Too Big To Fail: The Big Bank Lie

About a year ago, when it looked like the world was about to end and the economies of countries around the world were beginning to melt away like a Salvador Dali painting, the leaders of the U.S. government, i.e. President Bush and Treasury Secretary Paulson told us that we had only days, maybe only minutes, left to rescue those great bastions of Capitalism – the banks of Wall Street.  Everybody panicked. We couldn’t shovel money into the banks fast enough. If they died, we died – or so we were told anyway.

Today, the dust has settled, the banks are alive – having been given massive transfusions of life-giving money – and the people of America are left wondering: what just happened?  Here’s what happened: we were robbed by the banks.  After Lehman Brothers melted into a little puddle of red ink, there were reports that Goldman Sachs might be next.  Goldman Sachs!?!?  How could that be?  Isn’t Goldman the underlying sine qua non of American capitalism? If Goldman goes down won’t the entire country just dissolve? That’s what we were led to believe by Bush, Paulson, and their cronies.

So what happened? We (that means you and me, the American taxpayers) gave them a loan, called TARP, to keep them alive. We gave a lot of banks a lot of money because we were told we couldn’t survive without them.  They were “too big to fail”. Of course we didn’t give them our own cash, because we were also drowning in the melting economy – so we just printed the money and decided to let our descendants pay the government back through their tax bills over the coming centuries.

Here is where the big scam comes in: while Americans made a lot of stupid decisions buying houses they couldn’t afford at prices they couldn’t pay, the banks were equally – if not more – stupid because they gave us all those loans that we couldn’t pay back.  If the banks had the intelligence of a rock they would have realized that making such loans was pure folly.  They used to know that, but in their greed they put aside their knowledge as they chased the huge profits that can be made in a bubble economy.  So, what had happened was that we, the people, lost a bundle and so did the banks, but the banks got reimbursed for their losses – by us! But nobody reimbursed us! So now, not only do we owe the money we foolishly invested in overpriced houses, we are also on the hook for all the TARP money we printed because a lot of that will never be paid back.

Meanwhile, the bailed out banks – the ones we can’t live without, the ones that are too big to fail because our Capitalist economy depends on them – don’t want to play Capitalism anymore. They don’t want to lend money anymore. Instead they are hogging all their TARP money, refusing to lend money to people who need money for many purposes. In other words the big hog banks aren’t really functioning as banks anymore, which leads one to wonder why we thought they were too big to fail. In a sense they have already failed.  If they aren’t lending then they have failed in the principal purpose of a capitalist bank – making capital available. So if they have failed in their role, and yet, here we are, still alive and functioning, doesn’t that mean that they really weren’t “too big to fail” after all?  Aren’t the big hog banks proving every day that we really don’t need them after all? Isn’t this the big lie of Bush and Paulson?  Isn’t this the big lie of Wall Street?

One of the great drags on our economy now is the lack of available capital to restart businesses.  If we had simply nationalized the banks we would now have government-run banks that would be in the business of lending money to us because we would be the owners of the banks! They would sort of be like giant credit unions.  Instead, we have the Boss Hogs of Wall Street sitting on 200 billion dollars of TARP money, unwilling to do that for which we bailed them out.  The TARP bailout didn’t rescue the economy – the money we gave to the banks is still sitting in the banks, so how could it have any effect on the economy? The only thing TARP did was prove one thing: the whole Too Big To Fail story was nothing but a Big Bank Lie that only passed on the losses of the big banks to the American people.  We were duped. We were done a huge disservice by former President George Bush and former Treasury Secretary Hank Paulson, and we will be paying the price for this for generations to come.

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Is the U.S. Economy Dead or Is It Just Dying?

One year ago, the entire American banking system was on life support.  It was only through the intervention of the Federal government, using the promise of a semi-infinite supply of tax dollars that some of the banks survived.  If this infusion of billions and billions of dollars of cash had not been made our entire banking system would certainly have collapsed. The question we need to ask – but we haven’t – is this: is there a message here?

Thanks to the extreme measures the Federal Government took with the TARP program we still have some functioning banks, but a more important thing to consider is this: do we have a functioning economy?  The answer to that question is to be found in the history of the Dow Jones Industrials average for the past forty years.  The thing to note is the behavior of the Dow before the year 2000 and after the year 2000.  Notice anything? How about those two massive bumps?  I mean the one about ten years ago and the one a year ago. You know what those are? Those are bubbles, the signs of an economy that is being artificially and irrationally stimulated – an economy on drugs.

The other thing to note is that Bump #1 didn’t start in the year 2000, it started long before, its roots were in the 1980’s. Until then the Dow had been pretty tame, slowly inching upward ever since World War II. So what happened in the 80’s? The government created 401k plans and artificially stimulated massive investment in the stock market by average people who would have otherwise never invested in the market.  The same thing happened again with the 529 plans.

However, for the people who run our government that wasn’t enough. So they changed the tax laws again to provide a massive income tax credit for anyone who sold their house – and they made a provision so that you could do that every two years. That artificially fired up the housing market.  Then we had also the tech boom – a boom that the Fed actually opposed.  They didn’t like all these upstart companies on the NASDAQ sucking up all the investment money from the old money firms that made up the DOW.  So, the Fed killed Tech by ratcheting up interest rates until Tech collapsed.  After Tech was a smoking ruin, the Fed drastically cut interest rates and thereby fueled the housing bubble even more.

The thing to realize is that our economy, for the past twenty or thirty years has been a dying economy, kept alive by infusions of money from unsuspecting citizens contributing to their 401k plans and their 529 plans. It has been kept alive by people buying and flipping houses every two years.  It has been kept alive by one scheme or another while the true engine of our economy, manufacturing, was exported to China.  But nobody cared because you could buy Chinese stuff cheap at Wal-Mart and everyone was doing well in the stock market or the housing market.

Well, the party’s over, isn’t it?  True, the banks are alive again, having dined on the lifeblood of the taxpayers.  However, there are very few green shoots out there. Does anyone have an idea where our new economic engine will come from? Is it possible for our government to think of another economic scam that will power the country for another ten years? Or, are they running out of ideas?  Does anyone really think we can get by on our American manufacturing capability?  Let’s face it we just don’t make enough stuff anymore.  The future of manufacturing, at least for the next twenty years or so is in Asia, not North America. So what is our government thinking? Well, since the only thing they saved is the banks, one must assume that they figure that’s where the money will come from – i.e. lending at interest. But, let’s face it, the lendees are unlikely to be Americans, are they? No, the money (that’s your tax dollars that you gave them as TARP rescue money) will go to developing countries so they can develop their businesses and then pay back the banks at high interest rates.

Meanwhile, back at the ranch, what can we expect?  The truth is: not much. Our Capitalist engine doesn’t have a transmission anymore. In fact we lost it a long time ago.  We’ve just been coasting along.  The thing we don’t want to…don’t like to…admit, is that we are witnessing the failure of Capitalism.  Unregulated Capitalism – something we have had from many years – soon morphs into Predation: the strong preying on the weak. We have witnessed that. The Predators in our society, i.e. the financial community, have feasted on us.  There’s not much blood left to drink anymore.  They’ll move on, looking for victims in other countries – still propped up by our government.

Here, in the USA, we won’t admit Capitalism has failed – we can’t – it’s like denying religion or something. It’s like being unpatriotic.  It’s like stepping on the flag.  Capitalism is sacred in America – beyond criticism. It’s hard to figure why – after all, can’t we all see that it doesn’t work?  We can’t we simply acknowledge that it is an economic theory and system that just doesn’t work?  I know, I know ,we’re all afraid of the other two “isms”, Socialism and Communism. So we stick with our belief in Capitalism, even though the wheels have come off and we no longer have an engine for our economy – we still believe. We believe. We believe even though we are in a screaming nose dive.

If the past twenty or thirty years have proved anything, they have proved that unfettered Capitalism is a disaster. For proof just look at your bank account.  If we can’t bear to consider Socialism or Communism, then there is only one solution.  We need a new “ism”.  Call it Americanism if you like.  We need a new approach to economics. We need creative minds in our government who can see beyond the payoffs from lobbyists and the pressures of the fat cat bankers.  We need a new voice in economics, a voice of intelligence who can lead our economic recovery with a sound understanding of what went wrong. We don’t need idealogues, whether they are Capitalists, Socialists, or Communists; we need realists: practical, intelligent people who can understand what is broken and fix it. We simply need a new way of running our economy, a new economic theory for the 21st Century.

The question is this: do we have the intelligence and the courage to change the way we do business? Because if we don’t, it won’t be long before we don’t have any business.

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Vampire Banks Come Back to Life

Paul Krugman, the Nobel prize winning economist, is fond of using the term “Zombie banks” to describe banks that are operating despite having liabilities that exceed their assets.  Most of our major banks have fallen into this category – the living dead.  However, it seems that the situation is changing with the Obama/Geithner rescue plan for our financial giants.  We, meaning the government – meaning us, will work a deal with private investors to buy up all the toxic waste inside the banks which we either pay for directly or guarantee to the private investors.  Wall street likes the idea and bank stocks have surged recently as blood begins to flow again into the pale white faces of the undead bankers.  The problem is: it’s our blood.

One thing that our government has conveniently overlooked – at least, and hopefully only for the moment – is that these nearly dead banks never had a soul.  These undead banks functioned more as vampires in our lives than as agents of community development.  Have we forgotten credit cards that sucked people in with promises of 0% interest only to escalate to 33% interest when a payment might be a microsecond late?  Have we forgotten how these vampires gleefully raised the rates on all of our credit cards simultaneously simply because we had somehow overlooked a single credit card payment for a day?  Have we forgotten what it is like to be in Credit Card Hell?

Then, of course, there are the mortgages – the ones given to unsuspecting homeowner wannabees that just wanted a house of their own but needed a break on mortgage payments.  So they got an adjustable rate mortgage that was easy to pay during the first year, but after that the payments were just impossible because the interest rate adjusted into the stratosphere.  Which, of course, is exactly what the banks wanted. Just like Credit Card Hell, the banks had also created Mortgage Hell.

Did you know that General Motors is a bank?  I thought they made cars. It turns out that they are actually a bank, so they got TARP bank bailout funds.  I thought General Electric made appliances.  It turns out that GE Capital Finance is the largest finance company in the world.  It seems that you can make a lot more money by loaning money to people than by building stuff and selling it to people.  When President Obama was on Jay Leno’s show he said that over the past 15 or 20 years about 40% of the U.S. economic growth was based upon the financial sector. That’s what happens when you lend money to people at extremely high interest rates.  So now, in order to rescue our economy, it has become necessary to remove the stake from the heart of the vampire banks and give them new blood.

Paul Krugman points out the problem in today’s New York Times. We can’t just give the vampires a transfusion and then think everything is going to be OK.  It won’t be long before they start stalking us again – offering 0% loans for six monthsb, then an interest rate tied to the value of the Russian Ruble divided by the ratio of the Euro to the dollar times the population of China at the end of the six month introductory period.  We need protection from the vampires. We need “stakeholders”, so to speak, who will stand up to these soulless, deathless entities and tell them “No more!”  Tim Geithner is hinting that he might be thinking that way, but is he a true vampire killer?  Is President Obama?

Many years ago our government (yes OUR government, meaning “us”) had laws that limited interest rates. Back in those days you couldn’t get a “Pay Day” loan.  (Check out My Cash Now.  Their annual interest rate is 485.45%!!!!!)  Then came a period of “deregulation”, i.e. leading the lambs to slaughter where the restrictions on interest rates were lifted and many of us got suckered into loans that drained us of everything we owned and the bloated banks still weren’t satisfied. Of course not; you can never satisfy a vampire.

Guess what?  I just checked the stock market.  They’re back.  What will President Obama do? I think he’s a smart guy. I think he wants to put the “us” back in “U.S.”, but so far he’s being cautious.  I think he doesn’t want to spook the vampires – same with Geithner.  I think both of them might be stealth vampire hunters, but it’s too early to tell. Meanwhile, I would be careful about taking out a new loan from any institution without calculating the total cost to repay it.  Try using an interest rate calculator like this one. For example, if you put in a loan of $10,000 at 18% interest for ten years you’ll find that you have to pay not only the $10,000 but also $7,989 in interest.  On the other hand if the bank jacks up the interest rate to 33% you have to pay $79,160 in interest!!  The vampires love that.

Until President Obama and Secretary Geithner rein in the bloodsuckers it’s best to be careful before taking out any new loans…. and whatever you do, don’t go into any bank after dark.

Ever.

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The Economy-It’s Like Walking on Water

The recent disclosures that the Securities and Exchange Commission was told years ago that Bernie Madoff was running the largest Ponzi scheme in history and yet they did absolutely nothing about it does little to inspire confidence in our government.  The fact that the SEC did nothing to prevent our banking industry from infecting the entire world with toxic paper that had been touted as being of AAA quality simply reinforces the notion that the SEC is asleep at the switch.  Maybe we don’t even need the SEC after all.

President Obama said yesterday that the U.S. is facing economic catastrophe unless his stimulus bill is passed.  Apparently, present conditions, where job losses are the worst in decades is only a crisis.  Every day more people lose their jobs.  People are saving every penny they can in preparation for the bad times to come.  Businesses are laying off people in preparation for even worse sales. The banks don’t want to lend money because they have already been burned by the housing collapse and they are afraid that they could get burned again if the economy gets worse.

Many trillions of dollars of wealth have been lost worldwide. Much of this is related to property that has depreciated since it was purchased.  A lot of this is owned by banks now (those are technically known as toxic assets) and a lot is owned by individuals (those are known as underwater properties).  Everyone wants the government to reimburse their losses.  The rational question is: why should it? After all, these people made business deals and they came out on the short end. So what? That’s how business is; sometimes you win and sometimes you lose. The government (i.e. the taxpayer) is not there to bail out everyone who makes a bad business decision.  In fact, it’s the other way around.  The government never bails out people who make bad business decisions. Until now, that is.  That’s because the Bush administration couldn’t bear to see their rich folk pals lose all their money so they stampeded Congress into giving away $350 billion to the banks as a gift.

The problem is that the TARP hasn’t stimulated the economy. The banks won’t lend.  The people won’t borrow.  The economy runs on credit but people are afraid to either give or receive credit. The result of this fear is that the economy gets worse and people become even more afraid to lend or borrow. And so it spirals downward.  The question we should ask is this: will the so-called Stimulus Bill, now in Congress, actually stimulate the economy? Translated, this means will the Bill get people lending and borrowing money again? The answer is probably not, because it doesn’t directly address the problem of fear.

Remember when Franklin Roosevelt said, “All we have to fear is fear itself”? He hit the nail right on the head. When one looks very closely at the economy (at any time) it doesn’t inspire confidence.  Too many things could go wrong or are already going wrong.  Better wait until tomorrow to loan or borrow – wait and see how things go.  Everyone can tell you why the economy won’t work – depending upon whether they are Republican or Democrat the reason is different, but the rationale is always there in one way or another.  It’s like walking on water – everyone knows you can’t walk on water, and if you try you will sink.

And that is the genius of FDR – he knew that. And when you know that, you also know the answer to the problem – make the fear go away and the economy will work.  He was not asking people to believe in the economy, he was asking the people to believe in him.  Come what may, he convinced everyone, he would make the economy work – and you could take that to the bank. This is where President Obama needs to go now.  It isn’t enough to propose building roads and bridges, green energy or schools. Not everyone buys that. President Obama needs to make the people believe in the economy again, because when they do the people will start again to lend and to borrow and the economy actually will function again. So how does he convince the people? He simply tells them not to be afraid, because come Hell or high water he will not let us sink. Whatever it takes, it will be done. He needs to tell us that we can depend on him to do whatever it takes to make the economy run again and until then we’ll be OK because he will take care of whatever comes along.  Period.  Modern economies, because they are based upon credit, run on faith, not money or jobs.

Only President Obama can make us believe, not by passing a Bill or spending money or by cutting taxes, even though these things must be done.  The economy is not a machine of steel gears that can be tuned up with a little oil.  It runs on faith and what he really needs to do is say these words: “I will not let you sink.  I will save you no matter what. I will do whatever needs to be done. Do not be afraid because I will save you, and you can take that to the bank.”

Only then will our economy begin to recover.

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Dead Banks Walking

No matter how bad you think the economy is, it’s worse than you think it is.  A few days ago, Nobel Prize winner Paul Krugman suggested that we may have some “zombie banks” in the U.S. These Zombie banks, he uses a mythical “Gotham Bank” as an example, have assets that are less than their liabilities – a lot less.  Yesterday, economist Nouriel Roubini, the NYU professor who predicted our current economic meltdown, told a conference in Dubai that the U.S. financial system is “effectively insolvent”.  He expects the U.S. banks to have losses of about 3.6 trillion dollars while only having assets of about 1.4 trillion dollars.  Roubini stated that the economic systems of both the U.S. and Europe are effectively bankrupt.   It sort of puts in perspective the 350 billion dollar TARP bailout, doesn’t it?  Our economic ship has been sinking and we’ve been bailing with a teacup.

So what do we do?  As David McWilliams, an Irish economist, points out, the U.S. doesn’t have enough money to bail out the banks. He also suggests that we probably can’t borrow the money either because the only country with enough money to bail us out is China and they already own as much U.S. debt as they want.  As McWilliams quotes in his article, the China Business News has already said, “the US must pay back its debts, and to do that, it needs to live a more frugal life, instead of others lending it money to maintain its over-consumption”.  So how are we supposed to bail out our banks who apparently need over 2 trillion dollars just to get back to zero?  McWilliams suggests that the only answer is for the U.S. to print a lot of money – effectively devaluing the dollar and sending us into hyperinflation.  The advice for the average investor then would be simple: buy gold.

Maybe. However, there is another way; its just a matter of how you look at the situation.  If we take the viewpoint that the U.S. banks are “too big to fail”, we have an insoluble problem because we can’t stop them from failing.  As Krugman says, without naming names, our major banks are already zombie banks. They are dead banks walking.  If we persist in our belief that these are sacred institutions that cannot be allowed to fail then we should know that when these banks finally do die – as they must – we will be buried with them.  The time has come to view these failing banks as what they truly are: failed businesses. That’s it, that’s all they are. They are failed businesses.  They are not your business, and they are not mine either.  They belong to the rich folks who made some really, really bad investment bets.  Does that mean we have to bail out the rich folk?  I don’t think so, not with my money anyway, and not with yours either.

The solution is for us to start our own bank to replace the inept banks that made the wrong business decisions.  Our bank – the people’s bank – would be a U.S. government owned and operated bank. A bank of the people, by the people, and for the people.  Where would it get it’s money from? Why, from us of course, the U.S. taxpayers. Except, instead of using our tax dollars to bail out the rich folk we would maintain our ownership of our money. Our money would be in our bank, with temporary custody given to the government.  Until we are paid back we would receive regular interest payments on our contributions.  The nice thing about this bank would be that it would be operated for the benefit of the people – no more 33% interest rates on credit cards, no more “gotcha” adjustable rate mortgages, no more personal loans at 12% interest when inflation is at 3%.

The idea of a national banking system makes the rich folk shudder with horror.  They would much rather we just pay for their losses and bail them out indefinitely.  Except, this time they have gone too far.  We can’t pay their bill. They have gone too far.  It’s as simple as that.

Their poorly run investment businesses are dead banks walking, but they don’t know it.

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