LI(E)BOR

We have used the word “evil” to apply to bankers so often in the last four years that it’s become trite.  Nevertheless, the level of austerity imposed on us by the financial establishment in order for them to continue to seize money and power without accountability is so destructive that there’s really no other word that applies.  Once again, we have to go back to Hannah Arendt’s comment about the “banality of evil” to understand what we’re talking about here. It is the normalization of the unthinkable.  It’s not that these financiers are people who beat their wives or sell their children into sexual slavery.  I’m sure that some of these people are perfectly fine to socialize with.  You can play a few rounds of golf, have dinner, go sailing with them.  They seem like such nice, intelligent, clean-cut people, if a bit more ambitious than the average Joe.  OK, insanely more ambitious, but you know what I mean.  They don’t look like gun toting SS droogs in jackboots who will conduct you to the edge of the pit where they will shoot you in the back of the head for inconveniently living on land they had their eyes on.

And yet, isn’t that what they’re doing, in a so far non-violent way?  They’re leading hundreds of millions of people to the edge of the pit of financial instability and a lifetime of precarious existence and pushing them over with a swift kick to the back.  When you lose your job, your house, your marriage, everything but the clothes on your back and the student loans you will be paying off forever, and it’s all because some wealthy bankers need to preserve their bonuses, isn’t that evil?

Check out this unbelievable interview about LIBOR from the BBC with Harvard professor Niall Ferguson.  The second part is particularly outrageous.  Essentially, we are being pressured to turn generation against generation and Ferguson implies that Obama will sell us out at the end of this year:

Part 1:

Part 2:

(Roberto Unger’s call for the left to defeat Obama makes a lot more sense now.  Ahh, I see that Ferguson is one of the original Confidence Fairies that Krugman is always referring to.  What’s more, he’s married to Aayan Hirsi Ali, the Somali born former Dutch MP who works for the conservative American Enterprise Institute.  She has taken Christopher Hitchens’ place in the Four Horseman dialogues.  Man-o-man, no one is safe from the creepy thoughts of extreme right wing philosophy.  I can’t take the Four Horseman dialogues seriously now.  Not until she’s replaced.  She jumped from ultra religious conservatism to ultra right wing conservatism and is not a good ambassador for the New Atheist movement.  Sorry, Richard.  She’s going to damage your credibility.  You’ve got to be very careful about these people because in this country, the political right wing is inextricably tied to the religious right wing.)

The LIBOR scandal took me back to the fall of 2008 when Planet Money popped up on NPR.  At first, Planet Money was a good resource for non-financiers to get a grip on Credit Default Swaps and Collateralized Debt Obligations.  A few months later, that began to change subtly as the hosts of Planet Money got pulled into the realm of the serious people.  But in October 2008, they were on top of LIBOR.  I remember them talking about the TED spread and LIBOR and getting the sense that the LIBOR number, the interbank interest rate showing how willing banks were to lend to one another was an indicator of the global scale of the catastrophe.  No joke.  The higher the LIBOR number creeped, the more likely we were to spin off to a Depression that was bigger than the world had ever seen.  The thing is, according to the Commodities Futures Trading Commission (CFTC), the banks were manipulating LIBOR starting in 2005, affecting rates on adjustable rate mortgages.  And the downstream effect of LIBOR was felt in just about every interest rate on every act of borrowing by every individual in the world.  We are talking about hundreds of trillions of dollars.  In this Planet Money snippet, Adam Davidson discusses the effect of LIBOR and the TED spread and what it means for global markets around the world.  Throughout October, Planet Money followed TED and LIBOR and the effect of the bailout money.  For some reason, LIBOR numbers should have gone down a bit after the infusion of money but they didn’t, probably because the LIBOR rate, as high as it was, wasn’t real and wasn’t high enough to reflect reality.

But reality might have set off a global panic, triggering much more severe regulation of the finance industry so it had to stay hidden.  In the meantime, we’ve been carrying the weight of these behemoth zombies for four years and if we don’t do something now, we will be carrying them for years to come- at our expense.  And they’ve gotten off with minor slaps on the wrist.  The CFTC fined British banks a paltry $450 million for their manipulations.  That’s an insult to American taxpayers and totally inadequate.  Democratic lawmakers should be outraged and demanding accountability.  Where are they??

In another Planet Money episode from October 2008, we find out what LIBOR meant to the little people:

Justin asks us today:

“I saw you mentioned student loan availability, but what about existing loans? Since many student loans have their interest rates tied to LIBOR or Prime, what does LIBOR hitting all-time highs this week mean for students? And, perhaps more ominously, graduates who are in repayment? How long can this go on before they start to see some effect on their loans?”

Even if Congress passes the bailout, many students across the nation will begin to see higher costs for loans in the coming months or could be turned away by banks altogether as the credit crisis intensifies.

The goes the same for graduates. The big issue is what kind of loans you have.

Most direct government-backed loans such as Federal Stafford and PLUS loans have fixed interest rates. This means the interest rate will remain constant for the life of the loan.

If you took out private loans, which have become increasingly common as students look for new sources to finance the soaring costs of college, they typically have variable rates and are projected to jump this year. Sorry.

Sorry, student.  Sucks to be you.  In the light of the LIBOR manipulation details, that seems particularly callous, along with Davidson’s subsequent attack on Elizabeth Warren for caring about homeowners and consumers and not being “serious”.  It was the influence of the serious people on Davidson (by the way, who was he referring to as his serious sources anyway?  Her colleague Niall Ferguson at Harvard, perhaps? And do “penis years” have something to do with why his word may have carried more weight than hers?) and on our elected officials that lead to the gouging of the taxpayers to pay the bankers’ unconscionable debts on bad bets.  We are talking about trillions of dollars of OUR money, OUR retirements, so that the weekend sailors and golf buddies would not feel inconvenienced.

I used to think my outrage meter was pegged but I have never seen such corruption go unchecked in my lifetime.  What we have here is a bunch of extremely irresponsible and unethical people playing with people’s livelihoods like it wasn’t real money to them.  And it isn’t real money to them.  The tens of thousands of dollars we’ll be collecting each year in measly pensions and social security, that’s nothing.  They can burn through that in a matter of minutes.  If it were several million dollars in Social Security payouts affecting their retirement packages, that might get their attention and they’d be furiously lobbying Congress to save Social Security at all costs.  Social Security and pensions would become holy sacraments. But because we are talking about such piddling amounts that amount to pocket change to the wealthy, it has no real meaning to them.  We might as well be flood victims in Bangladesh, clinging to a few square meters of dry land while the water rises all about us.  Those poor people.  Well, that’ll learn them to farm in a flood zone.

The careers we have lost? Not their problem.  Our children’s college funds, the roofs they have over their heads, the food we put in their mouths, barely registers.  On an individual basis, none of us make enough money to get their attention.  The significance of the figures of our incomes does not arouse their concern.  They are so caught up and preoccupied with making their numbers that they don’t have the time to care about your little problems.  They have jumped to a new level in the game where the sheer volume of money being swapped is intoxicating.  They’re not playing in the real world anymore.

It’s got to stop.  The manipulation of LIBOR was uncovered by the US CFTC.  That means, we’ve been aware of it for some time.  We probably knew about it when Occupy Wall Street was protesting last fall and we probably knew about it when their camps were broken up and they were hauled off to jail and when the DHS sent in their riot troops.  Yep, the Obama administration has known.  And so far, not one banker has been hauled off to jail.  No one has been penalized.

Think about that.  The scope of the LIBOR scandal affects every person who has ever dealt with a bank in the past 7 years.  It’s so outrageously immoral and has caused so much destruction and continues to wreck havoc in Spain, Ireland, Britain, the US, everywhere that if it isn’t prosecuted as a the criminal enterprise that it is, then I can only conclude that our elected officials are complicit.  They had to have known that the banks that are now too big to fail were in fact failing and were disguising the scale of the catastrophe from the public.  Those banks are still in business, thanks to our largess, and no one in the Obama administration, particularly Tim Geithner, has dared to declare them insolvent and break them up as Sheila Bair suggested in 2009. They are now bigger and more dangerous than ever and they are calling the shots about our jobs, retirements and money supply around the world.

Our money went into their bottomless gullets and continues to go in, and yet, they and their political arms have the outrageous gall to insist that we, the hardworking taxpayers who paid in advance for our social security benefits, WE have to take a haircut.  That is what the so-called Grand Bargain is all about, ladies and gentlemen. That’s why we must lose our jobs.  We cost too much.  They think they can dump the blame on us for having to eat and getting old and needy.

We are living in a world that is run by criminals.  You may think that’s they way it’s always been but this is now institutionalized criminality.  No one can be trusted.  And when no one can be trusted, all hell breaks loose.

More on LIBOR:

Boston Globe- How a LIBOR scheme works and what it means to consumers

Joe Nocera- LIBOR’s Dirty Laundry

Yves Smith- Yes, Virginia, the real action in the LIBOR scanda was in the derivatives

Here’s an interesting take on LIBOR from 2007 when banks were manipulating the rate up: Why LIBOR won’t hurt that much.

Also, this Fresh Air interview with Paul Krugman in Oct 2008 is very revealing.  He was right about almost everything except the unemployment rate. (his prediction was too low).  But even more striking is the last 5 minutes of the interview when he talks about the two presidential candidates and why Ben Bernanke was struggling to get a handle on this.  Could it be that the measures were inadequate because the LIBOR rates had been artificially lowered?

Matt Taibbi’s most recent posts in the Rolling Stone:

A Huge Break in the LIBOR Banking Investigation (6/28/2012)

Another Domino Falls in the LIBOR Banking Scam: Royal Bank of Scotland (6/29)

Why is Nobody Freaking out about the LIBOR Banking Scandal? (7/3)

LIBOR Banking Scandal Deepens: Barclays releases damning email, Implicates    British Government (7/4)

Matt Taibbi discusses the LIBOR scandal with Eliot Spitzer:

Who here thinks creativity is easy?

You’ve probably seen this ad in the past couple of days.  I really loved it, although I’m not sure who at Intel approved of it:

I know the guy who invented one of the most widely used anti-depressants in history.  The company that he worked for bought his patent for a buck and is reaping in billions every year- well, for the time being anyway.  And what did Morris get?  Well, other than a pretty nice bonus, he gets fan mail.  He get letters from people who thank him for saving them from the wreckage of their minds.  Now, some of you may scoff haughtily at the notion of an anti-depressant, assuming (wrongly) that most people who take them don’t need them.  I might agree that they are overprescribed but the thing is, if you are one of the people who can pull yourself together under their influence in a way you can’t do without them, you probably aren’t terribly interested in the superior minded folks who tell you that there’s nothing wrong with feeling that there’s no light at the end of the tunnel.  Ever.  For day after day, year after year.  Well, you get the picture.

Yeah, Morris gets fan mail.  I don’t know how these people tracked him down but they did.  He’s a rockstar.

Last week, Don Draper, the Creative Director of Mad Men’s Sterling-Cooper, told his protege that she wasn’t an artist, she solves problems.  Those of us who work in creative fields like processor design, drug design, even auto-mechanics, are problem solvers.

Those who work in the insurance industry and the finance industry are NOT problem solvers.  I think this point was lost on the folks at Planet Money recently.  Ya’know, back when the Financial Meltdown of 2008 was young, Planet Money was a great little podcast.  It explained how all of the moving pieces meshed together.  The few missteps in the beginning when Adam Davidson told us all not to get too mad at the bonus structure of the bailed out companies were naive but we could overlook them.  Then came that cringeworthy interview he had with Elizabeth Warren and it all started going rapidly downhill from there.  The latest stupidity has spread from Adam to Alex Blumberg.  God, I had such high hopes for him.  One of the recent podcasts extolling finance as the “geniuses” behind every new innovation that has made our lives better has really taken the shine off of him for me.

Oh, sure, the moneybags have financed a lot of good stuff but there have been plenty of things that never got off the ground or have been hopelessly stalled.  Take stem cell research for example.  I guess it depends on the religious mindset of who is actually holding the moneybags.  Or the fact that back in the 90’s, Apple nearly went out of business when all of the big corporations gave lifetime employment to the IT nazis when they bought PCs that ran nothing but Windows.  We are all going to be paying for that  non-diversification of the the desktop for a lifetime.  Or the fact that our financial wizards can not think beyond 3 months, which is forcing a lot of companies to merge, cut their workforces or get gobbled up by private equity.  Or the fact that so many small businesses can’t get loans because all of the bankers who Adam Davidson insists we just had to save are sitting on big piles of money because they refuse to divest themselves of their bad assets.  Yes! Let’s hear it for our financial braintrusts!

How frickin’ clueless can you get?  I’ll answer that: pretty clueless, especially if you’ve never seen real creation at work.  Some of our corporate overlords have this fantastic notion in their overblown egos that the companies they pilot would sink without their skills.  The R&D people make note of this all of the time.  Yes, we can be replaced by cheaper Ajay Bhatts in Hyderabad but real creativity doesn’t come by swapping out parts.  It takes a certain environment.  Malcolm Gladwell touched on this in his most recent book, Outliers, when he describes the characteristics of successful people.  Your native intelligence can only take you so far.  Other things have to come into play, like how effectively your family advocates for you at school, opportunity and location and something that most of us in America overlook- how hierarchically our society is structured.  It turns out that in highly hierarchical societies, creativity and problem solving is squelched, sometimes with disastrously fatal results.

The grumbling of the problem solvers is starting to make noise.  At least we, the R&D people are starting to hear it from each other.   A real resentment is starting to simmer about how the corporate people think their s%^& doesn’t smell because they don’t have to spend their days in the labs touching things with their hands.  Their salaries and bonuses match their egos.  The newest thing is a management development program where the trainer encourages the non-corporate types to use the same meaningless biz-speak jargon to communicate with the “people who have the money”.  See, if you use the latest trendy word combination, they are more likely to listen to what you have to say.  You put it in a context they can understand, even if the rest of your presentation is completely over their heads.  Someone tried to convince me the other day that this was a good idea.  It’s not.  There are studies that show that the more jargon a business uses, the more poorly run it is, a prediction made by Richard Mitchell, the Underground Grammarian in his book Less Than Words Can Say three decades ago.    I don’t think I have an obligation to contribute to my own demise.

I worry about a country that had a cornucopia of innovation in the past is now facing its biggest creative crisis.  This country is becoming more hierarchical all of the time while it is also becoming less able to cope with the demands of new technology and how to solve problems with it.  It doesn’t help that our nation’s teachers blame everyone but themselves for their poor preparation.  Yes, if we would only pay them better, they would learn this stuff like every other advanced industrialized nation’s teachers that use standardized testing.  Well, not to worry.  At the rate things are going, there will soon be a glut of highly educated future teachers on the market who will be fluent in advanced mathematics and science.  When the creative types finally lose their jobs because they can’t convince the “people who have the money” that solving problems is worth a damn, they can take a crack at the classroom for a little less money but summers off.

They might not have fan mail, but at least they’ll have a union.

Catch more on the battle of the creatives vs the hierarchy on Mad Men tonight at 10PM EST on AMC.

PS.  Thank someone who solves a problem for you tomorrow.  We need to start a movement.

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Monday: Connexions

Remember when Lady Catherine De Bourgh condescended to pay Miss Elizabeth Bennet a visit to warn her not to quit her sphere because she had no connections (or connexions in my edition) to benefit her wealthy young nephew?  I always wondered what the heck she meant by “connections”.  It seemed to mean more than just embarrassing relatives.

I didn’t really get it until recently when I listened to my podcast of the day recommendation, The Aristocracy- How the Ruling Class Survives by BBC-4’s Melvyn Bragg.  You’ll note that although the aristocracy in England had its salad days back in the 18th century, Melvyn is using the present tense in his title.  But I’ll get back to that in a minute.

The aristocracy took hold in England after William the Conqueror lucked out at the Battle of Hastings in 1066.  The Norman ruling style was radically different from the Anglo-Saxon’s.  To the victor go the spoils might not have originated with the Normans but they did have an efficient way of administering and organizing it as the Doomsday Book will attest.  By the time the aristocracy finally reached their zenith, a little over 700 people owned more than two thirds of all of the land in England.  Pretty sweet if you were an aristocrat; not so much if you were a tenant farmer who owed your lord’s fields more attention than your own measley strips of land.  And since the land was all when agriculture was everybody’s business, you could say the aristocracy had a lock on the country’s wealth.

The English  did hang on to one nasty little artifact of Norman administration a bit too long however.  Primogeniture was the practice of bequeathing estates to the first born, preferably males. This was a way to keep the land intact and power undiluted.  The artistocrats who were peers were also ensured seats in The House of Lords.  The problem with primogeniture was that it left out a lot of very well-born children who had inherited no wealth or title.  These children became commoners and their only hope of advancement was through good marriages and connections, which I interpret as some sort of patronage system.  Meanwhile, the eldests went on to lead lives of wealth and privelege regardless of intelligence or character.  They spent lavishly because, well, it was their money and they deserved it.

Those younger sons, some of them tired of waiting around for their older brothers to die off so they could get an instant promotion, took matters into their own hands.  They couldn’t become members of the House of Lords but lo and behold! the House of Commons was wide open!  What better way to rig the game in their favor than to run for office.  And so many of them did.  Before long, both houses of Parliament were run by aristocrats.  Then the peasants started to get restless in the 19th century and pointed to the French Revolution across the channel.  That lead to the Great Reform Acts of the 19th century that allowed more commoners the right to vote.  The rest, as we say, was history.

Which leads me to the second podcast for the day.  (Whoo-hoo! a twofer!)  This is a recent podcast from Planet Money about the compensation of the busy little worker bees in the finance industry.  Oh, these poor souls, so put upon, moving columns of numbers around a spreadsheet and forced to make the same trades day after day.  Certainly they deserved those multi-million dollar bonuses.  Turns out, not so much.  These modern day aristocrats and their connections who have cornered the country’s wealth in their 1% sphere are ridiculously overpaid according to studies.  They just might not deserve it after all.  But the way they got their greesy little mitts on all that money is very instructive.  It all has to do with deregulation that happened in the early eighties when Ronald Reagan was in office and Congress was amenable to a little experimentation.

And then it hit me.  I made my own connection.  Hasn’t the Republican party been the party of entrenched wealth?  By American standards, the GOP is the home of the Rockefellers and the Forbes.  But in the past couple of decades, we’ve seen a lot of very wealthy businessmen buying their way into the Democratic party as well.  Jon Corzine, multimillionaire and former CEO of Goldman-Sachs is a prime example.  These days, you can’t even start a campaign for Congress or the Senate without a massive warchest.  If it turns out that Congress is not responsive to the wretched poor and middle class anymore, it could be that for the most part, they have no connection with us anymore.  We’re in the grip of the aristocrats.

It may seem obvious but the connection goes deeper than one of mere money.  It’s a mindset, a social sphere.  They won’t respond to us because it’s not our country anymore.  It’s theirs.  They own it now.  They appoint the judges to look after their wealth.  And we are going to have to be very clever and tenacious to get it back.

Like, what would happen if everyone who has a 401K stopped contributing en masse?

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Thursday: A Series of Unfortunate Events

There has been plenty of finger pointing in the past couple of days.  Tim Geithner is getting his under-the -bus moment this morning on the front page of the NYTimes.  What did Tim know about the AIG bonuses and when did he know it?  The WH is starting to float the “complete confidence” meme, which is sort of the equivalent of “Have you thought about resigning?  No, no, take your time.  We’ve got about a week as these things go.  Has anyone seen Sheila Bair?”

In the whole scheme of things, the $165 million is drop in the bucket, as those who like those drops are quick to point out.  But people who have studied scandals know that at some point, they have a life of their own.  This scandal has legs and it’s getting the royal treatment in the media.  Unlike the more esoteric scandals of the Bush administration where the offense had something to do with some obscure violation of historical significance, this scandal is one that the common man can relate to: Those finance guys are getting money for royally f^&*ing things up and while we’re forced to give up compensation benefits.  Our hard earned money that could have been used to fund major healthcare reform and badly needed infrastructure projects, is getting sucked up by the same obscenely rich people that got to do whatever they wanted under the Bush administration.   We voted for a Democrat who turned out to be *what* exactly?

(It was all sadly predictable but we won’t go there for our new readers who may have voted for the messiah.)

Planet Money was busy yesterday trying to put the anger in perspective.  There are three possible culprits for the accelerating meltdown: Washington, Wall Street and the macroeconomic moment complicated by the “Greenspan Put”.  I’m not sure I totally understand this last concept.  Maybe Dakinikat can unpack it but from what I gather, Alan Greenspan brought the Fed interest rate down to something like 1% so the Giant Pool of Money that investors had back in the late 90’s and 00’s couldn’t make money off of US Trearsury bonds.  The money had to go somewhere so it got rolled into risky instruments.  At some point in there, Alan Greenspan hinted (obscurely to us but loud and clear to people in the know) that the US would guarantee these risks.  And Voile!  Here we are, guaranteeing like there’s no tomorrow.  It’s rather puzzling coming from a Randian fan like Greenspan to have the government step in and bail investors out but finance has a logic of its own.  There’s probably internal self-consistency to Greenspan’s philosophy that our small minds simply cannot grasp.

Well, that is why we are the little people and are not given the power to do anything.  We might use it recklessly.  For instance, did you know that even though we taxpayers own something like 80% of AIG, guardians have been appointed on our behalf to actually administer the company? Yep, there are three trustees who are supposed to look over AIG lest we get our grubby, unsophisticated mitts on it and take away all of the bonuses.  And we aren’t allowed to say what happens to the rest of the money that went to Goldman Sachs and other banks either.  We might put a stop to it, doncha know.  It would be unseemly.  Wasn’t it nice for the Bushies and the Obama adminstration to appoint these Mr. Poe’s of Mulctuary Money Management for us?

Don’t worry your pretty little heads.

Sunday: Bad Bank

Take the red pill and go down the rabbit hole

Knowledge is power, Conflucians.  When it comes to the economy, I feel like a novice.   Playing with money never interested me.  It was enough to diversify my options in my 401K and leave it at that, although, I had a sneaking suspicion in the back of my mind that I should learn what it was they were up to.  But I opted for a degree in chemistry, not finance.  The truth is, it isn’t possible to know everything about everything.  There are limits to how much time out of our very busy lives we can dedicate to learning someone else’s area of expertise.  That has always been the danger of the 401K, IRA and pie-in-the-sky Grover Norquistesque wetdream of private Social Security accounts:  We’re busy and we have to trust people to handle our money responbsibly.   Needless to say, they’ve really let us down and now we are faced with the sometimes overwhelming task of learning the rules of  this high-stakes financial risk game.

The past several months have left me feeling a bit like Neo in the Matrix after they pulled his headplug and the world is revealed as it truly is.  I should have taken the blue pill.  What I see is not pretty.  I see a lot of shallow CEOs, oblivious to the fates of the people whose money they are entrusted with, determined to protect their lifestyles at any cost.  I see traders, addicted to adrenaline, looking for fixes and laying our nest eggs on the line for the rush of a big payoff.  I see corporations walking away from their future obligations because the people who work for them put their faith in them and deferred their compensation for promises that were never meant to be kept.  I see a government that was bought and paid for by these people and who will sacrifice the working class to pay its debt to its backers.  I see a Whole Foods Nation that doesn’t realize that it entered the ranks of the working class a couple decades ago in the era of Reagan’s “voodoo economics”.

You can’t be too careful these days.  If you want to know how to protect yourself from the predators who, in the end, are really no better than the common thugs who rob you at gunpoint, you’ve got to learn how to avoid the financial dark alleys. I’m so glad that we have Dakinikat to help explain stuff like “moral hazard” and “collateralized debt obligations”.  We have Paul Krugman, NakedCapitalism and Baseline Scenario who are keeping their ears to the ground and interpreting the entrails for us.  And we also have Planet Money and This American Life who are teaming up to break down the complex so we all get it.  Tonight, their joint project called Bad Bank airs on NPR and PRI stations at the This American Life regular time slot.  You can catch the podcast here or check your local NPR station.  The feed from WNYC starts at 4:00PM EST.  I urge everyone who has a mental black hole where their finance center should be to tune in for Bad Bank.

It’s time they stopped playing us for suckers.

Thursday: Geithner channels Alfred E. Newman

Tim Geithner takes optimism to the next level

I’m plugging Planet Money again today.  I simply *love* these guys.  Their podcasts reveal as much about the bizarre atmosphere surrounding the economic meltdown as the situation itself and its major players.  Gee, I hope they continue to get the high level guests after this last episode with Tim Geithner.  As I said before, Planet Money doesn’t seem to be into propaganda but they are keen observers.

So, Tim Geithner gives Planet Money an interview and he brings along a press aide.  As the producer mentions, during parts of the interview, you can hear the aide whispering to Geithner while he speaks as she keeps him relentlessly on message.  Too funny.  Or disturbing, because what Geithner says about “stress tests” makes you wonder- why bother?  According to Geithner, the government will begin to stress test several banks with the worst case scenarios.  They’re going to be tough and thorough, you betcha.  And if the stress test shows that the bank is troubled, we’re going to rescue them so they stay in private hands.  Even iffen they don’t need a lot of rescue, we’re going to rescue them so they stay in private hands.  Whatever the outcome, we’re going to save them- for the private sector, so don’t you worry your pretty little taxpayer heads because the banks will stay in private hands.  Of that, you can be sure, bynettyjingo!

What if the stress test shows the banks need to be nationalized?

We will save them for private hands!

The message seems to be pretty unambiguous:  No matter what the stress test reveals, the banks shall remain private.  This is meant to be reassuring to us, the taxpayers but if I were a banker, I’d be *doubly* reassured.  In fact, I might just ease up on the xanax and take a mini vacation to someplace warm.

It’s all going to be just fine.

If it weren’t for Paul Krugman always trying to harsh Geithner’s mellow.  Paul quotes Adam Posen about Japan again.  Says Posen:

Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.

These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble’s burst in 1992 through to 1998 …

What a frickin’ crepe hanger.

In the meantime, the banks will take our money and get back to us on it someday in the future.

Saturday Morning Dithers

New and improved! We have turned on a new feature that allows for threaded comments 5 levels deep.  So, if you’ve been waiting to tell someone off, personally, here’s your chance!

If you’re looking for a topic, try the newest podcast from Planet Money on mortgage renegotiations.  Bottom line:  the Obama proposal is designed to help homeowners with their interest.  It won’t address principal on a house that was overvalued when it was bought in the first place.   (Another Obama proposal that misses the point until it’s too late) The mortgage industry has fought hard against principal renegotiation clauses in the past for good reason.  But in this current economic climate, that may cause strapped homeowners to walk away from their homes with underwater equity.  It’s a short podcast and there’s some “twitter” stuff too.  Is anyone interested in twittering The Confluence?  Let us know in the threads!

In other news:

“First you say you will, and then you won’t.  And then you say you do, and then you don’t.  You’re undecided now, so what are you going to do?”

The AP reports this morning that Obama did not say he was going to nationalize the banks.

WASHINGTON (AP) — The White House on Friday insisted it’s not trying to take over two ailing financial institutions, even as stocks tumbled again. On Wall Street, talk of nationalization of Citigroup Inc., and Bank of America Corp., prompted investors to continue to balk, worried that the government would have to take control and wipe out shareholders in the process.Citigroup fell 20 percent, while Bank of America fell 12 percent in afternoon trading but also came off their lowest levels.

“This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,” White House press secretary Robert Gibbs said when asked about nationalizing the banks.

“That’s been our belief for quite some time, and we continue to have that,” Gibbs said

…

When a reporter suggested Gibbs could do that by saying point bank that Obama would never nationalize banks, Gibbs would not make that statement, but emphasized: “I think I was very clear about the system that this country has and will continue to have.”

Uh-huh.

This reminds me of the comments that Bush and Cheney made about Americans and their propensity to buy large, oil guzzling vehicles and how this was a uniquely American cultural thing and that no long-haired, hippy type, pinko fag, treehugger (and by this, I think they meant *us*, Oh Best Beloveds), was going to change us.  And how did that work out?

Paul Krugman writes about the fear of nationalization in his blog, The Conscience of a Liberal:

We are not talking about fears that leftist radicals will expropriate perfectly good private companies. At least since last fall the major banks — certainly Citi and B of A — have only been able to stay in business because their counterparties believe that there’s an implicit federal guarantee on their obligations. The banks are already, in a fundamental sense, wards of the state.

And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders.

What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.

Yes, it seems like the thing that bankers fear most from nationalization is that they aren’t going to be saved by the white knight.  They are going to have to eat $@%! and die and the American people will own them, at least for awhile until they can be restructured and sold again to private investors.  THAT’S what’s sending the stock market down.  Some very rich people are going to see the end of the gravy train.  It is most certainly not what they paid Obama to do.  And Obama dithers because he knows he can’t count on $600 million for his next election if he screws his backers, er, bankers.

Verily I say unto you, President Obama, you cannot serve two masters.  You took an oath to “preserve, protect and defend” the Constitution of the US “to the best of [your] ability”.  The fact that you have no experience, insight or coalitions earned over time to help you does not excuse you from fulfilling your oath.  You may be a weak president, by design (thank you David Broder and Karl Rove), but this is something you will have to overcome or you will be a one term African-American president who will have a worse legacy than George W. Bush.  Your new freshness ties your hands.  Too bad for you.  Do the right thing. Promote the general welfare already.

But what’s this?  Obama is holding a fiscal summit to reduce the deficit? I thought that putting the brakes on deficit spending is exactly what one does not do during a deflationary cycle.  (Hey, I’m not an economist so correct me if I’m wrong here)  Is this the same fiscal responsibility summit that is designed to cut social security benefits?  Because Social Security is practically the only government program that is working fine all by itself with little excess overhead and a record of outstanding value to the taxpayer?  Ohhhh, right.  It’s sitting on a big wad of cash, that surplus I’ve been paying into my entire working life (thank you Ronald Reagan for raising my payroll taxes).  Yes, let’s give that money to the bankers to play with.  We’re not going to just throw the baby out.  We’re going to harvest its organs first.  Nice going.

It sounds like Obama is Ok with The Shock Doctrine theory of cultural change.  Or he’s desperate for the money.  Or both.  Aren’t we all lucky to be living through such interesting times?  And we couldn’t have Hillary why, exactly?

Hillary Clinton in Indonesia (note all of the happy faces)

(Note:  Funny thing about that picture above.  It used to be attached to the NYTimes article on her stop in Indonesia but it was replaced by another one which shows her pretty much in isolation without the adoring crowds.  That was no accident.  The original picture above is stunning.  She *looks* like The Foreign President.  Well, we can’t have that.)

Thursday: Japan or Sweden?

Planet Money discusses the Swedish model of bank nationalization in its latest podcast.  In 1994, Sweden went through its own financial meltdown.  In some ways, it sounds similar to what is happening here in the US.  The economy heated up and people borrowed and spent like there was no tomorrow.  That short term thinking turned out to be a big part of the problem.  Banks took a lot of risks and found themselves on the brink of insolvency.  In the end, Sweden nationalized its biggest bank.  It was very painful for taxpayers but in the end, the bank was restructured and everthing is hunky dory.

It sounds like Sweden got a grip on their problem and correctly diagnosed it more quickly than Japan did.  As you may recall, Japan tinkered around the edges, stimulated the economy but didn’t nationalize the banks.  The banks held onto their toxic assets hoping that they would be worth something someday.  It wasn’t until the crisis had dragged on for almost a decade before Japan got tough with the banks and the economy started to turn around.  But Japan has been in the news again recently.  Their economy is suffering once again because there has been a drop in exports.  That’s to be expected in a global economic crisis but I’m getting the impression that Japan is a little more vulnerable because of its lost decade.  There is something intrinsically not quite right.

Our present course seems to be dangerously close to the Japanese model than the Swedish model.  Tim Geithner has been painfully vague about how much control of the banks the public will have.  Maybe that’s to keep the stock market from tanking. It’s also true that Sweden didn’t try to nationalize so many banks.  Our problem is on  a much bigger scale.  But it is disturbing that the Obama administration came into office with so much confidence and so little advanced planning.

The second part of the podcast features Paul Krugman taking reader questions.   Finally, Paul is asked what his favorite blogs are.  Alas, The Confluence is not among them.  I know, I know, it was probably just an oversight but I was hurt nonetheless.  Paul, Paul, what do we have to do to get your attention?

{{sigh}}

Friday: {{Gasp!}} Judd Gregg is a REAL Republican??

Not a fake Democrat, like Obama, but a REAL Republican?

“I’m a fiscal conservative, as everybody knows, a fairly strong one,” Mr. Gregg told reporters at a news conference in the Capitol. “And it just became clear to me that it would be very difficult, day in and day out, to serve in this cabinet or any cabinet.”

He actually believes in that rugged individualism, small government (unless when big government is necessary to help your golfing buds), social conservatism crap.  Oh, and he didn’t like the politicization of the census idea that Obama’s crew is floating.  To be perfectly honest, I don’t like it either.  The idea that we may be stuck with Chicago style gerrymandering makes my skin crawl.  So, can we assume that Obama’s *next* pick for Commerce secretary will be on board with tinkering with the census?

Call me a stickler but shouldn’t Commerce and Labor have secretaries already?

But the political fallout is left to the White House, which now has a string of appointees who have stepped aside over vetting problems, unpaid taxes or philosophical differences with Mr. Obama. Since the president took office last month, not a week has passed without the White House responding to a personnel crisis.

Mr. Gregg said he alerted Mr. Obama to his decision “several days ago,” but administration officials said the senator’s withdrawal had taken them off guard.

The White House sought to contain the political fallout, issuing a terse statement and pointing out that Mr. Gregg had said he would “support, embrace and move forward with the president’s agenda.”

I mean, we are living through one of the greatest economic catastrophes in our nation’s history.  It just seems to me that these departments are very important.  And what about HHS?  Did we find someone for that position yet?  At least the Bushies had their kleptocrats all lined up when they took office.  They were dead serious about commencing the business of f%&^ing things up.  Obama and his crew are still celebrating a victory.  And celebrating.  Put the damn champagne flutes down already and govern.  Enough with the bipartisan gimmicks.

“I am going to keep working at this,” said Mr. Obama, adding that the American people were “desperate” for Democrats and Republicans to work together.”

Uh, no.  David Broder and his Villager pals want mushy, indistinct bipartisanship or they will make your job hard.  The American people want government that works.  That requires a political philosophy.  Hey, DNC, do you think we could actually get a DEMOCRAT to run on our party’s ticket next time?  Just sayin’.

“It has become apparent during this process,” Mr. Gregg said, “that this will not work for me, as I have found that on issues such as the stimulus package and the census, there are irresolvable conflicts for me.”

“We are functioning,” he added, “from a different set of views on many critical items of policy.”

Yep.

In other news:

• David Sirota is a fine writer.  Unfortunately, he is temporarily insane.  Note to David: Stop digging.
• Paul Krugman is eating harshmellows this morning in Failure to Rise.  No wonder economics is called the Dismal Science. He’s also sounding critical of the Obama Administration’s lackluster response to this crisis, which can only mean one thing- Paul is a racist.  Will someone please send him his complimentary white sheet and “So, you’ve decided to become a racist?” Welcome package?
• Nouriel Roubini lays out the steps for making the banking system solvent again.  There is a continuum from footing the bill for the banks, and sticking taxpayers for the whole damn thing, to nationalizing the banks and forcing the bankers and shareholders to take a loss.  Roubini is advocating the latter because at this stage of the game, that’s where we’re headed if we want to keep the crisis from spreading.  Guess which approach on the continuum Obama wants to take?  Trick question!  Nobody really knows.  He wants a public/private investment scheme.  It’s probably some post partisan yada-yada-yada.  If it’s neither Democratic or Republican, it must be good because it pisses everyone off equally.   Right?
• Don’t miss the Planet Money podcasts I mentioned yesterday if you want to understand what’s going on with finance and the banking industry.  They’re easy to understand and jargon free.  They break concepts down to bite sized pieces so that everyone gets it.  Before long, you’ll be slinging “tranches” and “haircuts” like Paul Krugman.  Er, without the tenure and the Nobel Prize.  But seriously, folks, knowledge is power and the sooner we know what’s really going on, the harder it will be for Obama and his banker buddies to snooker us.  We don’t want them to yank our chains and distract us.  We want to be able to follow the money.  So, download the podcasts and learn about this nauseating money stuff even if you think you’re going to hate it. (You won’t, trust me)  It’s well worth the effort.  You can start here at This American Life’s episode on The New Boss.  Skip to Act III: Fifteen Trillion Dollar Dismal Science Experiment, which is the background of the Japanese lost decade, which we seem hellbent on repeating.  Then, follow it up with more of Adam Posen’s explanation of the Japanese model and bank nationalization in Get Tougher, Please.  Then go to Alex Blumberg, Adam Davidson and Caitlin Kennedy’s skit on How to Save a Bank. These guys are doing the work of angels breaking down the incomprehensible for the rest of us.  Great job!  Send them some bloggy mojo.

Thursday: What the bankers bought with $600 million.

No seppuku for them.

Last week, we briefly discussed Japan’s lost decade.  In short, it goes like this: Japan’s bubble burst back in 1990-91 with the collapse of their real estate market.  The Japanese government took a mostly hands off approach to the recovery and even imposed some austerity measures, like tax increases.  That made their recession worse.  It wasn’t until 2001 when a new prime minister appointed a whiz of a finance guy that the Japanese economy started to come out of it’s big, black hole.  The remedy that worked was- ta-da-da!- getting tough with the banks.  Yes, the banks were mainlining borrowed money and using it to create even more ingenious ways of making up their lost cash.  Adam Posen called it “gambling with resurrection”.  The Japanese finally realized that being co-dependent to an industry with a gambling addiction was not in anyone’s best interest so they forced the banks into sobriety and voile!, the Japanese economy started to recover.  (I am beginning to see why the banking industry might not have wanted Hillary Clinton.)

Unfortunately, that’s not the approach we in the US are going to take.  No, we are not going to force the banks and bankers to have a day of reckoning.  We are going to postpone the intervention so we can draaaaaggg this recession out.  Why?  Well, to my untrained, non-econ eye, it appears that bankers and their shareholders are more equal than the rest of us wretched refuse.  The recession is going to be hard but not as hard on the bankers as it could be and, really, isn’t that what we all live for?  To make sure that the people who aspired to those positions can live in the style to which they have become accustomed?  YOU may get laid off and have to suffer, but why should they?  If they are living well, they serve as shining beacons on a hill, examples to us all.   We can all look up and say, “My tax dollars paid for that”.  It’s something to be proud of.

OK, some people in Connecticut clearly haven’t gotten the memo that we are to leave the poor bankers and their government welfare bonuses alone.  They are littering the poor, hapless bankers’ yards with furniture, simulating foreclosure.  That just pisses bankers off.  First they have to get Manuel to clean it all up and then they have to fly off to Aspen *weeks* earlier than they intended to.  What do these people want from them??  Isn’t it enough that they may be forced to survive on a measley $500K?

For those of you who want to know what Geithner’s plan means and how it will keep bankers safe, check out the two most recent podcasts from Planet Money:

Get Tougher, Please – Guest Adam Posen describes what needs to be done to banks to shorten the recession sensibly.

How to Save a Bank – A critique of the Geithner’s plan.  It falls short of what needs to be done to banks to shorten the recession sensibly.

At the end of yesterday’s podcast, I got a distinct impression that Adam Davidson and Alex Blumberg felt betrayed and depressed by the whole proposal.  You can hear it in their voices.  Jeez, I hope they weren’t Obamaphiles because that kind of rude awakening sucks, er, is of low quality. But what did we expect from Obama who got nearly a billion in campaign contributions from the Wall Street gang?  They need to keep shooting up and hoping that their brilliant schemes will pay off like one of Ralph Cramden’s “Get-Rich-Quick” ideas.

Oh, and one other thing.  I have read rumors that someone is floating the idea to tap into the Social Security trust fund for cash to get the economy rolling again.  Just a short term loan or something.  Yeah, Yeah, it’s just a parody but let’s just take the idea out of circulation right now.  Some of us who diligently stashed away money in our 401K’s are now looking at pretty fricking bleak retirements.  We may not have time to recover our losses before we’re given our gold watches.  Social Security had better be there for us, especially those of us who have been paying the surplus funds since we started working.  I’ll start my own March on Washington if anyone even *thinks* about tapping into it.

That’s a promise.