings stand to be wiped out in the process. And the managers
responsible for the banks’ problems would follow…

[The term pre-privatization appears to come from the respected blog Calculated Risk. The term was half-jokingly introduced to avoid the stigma associated with the word "nationalization".]

In other words, we have options other than keeping these parasitic
banks on an intravenous money drip. The latest Baseline Scenario forecast sums things up.

Ideally, global economic growth requires a rebalancing away
from the financial sector and toward non-financial industries such as
manufacturing, retail, and health care (for an expansion of this
argument, see this op-ed).
Especially in advanced economies such as the US and the UK, the
financial sector has accounted for an unsustainable share of corporate
profits and profit growth. The only solution is to invest in the basic
ingredients of productivity growth - education, infrastructure,
research and development, sound regulatory policy, and so on - so that
our economy can develop new engines of growth. [Add energy to the list]

But this change in the allocation of resources is
greatly complicated by the increased political power of the financial
lobby. During the boom years, large banks and their fellow travelers
accumulated ever greater political power. This power is now being used
to channel government subsidies into the now outmoded (and actually
dangerous) financial structure, and in essence to prevent resources
from moving out of finance into technology and manufacturing across the
industrialized world.

We have done considerable damage to our economies through a debt-fueled bubble. But it could get worse. If
the financial sector can use its political power to generate a higher
level of subsidies from the government, we will convert even more of
our banking industry into pure
rent-seeking activities
(i.e., all the bankers will do is lobby, successfully, for more support
in various forms). If public policy is captured by banks in the US,
Europe and elsewhere, then we face much slower productivity and overall
growth rates for the next 20 years.
[emphasis added]

If we can get past these seemingly intractable political problems,
we can try to rebuild our energy infrastructure. We will know one of
two things as we look back on what happened in 2030.

  1. It was possible to reduce our oil and coal consumption over time to
    lessen the dangers from fossil fuel resource depletion and
    anthropogenic climate change.
  2. It was not possible to do these things to the degree required and our standards of living deteriorated over time.

If we do not overcome the political obstacles to changing how we
allocate capital resources, we will know in 2030 that we never had a
chance—we were stuck with #2 regardless of whether success was possible
or not.

Contact the author at [email protected]

Notes

1. The major counterparties to AIG have never been publicly
disclosed and the Fed continues to protect their identity. Bloomberg
has also sued the Fed (under the Freedom of Information Act) to disclose the names of banks getting loans from the central bank.

The Fed refused yesterday to disclose the names of the
borrowers and the loans, alleging that it would cast “a stigma” on
recipients of more than $1.9 trillion of emergency credit from U.S.
taxpayers and the assets the central bank is accepting as collateral…

The Bloomberg lawsuit said the collateral lists “are
central to understanding and assessing the government’s response to the
most cataclysmic financial crisis in America since the Great
Depression.”

Obama has consistently called for transparency in government
handling of the financial crisis. Yet no one in his administration has
pressured the Fed to disclose who it is giving money to.

 

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Re: No, we can't

"We have met the enemy and he is us."

Seems as if Walt Kelly's Pogo characters Tamananny Tiger, Molester Mole and Seminole Sam should be updated to represent today's affairs.

Roogey Batoon as Timmy Geithner??

Superb post BTW.

caroline_culbert's picture
caroline_culbert
Status: Platinum Member (Offline)
Joined: Oct 2 2008
Posts: 624
Re: No, we can't
Chris Kresser wrote:

no one in his administration has pressured the Fed to disclose who it is giving money to.

Yes... you're right but I think Obama made a pretty good argument, in that, the gov. is intent on helping the middle class first (keeping what little they have left from this debacle) and not intent or focused on "punishing" certain sectors of our industries-- even if that mean biting the bullet so as to bait the banks into lending again... that is all he is trying to do (first); fuel the banks into lending!

scepticus's picture
scepticus
Status: Silver Member (Offline)
Joined: Jan 16 2009
Posts: 129
Re: No, we can't

What Obama seems to be doing 'first' is to ensure Goldman Sachs, Morgan Stanley, JP Morgan et al are made whole. Perhaps after that is done he'll have some money for the middle classes. These banks are the main counterparties to AIG swaps, and why AIG keeps getting more money, and why bernanke refuses to reveal where the tarp money is going.

I had high hopes for obama too when he was elected even though I am not american, but it's disspapointing to see that ultimately he (or at least his treasury staff) are still owned by wall street.

 

 

caroline_culbert's picture
caroline_culbert
Status: Platinum Member (Offline)
Joined: Oct 2 2008
Posts: 624
Re: No, we can't
scepticus wrote:

What Obama seems to be doing 'first' is to ensure Goldman Sachs, Morgan Stanley, JP Morgan et al are made whole. Perhaps after that is done he'll have some money for the middle classes. These banks are the main counterparties to AIG swaps, and why AIG keeps getting more money, and why bernanke refuses to reveal where the tarp money is going.

I had high hopes for obama too when he was elected even though I am not american, but it's disspapointing to see that ultimately he (or at least his treasury staff) are still owned by wall street.

i disagree, in that, he is a realist and letting the banks go under is letting the ship go under... no matter how much one hates the parent the child shouldn't starve because of his/her resentment against the parent.  i really liked his state of the union speech.  i think he hates the banks as much as we do but if we cant undwestand his arg. then we r not going 2 understand his resolve. (imo)

that1guy's picture
that1guy
Status: Gold Member (Offline)
Joined: Jan 11 2009
Posts: 333
Re: No, we can't

Caroline,

I feel that is one of the biggest issues to start (Obama tring to get the banks lending again). Borrowing and buying stuff is what got us into trouble to begin with, and got many many people in over their heads, so for our administration to think that it will all get better as soon as america goes further into debt buying more stuff that they can't afford is crazy. consumer debt is already over 360% of GDP as we speak, talk about a crazy bubble...and all the government is trying to do is blow more air in it, execpt this time it is in the timeline of many other problems headded our way in the next 5-10 years (possibly sooner because of everything being done...). Dr Martenson said it best, 'the next 20 years are going to be nothing like the last.'

 

by the way, My name is Mike, I was meaning to add that one one of my lasts posts, lol

caroline_culbert's picture
caroline_culbert
Status: Platinum Member (Offline)
Joined: Oct 2 2008
Posts: 624
Re: No, we can't
that1guy wrote:

Caroline,

I feel that is one of the biggest issues to start (Obama tring to get the banks lending again). Borrowing and buying stuff is what got us into trouble to begin with, and got many many people in over their heads, so for our administration to think that it will all get better as soon as america goes further into debt buying more stuff that they can't afford is crazy. consumer debt is already over 360% of GDP as we speak, talk about a crazy bubble...and all the government is trying to do is blow more air in it, execpt this time it is in the timeline of many other problems headded our way in the next 5-10 years (possibly sooner because of everything being done...). Dr Martenson said it best, 'the next 20 years are going to be nothing like the last.'

 

by the way, My name is Mike, I was meaning to add that one one of my lasts posts, lol

hi mike Smile

i HATE the banks and if i were pres i would have let the banks fail and then the country wouldve been dead (i think). But if we try to minimize the impact then maybe a broken leg instead of paralized.  then attack the stupid person for jumping off the bridge who didnt check his parachute.  imo i think it would've been best to eliminate the idiot from gene poole.

should we sever quickly?

or

wean the sick from their addiction and make the addicted a better person?

or

just eliminate them (their genes) from gene poole, i.e., (get rid of money completely)?

 

switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
Re: No, we can't
scepticus wrote:

What Obama seems to be doing 'first' is to ensure Goldman Sachs, Morgan Stanley, JP Morgan et al are made whole. Perhaps after that is done he'll have some money for the middle classes. These banks are the main counterparties to AIG swaps, and why AIG keeps getting more money, and why bernanke refuses to reveal where the tarp money is going.

I had high hopes for obama too when he was elected even though I am not american, but it's disspapointing to see that ultimately he (or at least his treasury staff) are still owned by wall street.

I couldn't agree more.  This bailout has absolutely nothing to do with the welfare of the average American.  It is the largest transfer of wealth to the richest 1% of the population in history.  Pure and simple.

We're being hoodwinked into believing that chaos will ensue if we don't bail out those banks.  Guess what?  Chaos is going to ensue anyways, but we'll be $11 trillion further into debt and have even less capital to do anything about it.

Just imagine what one of those eleven trillions could have done for renewable energy infrastructure, food security, etc.  Instead, that money is going directly to companies that are already doomed, like AIG.  They'll just burn through it and ask for more.

No, this isn't about rescuing the middle class.  

What I haven't decided yet is whether Obama knows this, or whether he's so deeply steeped in the Keynsian mythology that he really believes he's doing the right thing.

caroline_culbert's picture
caroline_culbert
Status: Platinum Member (Offline)
Joined: Oct 2 2008
Posts: 624
Re: No, we can't

I DON'T KNOW!!! I'M SO MIXED UP ON OBAMA b/c it seems like he truely wants to help the best possible way but some may see things he's not seeing, or what is it?  I CAN'T FIGURE IT OUT.

switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
Re: No, we can't

I voted for Obama.  I even worked on his campaign.  I was inspired by many of the things he said.  But I never believed that he would bring real change to Washington, and I wasn't nearly as excited about his presidency as most of my friends and family. 

Obama is beholden to the same financial interests that any politician who reaches that level is.  As humble as his background may be, he's now part of an elite political ruling class that is primarily interested in maintaining its power and control.  I don't see this as a conspiracy, and I don't even think it means that Obama or anyone else who is part of it doesn't have good intentions or isn't a good person.

It does mean, however, that it is not easy for a politician to make changes that would threaten the financial and political hegemony of the ruling class.  If a politician doesn't reward the interests that help bring him/her to power, that person won't be in office for long.  

This is one of the major problems with our system as it exists today.  It virtually guarantees that significant change will not come from the office of the Presidency, or from national government in general.

That's why I believe the real change has to come from the people.  You and I.  Our community.

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