Sunday, September 2, 2012

False Savior: Barack Obama (5) - The Bailout Fiasco

The federal rescue of bankers deemed "too big to fail" went far beyond the $812 billion TARP bailout. The federal bailout incorporated funds from a variety of federal agencies - the FDCI, the Treasury Department, and a host of others. Nomi Prins, a Wall Street veteran of 10 years at Bear Stearns and Goldman Sachs (author of "It Takes a Pillage") says the total cost to the U.S. taxpayer was $17.5 trillion ($9 trillion through the Federal Reserve alone).

U.S. officials of course needed to arrest the financial meltdown that nearly crashed the world economy in 2008. However, the U.S. was uncommon among the developed nations in bailing out its banks without any requirement that those rescued extend loans to relieve the credit crisis. This meant that the ingredients of the runaway speculation that produced the 2008 collapse were left in place: large volumes of speculative capital, securitized debt, and the expectation by investment bankers that there would always be a boundless taxpayer bailout fund to save them from their own reckless disregard for prudent financial practice and the requirements of the law.

In other words, we are well on our way to the next catastrophe, with bank profits once again being driven largely by speculative investing. The banks continue to sit on more than two trillion dollars in cash and liquid assets, which they refuse to loan to small and medium size businesses to prevent further layoffs (S&P 500 corporations are also hoarding). Meanwhile, they eagerly extend loans to professional speculators to finance quick capital gains in Chinese properties, Brazilian currency, short selling of Greek bonds, gold futures, and emerging market funds.

We don't know precisely what was done with the bailout funds because the recipients of the money consider it an affront to even be asked. No bank has provided even the most basic accounting of what exactly it has done with the free money, simply replying, "we're choosing not to disclose that." We do know that money was used to speculate in foreign currencies, stocks, and properties abroad, and that banks were allowed to pour money into their own pockets for recapitalization or mergers, and to make loans to government-guaranteed borrowers, thus undermining the alleged purpose of the bailout.

In the wake of the bailout banks showed their gratitude by charging customers higher interest rates (credit card companies successfully thwarted timid Congressional efforts to place a cap of 34 percent on credit card charges and fees), instituting a range of new penalties, and hoarding cash in offshore tax havens while U.S. unemployment soared. At a time when homeowners couldn't get their mortgage loans modified, couldn't get funding for their children's college education except at extortionate rates, and were increasingly denied bank loans they needed to keep their businesses from collapsing, wealthy bankers and corporate executives continued giving themselves enormous bonuses. As the working poor and middle class lost their homes by the millions, or were forced to watch the value of those homes fall below what they owed on their mortgages, companies like A.I.G and Goldman Sachs got reimbursed 100% by the U.S. Treasury for their loans and speculative bets, many of the latter made against the very securities they were aggressively selling.

While Obama clearly rescued Wall Street, he appears to have left Main Street in the lurch. His 812 billion dollar stimulus package had little or no effect on lowering unemployment, which is now higher in "recovery" than it was in the wake of the financial collapse. The problem is insufficient aggregate demand in the wake of Wall Street's looting: consumers can't lead a recovery because they lack the resources to do so after being robbed. And stimulative tricks don't work because no business is going to invest and expand after a tax cut, or hire more workers, if there is no demand for the increased products and services produced by those additional workers. And even Obama policy-makers at the highest levels admit that the bleak outlook will not change anytime soon. Fed Chairman Ben Bernanke, for example, has predicted that it will take until 2016 to return to the level of jobs we had in 2007.

Let's recall the events that brought us to this point. A series of big banks went bust in an avalanche of worthless paper, including Lehman Brothers, Washington Mutual, Merrill Lynch, Wachovia, and the insurance giant AIG. The stock market plummeted several thousand points. Credit markets froze up. Banks of all kinds and sizes were writing down and writing off hundreds of billions of dollars in losses due to collapsing housing markets and an alphabet soup of odd assets like CDOs, CLOs, CDSs, and the like. Former Treasury Secretary Hank Paulson announced that the solution to the problem was to buy up the bad assets. But the banks didn't want to sell those assets at their collapsed market prices, they wanted the public to be forced to buy them at the prices the banks had originally paid for them (but the assets had since lost about 90% of that value). So much for the "free market" never needing state intervention to get prices right: If you're "too big to fail" you get a special deal.

Meanwhile, whereas the Obama "recovery" has been great for Wall Street, it has been the weakest and most lopsided recovery from any of the recessions since 1947. Pre-tax corporate profits almost doubled in just over two years, from $971 billion in December 2008 to $1.876 trillion in March 2011. By early 2012 they surpassed $2 trillion. This while workers' wages were slashed, jobs were eliminated, work hours and benefits were reduced, and gains from rising productivity were channeled exclusively to corporations. So now more than 40 million U.S. workers have no full-time jobs, and earn on average 70% of full-time pay as temp and part-time workers; 47 million are under the official poverty line; and 45 million now receive food stamps, including more than 15 million children. Incidentally, the true number of U.S. jobless is between 23 and 25 million, not the much lower official figure, and the true unemployment rate is between 18 and 19 percent. Between 30 and 40 percent of American homes are under water.

Amidst these dismal circumstances, Obama and the Democrats offer no resistance to cuts in Medicare, Medicaid, employer provided health insurance, Social Security, public employees wages and jobs at all levels of government, pensions, unemployment benefits, and the gutting of middle class tax cuts like the alternate minimum tax and the mortgage deduction. Whereas federal spending should have focused on direct job creation and on reducing homeowners' mortgages and payments, Obama saw that it went instead towards subsidizing a few mortgage leaders and mortgage servicing banks.

And he has proven totally unwilling or unable to create jobs, stop foreclosures and spreading negative homeowner equity, and prevent chronic fiscal crises at the state and local levels. He has, on the contrary, decided to become an austerity hawk, as cutting deficits and the debt became his policy centerpiece by late 2011.

But no economy has ever recovered through austerity measures, and ours won't either. Obama's recovery strategy has failed because the original stimulus was too small and not focused on immediate job creation, but rather, corporate subsidies. It also showed an over-reliance on business tax cuts that were hoarded rather than invested. Obama declined to require bank lending as a pre-condition to receiving bailout funds. He simply disregarded the crisis in jobs, housing, and local budgets, sponsoring an ineffective traditional policy response to the first economic relapse in the summer of 2010, and then eagerly surrendered to Republican focus on deficit cutting and austerity solutions in the face of the second economic relapse in 2011.

As a result, there is now no way the U.S. can recover as the world economy continues to slow. The much celebrated 200,000 a month in job creation largely reflected seasonal and other statistical adjustments and is now a thing of the past. We're in for a long period of suffering.

Austerity, we should keep in mind, is a maneuver by bondholders and bankers to buy time in hopes that somehow "market forces" can be brought under control, so they won't have to sell their bonds at a loss. The Obama administration's three recovery programs since 2009 also represent attempts to buy time. (Economic growth, reflation, liquidation, are the three programs). The subsidies to states, cities, the unemployed, schools, etc. were designed to arrest the massive collapse of consumption that was occurring in '08-'09, but only for one year. After that year, the $300 plus billion in tax cuts passed in 2009 and the additional $802 billion in tax cuts in 2010, were supposed to kick in and produce business investment and job creation in the U.S. But corporations continued to sit on a $2.5 trillion cash hoard, and did not invest in U.S. workers. Meanwhile, U.S. multinationals are sitting on an additional $1.4 trillion in offshore tax havens, in order to avoid paying U.S. corporate income taxes.

While the global capitalist banking system gets constant liquidity injections composed of zero interest loans and "quantitative easing" - the Fed printing up money to buy bad assets from banks and lenders - the economy is not, in fact, re-inflating. The only result has been the Federal Reserve spoon-feeding speculators around the world and juicing up stock markets, real estate, currency speculation and volatility, oil and commodity prices, and financial securities in general. This does nothing to bail out Main Street.

Meanwhile, the portion of income claimed by the richest 1% is its highest share since 1928, just before the U.S. economy collapsed into the Great Depression. According to the CIA's annual World Factbook, which ranks nations on a "Gini" formula designed to measure inequality, the U.S. is in the company of the Philippines, Ecuador and Rwanda in the global inequality derby.

And forget about borrowing to meet your needs. Most banks still refuse to loan at reasonable rates.

We are in the midst of a bankers' strike designed to make U.S. workers pay endless tribute to America's newest Robber Barons.


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