Matt Taibbi has a follow up to his Secrets and Lies of the Bailout article in the Rolling Stone. This one, called “One Broker’s Story” is about the consequences of the bailout to ordinary brokers as a result of asymmetric information. Neil Barofsky hinted at this in his book Bailout when he described all of the money that the government let the banks have access to. It amounts to trillions and trillions of dollars. It’s a little like opening the bank vault doors to people who have a habit of setting money on fire and telling them, “We know you didn’t mean to burn up everyone’s nest eggs. Now, don’t do it again.”
Trillions and Trillions. Imagine all of the money that the Republicans are constantly going on about in the deficit crisis hysteria and multiply it my several times over. The social security shortfall requires a minor adjustment, a teensy tweak. But the amount of money we have thrown at bankers and allowed them to access whenever they want is vastly, vastly larger. When it comes right down to it, the bankers pretty much own the money supply. They can tap into it whenever they want, charge interest on money they lend to others on money they got virtually interest free, and they don’t have to tell you about it.
The hapless broker in Taibbi’s story didn’t know that the bank he worked for, Wells Fargo, had access to all this cash. He was looking at the fallout of the 2008 disaster, estimated the financial solvency of all of the major banks and decided to short them because he figured it was only a matter of time before they started falling like dominos due to the weight of all their bad assets. But the broker didn’t know that all these banks had nothing to worry about because not only did the US government bail them out, it covered up their problems and then opened the money sluice to them in perpetuity. So, stocks continued to climb in spite of all evidence to the contrary and the broker lost his shirt and everyone else’s shirts he did business with.
He only found out when Bloomberg filed a FOIA to obtain information on where all the bailout programs money was going. The banks and the Treasury (and the White House, I’m sure) were hoping to keep it a secret as long as possible.
What the stock market is showing everyday is an illusion. The banks are doing well because they’re being propped up by our money. That is the observation. The question is, why? Why are we allowing the banks to have so much money? Why aren’t we letting the market suffer?
I think it comes back to the 401K and IRAs again. So many of us have so much of our money locked into the market instead of pensions that if the government let the market sink to its natural level, there would be a social and political crisis. It is a vicious circle. And we can’t take our money out to start new businesses or pay debts or just live without paying punitive taxes. Those taxes virtually guarantee that the money stays in the market. So, the government has to prop up the market until it can’t be propped up anymore. That should happen when the next bubble bursts on Wall Street.
Taibbi finishes the post like this:
This is the real problem with the bailouts, and the issue we tried to underscore with the “Secrets and Lies” piece. With their hide-and-seek policies, bogus stress testing and stubborn insistence on calling failing banks healthy and publicly endorsing other such fibs, the architects of the federal rescue (from both the Bush and Obama administrations, as well as from the Federal Reserve) created a two-tiered market. The new economy has two classes of investors: those who know the real numbers, and those who don’t.
So while the proponents of the bailout will argue they were a success, and the covert and overt federal support helped bring the Dow all the way back from below 7,000 to above 13,000 – seemingly a good thing no matter how you look at it – there’s another bitter reality, which is that the bailouts officially created a sucker class.
When banks started making fortunes again in 2009 and beyond, it wasn’t a victimless situation. There were losers in this trade, too. Hartzman and his clients are examples of the kind of people who lost when the government made decisions about who’s entitled to the truth and who wasn’t. As one former hedge fund manager put it to me recently, “Joe Sixpack has no chance in this market.”
We are the sucker class. Well, some of us are suckers. Some of us weren’t suckered into voting for Obama either time. Ultimately, the responsibility for this fiasco falls on his shoulders and those of the people he hired. And the people who unquestioningly supported him.
And about that $1Trillion platinum coin, mint the damn thing already. As Krugman pointed out yesterday:
There seem to be two kinds of objections. One is that it would be undignified. Here’s how to think about that: we have a situation in which a terrorist may be about to walk into a crowded room and threaten to blow up a bomb he’s holding. It turns out, however, that the Secret Service has figured out a way to disarm this maniac — a way that for some reason will require that the Secretary of the Treasury briefly wear a clown suit. (My fictional plotting skills have let me down, but there has to be some way to work this in). And the response of the nervous Nellies is, “My god, we can’t dress the secretary up as a clown!” Even when it will make him a hero who saves the day?
The other objection is the apparently primordial fear that mocking the monetary gods will bring terrible retribution.
It sounds like another civility bluff to me. The bullies announce they are going to steal your lunch money, push you down in the dirt and stomp on your face but if you protest or come up with some clever workaround, they start heading to the fainting couch with the vapors.
Normally, I’d say that this kind of silliness with the coin is just going to make the matter worse because who in the world will take us seriously. But there shouldn’t be any real economic fallout, so mint the damn coin.
On the other hand, maybe we should just call their bluff. Let them wreck the economy, pull down our credit rating, sow chaos and confusion and ruin people’s lives. I’m sick of Republicans pulling this shit. They need to be terrified of the consequences of their actions for a change. If you mint the coin, they’ll just come back with something else to hold hostage. So, let the babies have their way and get the end of the financial world over with. It’s out of control and an unmitigated disaster and it’s going down eventually anyway. Why prolong the suffering. Let’s just lance the boil now and start over. I want a capitalism without exploitation.
Reboot. Do it now.