Wall Street's 10 Greatest Lies of 2009

via Thom Hartmann's email newsletter:

Lies that justify screwing over Main Street.

By Nomi Prins, AlterNet
Posted on December 28, 2009, Printed on December 29, 2009

On December 13, President Obama declared that he was not elected to help the “fat cats." But the cats got another version of that memo. A day later, 10 of them were supposed to partake in some White House face-time to talk about their responsibilities to the rest of the country, but only seven could make it. No-shows for the "very serious discussion" -- due to inclement New York weather or being too busy with internal bonus discussions to bother with the President -- were Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack and Citigroup Chairman Richard Parsons.

Yes, Obama inherited a big financial mess from the Bush administration – which inherited its set-up from the Clinton administration (financial recklessness, it turns out, is non-partisan) -- but he and his appointees have spent the year talking about fighting risk and excess on Wall Street, while both have grown.

Treasury Secretary Tim Geithner patted himself on the back for making the "difficult and necessary” decisions of fronting Wall Street boatloads of money to cover its losses and capital crunch last fall. Federal Reserve Chairman Ben Bernanke (a Bush-Obama favorite) was named Time Magazine’s Person of the Year for saving the free world as we know it. And Congress is talking "sweeping reform" about a bill that leaves the banking landscape intact, save for some minor alterations. For starters, it doesn’t resurrect the Glass-Steagall Act of 1933, which separated risk-taking (once non-government-backed) investment banks from consumer oriented (government-supported) commercial banks.

Meanwhile, Wall Street is restructuring (the financial equivalent of re-gifting) old toxic assets into new ones, finding fresh ways to profit from credit derivatives trading, and paying itself record bonuses -- on our dime. Despite recent TARP payback enthusiasm, the industry still floats on trillions of dollars of non-TARP subsidies and certain players wouldn’t even exist today without our help.

Wall Street’s return to robustness and Main Street’s continued deterioration are the main takeaways for 2009 that stemmed from the 2008 choices to flush the financial system with capital and leave the real economy to fend for itself. Lies that exacerbate this divide only perpetuate its growth. With that, here is my top 10 list of lies. Please consider adding your own, and let’s all hope for a more honest New Year.

1) The economy has improved.

Earlier this month, Bernanke declared, “Having faced the most serious financial crisis and the worst recession since the Great Depression, our economy has made important progress during the past year. Although the economic stress faced by many families and businesses remains intense, with job openings scarce and credit still hard to come by, the financial system and the economy have moved back from the brink of collapse."

Sure, the economy is better -- if you work at Goldman Sachs or had an affair with Tiger Woods. But while Bernanke, former Treasury Secretary Hank Paulson and Geithner turned the Federal Reserve into a national hedge fund (cheap money backing toxic assets in secrecy), and the Treasury Department into a bank insurance policy, the rest of the real economy took hit after hit -- starting with jobs.

The national unemployment rate remains at double digits. Despite Washington’s bizarre euphoria about unemployment rates last month being better (they edged down in November to 10 percent from 10.2 percent in October), the number of Americans filing for initial unemployment insurance rose during the second week of December. After all the temporary holiday hires, that number will probably increase again. Plus, unemployment rates in 372 metropolitan areas are higher than they were last year.

2) If you give banks capital, they will lend it out.

On Jan. 13, 2009 Bernanke concluded that "More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.” He said that "Our economic system is critically dependent on the free flow of credit." He was referring to the big banks. Not the little people.

Ten months later, though, he admitted that, "Access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses” and that “bank lending has contracted sharply this year."

In other words, big banks don’t share their good fortunes. Shocking. And as a result, bankruptcies are rapidly rising for businesses and individuals – a direct result of lack of credit coupled with other economic hardships like job losses.

Total bankruptcy filings for the first nine months of 2009 were up 35 percent to 1,100,035 vs. the same period in 2008. The number of business bankruptcies during the first three quarters of 2009 eclipsed all of 2008. Individual consumer filings totaled 373,308 during the third quarter of 2009 and were up 33 percent vs. the same period of 2008. Tell those people about the free flow of credit, Ben.

3) Taxpayers are being repaid.

On December 17, the Treasury Department announced: ”As a result of our efforts under EESA (the Emergency Economic Stabilization Act that spawned TARP), confidence in our financial system has improved, credit is flowing, and the economy is growing. The government is exiting from its emergency financial policies and taxpayers are being repaid.”

Even as banks rush to repay TARP in order to get the government off their backs before annual bonuses are set, the Treasury Department is helping them out. On December 11, the Internal Revenue Service gave government-subsidized banks a tax exemption that, for instance, allows Citigroup to keep the benefit of $38 billion. Three days later, Citigroup announced its $20 billion repayment of TARP. Get the math? Not exactly a taxpayer windfall.

Additionally, the FDIC gave banks including Citigroup, Bank of America, and JPMorgan Chase a holiday gift -- at least a six-month break from having to raise capital to support the billions of dollars of securities (read: toxic assets – remember those?) that firms are going to have to add to their books in 2010. That will open a whole new can of worms – a glimpse into either insolvency and a replay from the too-big-to-fail scenario, or book-cooking (the Financial Accounting Standards Board, as of last year, has allowed banks to price their own assets if there’s no true market for them – fun times), or both. Meanwhile, banks can use the capital for bonus payments instead.

4) Homeowners are being helped.

Last year’s big lie was that banks would turn around and help their borrowers if they got federal money. Yet, they were under no obligation to do so, and thus, they didn’t.

Since the Obama administration released guidelines for the Home Affordable Modification Program (HAMP) on March 4, 2009, the HAMP permanent loan modification numbers have been anemic.

Separately, by almost every measure, mortgage and credit problems are worse this year than last. There were almost a million new foreclosure fillings in the third quarter of this year, 5 percent more than in the second quarter, and 23 percent more than during the third quarter of 2008.

Plus, foreclosures are not abating. Mortgage delinquencies (borrower 60 or more days overdue) increased for the 11th quarter in a row, reaching a national average record of 6.25 percent for the third quarter of 2009. Delinquencies precede foreclosures. Compared to last year, mortgage borrower delinquencies are up 58 percent. Meanwhile, banks are sitting on properties they acquired to avoid selling them into the market and having to book the resultant loss.

5) Big banks will help small businesses.

On October 24, because a whole year had passed without this happening, Obama declared, “It's time for our banks to stand by creditworthy small businesses and make the loans they need to open their doors, grow their operations and create new jobs."

Small businesses, which employ half of all private sector employees, had received less than $400 million in new loans under government programs, and were granted access to just one program that buys up to $15 billion in securities tied to small business loans. According to the Small Business Administration (SBA) the number of approved loans shrunk from 124,360 in 2007 to 69,764 in 2009 (it was 93,541 in 2008).

Two months later, since that didn’t work, Obama reiterated, “given the difficulty business people are having as lending has declined, and given the exceptional assistance banks received to get them through a difficult time, we expect them to explore every responsible way to help get our economy moving again." He asked the big bank chiefs to take "extraordinary" steps to revive lending for small businesses and homeowners.

Too bad banks don’t gear their business strategy to expectations and suggestions. Still, as a gesture of good faith, Bank of America promised to kick in an extra $5 billion more to small- and medium-sized businesses next year. JP Morgan Chase promised to increase lending by $4 billion. Goldman had already decided to go the pledge route a few weeks earlier, putting up half a billion dollars in small business “charity" to help its deservedly negative image.

To make up for what the banks aren’t doing, the Obama administration is setting aside $30 billion from the financial bailout fund to stimulate lending to small businesses.

6) The Fed values transparency.

On February 10, Bernanke told the Committee on Financial Services that he "firmly believes that central banks should be as transparent as possible. Likewise, the Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet."

Yet, on March 5, the Fed refused to comply with a Freedom of Information Act request and lawsuit filed by Bloomberg News to disclose the details of its 11 lending facilities. In front of the Senate Budget Committee, and in response to a question from Senator Bernie Sanders, I-VT, about naming the firms that got money from those facilities, Bernanke said "No" -- such disclosure would be "counterproductive" and risk “stigmatizing banks."

Undaunted by this irony, on May 5, before the Joint Economic Committee, Bernanke reiterated, “The Federal Reserve remains committed to transparency and openness and, in particular, to keeping the Congress and the public informed about its lending programs and balance sheet.” He told PBS NewsHour on July 28 that “We are completely open to providing any information Congress wants.”

To date, the Fed has not disclosed the recipients of its cheap loans for toxic collateral.

7) History will not repeat itself.

In the beginning of the year, Obama said of Wall Street firms, “There will be time for them to make profits, and there will be time for them to get bonuses. Now is not that time.”

He also said that "part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.”

Yeah. Wall Street’s really into restraint....

Nine month later, as banks were racking up record profits and bonuses, Obama said the same thing, in different words, in his September 14 Federal Hall speech. “We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses… the old ways that led to this crisis cannot stand...History cannot be allowed to repeat itself.”

The only problem? History was repeating itself, as he spoke. Big banks took more risk in 2009, and posted more of their profits from trading operations than they had before they nearly collapsed in 2008. Trading profits at the top five banks rose from a $608 million loss in 2008 to $118.5 billion for annualized 2009, and $61.7 billion in 2007.

8) The pay czar will fight against – pay.

Treasury Department pay czar Ken Feinberg was supposedly appointed to keep a lid on excessive compensation for companies sitting on federal bailouts. Two problems with that: first, the Treasury Department continues to ignore the fact that the TARP portion of the bailout was only a tiny portion of the full bailout, and second, Wall Street was pushing back and winning at every turn.

For instance, after announcing he’d cap compensation for the top 25 execs at AIG, on October 23, Feinberg gave three of them a pass. These men were apparently “particularly critical to the company's long-term financial success.” Turning to his other role as Wall Street’s mouthpiece, Feinberg made excuses for AIG. “AIG compensation practices are unique. We took into account independent, very credible opinions of others to come up with a package that we think will help AIG thrive." That’s nice.

But he’s not kidding about thriving – those three employees will receive bonuses of about $4 million, $5 million and $7 million. AIG’s new CEO, Robert Benmosche, who joined AIG in August and got his pay approval out of the way on October 2, is bagging $10.5 million in annual compensation, including $3 million in cash, $4 million in stock options and $3.5 million in annual performance bonuses.

Then, on November 12, Feinberg said he was "very concerned" about scaring away top talent at the seven firms that took the biggest bailouts. Way to keep a lid on it, Ken.

But to be fair, it’s not really Feinberg’s fault. New York Fed and Treasury Department officials have been urging him to dial back restrictions for AIG folks in 2010 as well. Why? Because restricting pay will make it harder for the government to get back its loans to AIG. Right. Somehow paying these people stupid sums of money is the only way to get our money back. Because their "talent" worked out so well going into last year.

Elsewhere on Wall Street, the top six banks are getting set to pay out $150 billion in bonuses ($10 billion more than in 2008). GS is leading the pack in terms of bonus increases; it will dole out a projected $22 billion in compensation in 2009, compared to $11.8 billion in 2008 and $20.2 billion in 2007. JPM put aside $29.1 billion for 2009, compared to $24.6 billion in 2008 and $29.9 billion in 2007. Wells Fargo is spending $26.3 billion this year, compared to $23.1 billion in 2008 and $25.6 billion in 2007.

9) The lobbyists made us do it.

Going back to the big bank love fest at the White House earlier this month, execs promised to do better on regulation matters, citing a "disconnect" between their steadfast support for regulation and the fact that their lobbyists were pushing for as little new regulation as possible.

Really? Because this disconnect cost the financial sector $334 million so far this year for 2,560 lobbyists; a pittance compared to bonuses, but still, hard-taken cash. I’m sure another $334 million is coming to fight for stricter regulation in the New Year. Not.

10) Citigroup is the picture of health and too-big-to-fail is over.

Once the nation’s largest bank, later its largest bailout recipient, the firm exited its TARP obligation on December 14 with CEO Vikram Pandit stating, "Once Citi repays the $20 billion of TARP trust-preferred securities and upon termination of the loss-sharing agreement, it will no longer be deemed to be a beneficiary of ‘exceptional financial assistance’ under TARP beginning in 2010." (Read: I don’t want to hear about compensation caps anymore!)

He went on to say that, "By any measure of financial strength, Citi is among the strongest banks in the industry, and we are in a position to support the economic recovery."

Shareholders didn’t feel the same way. Citigroup shares already trading well below those of its main competitors have fallen 13.5 percent since that announcement. One of their key clients, the Abu Dhabi Investment Authority, accused the firm of misleading them over a $7.5 billion investment. Plus, in order to come up with the money to pay back the government, they had to raise it in the markets, thus diluting their stock – all to keep their petulant star employees happy at bonus time.

The Citigroup story should be examined for the other big banks. They may talk tough about paying back the government, but underneath they are hurting. And their pain will become our cost again – because nothing fundamental has changed this year, and that means – floating on our public money, these banks are actually still ticking time bombs.

Bonus Lie: Goldman Sachs is sorry.

On November 17, Lloyd C. Blankfein said he was sorry about his firm’s role in the financial crisis. "We participated in things that were clearly wrong and have reason to regret, we apologize." He didn’t say he was sorry the firm is still floated on $43 billion of total subsidies including FDIC guarantees for debt it raised, that were logically supposed to aid consumer oriented banks, and the $12.9 billion it got through the AIG bailout.

Yet the firm has the highest percentage of trading revenue of all the banks that got assistance; in other words, the revenue most linked to risk-taking, at 79 percent, or $38 billion out of $47 billion for annualized 2009. This is up from 41 percent, or $9 billion in 2008, and 68 percent in 2007 and 2006. And as noted before, Goldman leads the bonus sweepstakes for 2009. The firm is probably not very sorry about all of that.

Maybe I’m being too hard on everyone. Maybe all those toxic assets we all forgot about have value now. Maybe bank profits are based on something real. Maybe the increasing reserves against increasing credit losses aren’t happening. Maybe those foreclosures aren’t really happening. Maybe banks aren’t sitting on homes because they don’t want to dump them into the market and ruin the fantasy that prices have hit bottom. Maybe eight million jobs are waiting on the other side of 2010. Maybe I should just send a holiday card to Goldman saying thanks for everything. I’m sorry I ever quit. Maybe Lloyd Blankfein really is God.

Or maybe, the next mammoth pillage will be the one that makes a difference. But I truly don’t want us to have to find out. May 2010 be the start of a more insightful decade.

Nomi Prins is a senior fellow at the public policy center Demos and author of It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street.

Why the Present Depression Will Be Deeper than the Great Crash of 1929

Charles Hughs Smith: (June 4, 2009)

Galbraith's conclusions about the causes of the Great Depression point to why the current Depression will be deeper. Continuing our analysis of The Great Crash of 1929 by John Kenneth Galbraith: by understanding the causes of the Great Depression as elucidated by Galbraith, we can observe the differences between the present and 1929. These reveal why today's Depression will be even deeper than the 1929-1941 one and why today's policy "fixes" as pursued by that great student of Depression, Ben Bernanke, are fighting the last war--a Keynesian stimulus strategy doomed to catastrophic failure. I hesitate to call this topic "important" because such announcements instantly cut my readership in half. Thus I am inclined to call this topic "edgy," "explosive" and "contrarian," all of which sound more interesting than "important" (yawn). Galbraith begins his exploration of causes by noting that "economics does not allow final answers on these matters. But, as usual, something can be said." First, he demolishes the notion that abundant credit caused a speculative orgy. The long-accepted explanation that credit was easy and so people were impelled to borrow money to buy common stocks on margin is obviously nonsense. (page 169) On numerous occasions before and since credit has been easy, and there has been no speculation whatever. Furthermore, much of the 1928 and 1929 speculation occured on money borrowed at interest rates which would have been considered especially astringent. Far more important that rate of interest and supply of the credit is the mood. Speculation on a large scale requires a pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich. (emphasis added, CHS) Next, Galbraith looks to the wellspring of credit which has been virtually nonexistent in our current speculative boom: savings. (Or at least domestic i.e. U.S. savings.) Savings must also be plentiful. If savings are growing rapidly, people will place a lower marginal value on their accumulation; they will be willing to risk some of it against the prospect of a greatly enhanced return. Speculative excess is somewhat self-regulating--or should be unless manipulated by the very state which is pledged to protect the economy from such excesses. Galbraith notes: Finally, a speculative outbreak has a greater or less immunizing effect. The ensuing collapse automatically destroys the very mood speculation requires. Moving from the causes of speculative excess to that of Depression, Galbraith rejects a cyclical cause: "No inevitable rhythm required the collapse and stagnation of 1930-1940." As for the business cycle--expansion of plant, credit and inventory once over-extended, requires a contraction to restore balance--Galbraith grants it viability, but he rejects it as the cause of the Depression: In 1929 the labor force was not tired; it could have continued to produce indefinitely at the best 1929 rate. The capital plant of the country was not depleted. In the preceding years of prosperity, plant had been renewed and improved. Finally, the high production of the twenties did not, as some have suggested, outrun the wants of the people. There is no evidence that their desire for automobiles, clothing, travel. recreation or even food was sated. A depression was not needed so that people's wants could catch up to their capacity to produce. So then what did trigger the Great Depression? Galbraith sets aside the speculative collapse itself for a moment and digs for problems in the real economy. He begins by noting worker productivity rose by 43% between 1919 and 1929 even as wages, salaries and prices all remained comparatively stable. This enabled increasing profits, which due to the large income disparities of the era, flowed largely to the well-to-do. What did the wealthy do with this new-found capital? A large and increasing investment in capital goods was a principal device by which the profits were spent. (page 175) It follows that anything that interrupted the investment outlays--anything, indeed, which kept them from showing the neessary rate of increase--could cause trouble. The effect, therefore of insufficient investment--investment that failed to keep pace with the steady increase in profits--could be falling total demand reflected in turn in falling orders and output. As I understand this, the proximate cause was a vast income disparity which placed much of the prosperous era's profits in the hands of a small wealthy class, who then mal-invested the profits. If that isn't ringing some bells in your head, then please recall that income disparity, which fell from 1946-1970 or so, has been rising ever since. Bingo--profits flowed increasingly into the hands of a elite wealthy class who then squandered/mal-invested the vast profits, undermining the entire economy. Galbraith then turns to the causal relations between the collapse of the speculative stock market and the ensuing Depression. Once again, Galbraith fingers income disparity: 5% of the populace garnered a full third of personal income. This highly unequal income distribution meant that the economy was dependent on a high level of investment or a high level of luxury consumer spending or both. The rich cannot buy great quantities of bread. If they are to dispose of what they receive it must be luxuries or by way of investment in new plants and new projects. As the stock market crashed, those with the most to lose--the wealthy--found their cashflow and capital massively crimped. Since the entire economy was dependent on them spending and investing freely, the economy crashed, too. You see where this leads in terms of the 1990s-2006 boom. The stupendous profits skimmed in the great dot-com boom flowed disproportionately into a few hands, who then mal-invested the gains (in a macro context) in a completely unproductive burst of overbuilt housing and commercial real estate. The ensuing bubble drew in all those who in Galbraith's words believed they deserved to be rich and as those hapless speculators crashed they took the entire middle class of homeowners with them. Galbraith also fingers two other causes of the Great Depression: Faulty corporate structure and flawed banking structure. The parallels to the present are achingly obvious; here's Galbraith's terse description: The fact was that American enterprise in the twenties had opened its hospitable arms to an exceptional number of promoters, grafters, swindlers, imposters and frauds. This, in in the long history of such activities, was a kind of flood tide of corporate larceny. As gargantuan as the flood of corporate larceny was in the 20s, the present era certainly exceeds it by a large margin. Here is Galbraith's trenchant comment about the banking practices of the 20s: Since the early 30s, a generation of Americans has been told, sometimes with amusement, sometimes with indignation, often with outrage, of the banking practices of the late 20s. In fact, many of those practices were made ludicrous only by the depression. Loans which would have been pefectly good were made perfectly foolish by the collapse of the value of the collateral he had posted. The same, I fear, cannot said of the present: millions of guaranteed-to-default mortgages made to impossibly unqualified borrowers were never good nor prudent. The same can also be said of millions of auto/truck loans, millions of credit cards, millions of home equity lines of credit, etc. Even worse, of course, the banks of the present era achieved heights of leverage via off-balance sheet derivatives, the securitization of mortgages and other financial legerdemaine that even the greediest, most venal bankers of the 20s could not even imagine. Lastly, Galbraith blames "the dubious state of the foreign balance," i.e. the imbalance of foreign trade and flow of funds. In 1929, the problem seems to be that the U.S. was a magnet for capital inflows even as it managed a trade surplus. That imbalance doomed the global economy. Now of course we face the opposite imbalance but the same result will follow: the U.S. continues to run a staggering, unprecendented trade imbalance even as it sucks up an unprecedented share of global capital/savings. Galbraith concludes: "Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small. But business in 1929 was not sound; on the contrary it was exceedingly fragile. It was vulnerable to the kind of blow it received from Wall Street." You mean like the evaporation of $12 trillion wealth we've just experienced in the U.S.? But the present is far more fragile and vulnerable than the U.S. economy of 1929, for the following reasons. In 1955 Galbraith could not possibly have foreseen or anticipated these current conditions: 1. A Federal government which since the "Reagan Revolution" of 1981 (e.g. don't tax and spend, just borrow and spend) has borrowed during so-called good times on a scale once reserved for rare Keynesian stimulus to combat serious recession. Thus we find ourselves at unprecedented levels of debt (comparable in terms of GDP to the entire cost of World War II) and our current Depression has barely begun. 2. A corrupt-to-the-core corporate structure riddled with bogus accounting, reliance on financial trickery for profits and misdirected/worthless regulatory oversight. 3. A banking sector of such debauchery and fraud that the excesses of the 1920s are reduced to the pranks of slighty-naughty choirboys and girls. 4. A Federal system of entitlements (Medicare, Medicaid and Social Security) which has grown far faster than the underlying economy for decades and now threatens the very solvency of the government itself, so stupendous are the future obligations. 5. A global military hegemony which costs more than all the other militarys and intelligence operations of the entire world put together. The U.S. military consumes more oil than the nation of Sweden (9 million residents). 6. An industrial, transportation and energy infrastructure that, rather than being rebuilt during the past 26 years of debt-based "prosperity," has crumbled in a long decline. Rather than invest in electrical power grids and energy-efficient transport systems, the U.S. squandered the trillions of borrowed dollars on toys, gewgaws, electronics made elsewhere, malls and commercial towers with only transient value and millions of bloated, inefficient poorly constructed homes no one needed or could afford: "assets" which were not productive at all, "assets" which are now capital traps on a scale heretofore unimaginable 7. A paucity of U.S. savings (and thus of domestic capital) with only one historical parallel: the depths of the Great Depression when unemployment was 25%. 8. A huge reliance on financial leverage, debt, borrowing and trickery for corporate profits; the U.S. exports soybeans, increasingly worthless dollars and "financial innovations" which are now exploding in economies from Ireland to India with the destructive force of superweapons. In exchange for this dubious paper, we have accepted actual tangible goods from the rest of the world. They are now slowly waking up to the fact they've been conned on a scale few can grasp. 9. Globalization has reworked the global supply chain in an astonishingly brief period of time. As a result, the arbitrage of currencies (foreign exchange a.k.a. forex), wages, governance (less is more profitable) and environmental regulations (zero is the most profitable) have all placed advanced post-industrial economies like the U.S. at great structural disadvantages. 10. The U.S. claims to be competitive but much of this competitiveness is highly selective and thus illusory. Everything in the U.S.--labor, goods, buildings and taxes--is high-cost, overregulated (except for finance, banking and governance) and vulnerable to unpredictable lawsuits and officially sanctioned looting. Other than recent immigrants, non-U.S. employers find the workforce is often surly, unappreciative, narcissistic, entitlement-obsessed, unhealthy, poorly educated, unmotivated and more inclined to get-rich-quick schemes than actual enterprise or productivity. The middle management labors under impossible demands to enrich stockholders next quarter and heavy turnover insures few stay in any job long enough to learn it effectively. Team cooperation is a doublespeak fraud imposed by "facilitators," creating a phony work environment where employees and managers alike pretend to care. This bogus environment breeds a looting, game-the-system mentality in which everyone is grabbing for all they can before retirement, restructuring, reassignment, resignation or getting fired. A "quarterly profits are God" mentality reduces the workforce (even the good workers) to units of input which are pared back or hired without regard to morale or loyalty. This managerial and cultural pathology makes a mockery of worker loyalty and breeds the very qualities of distrust and "I got mine" attitude which undermines both productivity and workplace happiness. 11. Last but certainly not least, the U.S. economy is highly depedent on cheap, abundant fossil fuels--the very fuels which are in the global depletion phase, happy stories about unlimited natural gas and tar sands to the contrary. For all these reasons, we can anticipate the Depression currently unfolding will be deeper, longer and more destructive than the Great Depression. Let's recount the chain of events which partly parallel the Great Depression and partly diverge in meaningfully more destructive ways from that previous era: 1. The postwar income convergence (i.e the rise of the great middle class, the reduction of poverty and the relative reduction of the Plutocracy's share of national income) reverses in the early 1970s as the "true prosperity" of the postwar era ends and is replaced by income flowing increasingly to the top as stagflation, globalization and the decline of dollar gut the purchasing power of the middle class. 2. The rising productivity of the 50s and 60s slips to the flatline through the 70s and early 80s, only picking up again as computer software and hardware revolutionize the back office, sales, manufacturing, just-in-time shipping/production, etc. 3. Concurrent with this gradual return to productivity is the rise of finance as the key profit-center of corporate America. As income skews ever more heavily to the top 1%/5%, then capital (productive assets) become ever more heavily concentrated in the hands of the financial Plutocracy. The top 1% now owns some 2/3 of the nation's entire productive wealth. 4. As profits rise (from rising productivity) then the profits flow not to wages (which remain flat to down 1975-2009 for all but the top 10% professional class) but to those who own the capital. 5. As the middle class experiences a decline in their income and purchasing power (for reasons cited above: declining dollar, rising income disparity, and wages falling due to global wage arbitrage) then they turn more and more to borrowing and ever greater debt to fund what they have been brainwashed by the media to believe is "the American dream" of imported luxury goods, bloated homes, vacuous cruises, etc. The only other mechanism available to the middle class to increase household income is for Mom/Aunt/Grandmom to enter the workforce, which she does in the tens of millions, with sociological consequences which are still unfolding. 6. This advert/media-driven desire to borrow to fund the "good life" is hugely profitable to the money-center banks, which expand rapidly into mortgage securization, derivatives and consumer credit to the point that they come to dominate corporate profits. 7. The financial Plutocracy, observing that actually producing goods is not very profitable unless you can fix prices as per ADM (Archer Daniels Midlands) or gain government subsidies and tax giveaways (oil lease depreciation, etc.) sinks its capital into the FIRE economy (finance, insurance and real estate), eschewing real-world investments as comparatively unprofitable. Though rarely noted, this is a longstanding trait of capitalism stretching back to 1400-era Venice. When trade became less profitable than mainland farmimg, the Venetian Elite stopped funding trading and bought farms on the mainland. As a side effect, Venice ceased to be a military and trading power. But the Elite remained immensely wealthy. 8. As the tech bubble expands, middle-class investors see the Plutocracy (those with enough capital to qualify as angel investors and vulture, oops, I mean venture capital) reaping huge gains, and they enter the dot-com stock bubble buildup with a vengeance. 9. In a happy accident, the Soviet Empire collapses just as productivity begins its computer-fueled rise in the U.S. In a so-called Unipolar World in which U.S. military, political and financial influence is unrivaled, non-U.S. investors seek the relative safety and high returns (based on appreciation of the dollar) of U.S. financial instruments. 10. The dot-com bubble implodes in a speculative meltdown (dot-bomb), and retail investors (a.k.a. the middle class 401K investors) are devastated. The ephemeral wealth they once possessed, however briefly, fuels their speculative desire to get into the next get-rich-quick game, which just so happens to be "something everyone understands:" real estate and housing. 11. Having exhausted the dot-com play, Elite capital is seeking a new high-profit home. The miracles of derivatives (CDOs, credit default swaps, etc.) and securitized debt (mortgage tranches, etc.) open up vast new opportunities for leverage, off-balance sheet shenanigans and outright fraud/debauchery of credit. As chip wafer plants disappear from Silicon Valley (too dirty, too costly, etc.) then they're replaced with paper: mortgage-backed securities. 12. Sniffing gold in them thar exurban hills, the under-capitalized and over-indebted U.S. working class and middle class reach for the chalice of easy-money gold: leveraged real estate. 13. With the Federal financial regulatory agencies in a Republican/Democrat-enforced somnambulance, the coast is clear for brigands, shysters, fraudsters, con artists, liars, cheats, and assorted riff-raff in the realtor, mortgage and appraisal businesses, who all feed the ravenous maw of the money-center banks' apparently limitless appetite for real estate assets to securitize and leverage in exotic and highly profitable ways. 14. For a wonderful five years circa 2001-2006, the game is afoot and no-down-payment Jill and $100 million bonus Jack are immensely enriched. Meanwhile, the underlying real economy is becoming ever more imbalanced and ever more fragile as real production and real productivity plummet as everyone rushes to the speculative riches of exurban McMansions and malls. 15. This last best speculative leveraged bubble pops, gutting a Wall Street which had grown utterly dependent on leverage, debt, gamed/fraudulent accounting and bubbles for its rising profits. 16. Doubly devastated by the implosion of housing and their stock investments (mostly in retirement funds), the middle class faces the terrible consequences of its 26-year stupor of ever-rising debt and leverage. Alas, the Emperor's clothes are revealed as remarkably transparent. 17. Just as in the Great Depression, to its great surprise, the Elite has also suffered catastrophic losses and declines in capital and income. 18. Having borrowed and squandered trillions of dollars since 1981 on unaffordable entitlements, military misadventures and assorted worthless bridges-to-nowhere pork spending, the Federal government (The Fed and the Treasury) finds that its ability to borrow its way out of its current debt hole somewhat annoyingly limited. The rest of the world has finally caught on to the con, and Chinese university students are openly mocking Treasury Secretary Geithner's Orwellian claim of "we support a strong dollar." The miracle is that he was not pelted with tomatoes and tarred and feathered for making such absurd statements. 19. With the global media concentrated in a scant few corporate hands (less than 10), this pulling away of the curtain is deleted/excised from media coverage in a ruthless campaign of pure "green shoots" propaganda. 20. As the wheels fall off the U.S. economy and the bubbles cannot be re-inflated, fruitless attempts at holding back the tide with incantations (stop, tide, I am Obama/Geithner/Bernanke!) and loopy sand castles (the bottom is in, buy now! Green shoots are sprouting everywhere except in the real economy!) abound. Unresponsive to propaganda, the real world grinds down into a global Depression without visible end. Is this "edgy" enough to be worthy? I hope so.

Health Industry Invests Our Money In—Tobacco!

from Truthout.org:

Canadian, US, UK Life, Health Insurers Investing Heavily in Tobacco Companies

Friday 05 June 2009

by: Agence France-Presse | Visit article original @ Agence France-Presse

Life and health insurance companies retain major
investments in the tobacco industry. (Photo: Bloomberg)

Canadian firm Sun Life has $1 billion in two companies.

Major U.S., Canadian and British life and health insurance companies have billions of dollars invested in tobacco companies, says a study published in the New England Journal of Medicine.

Wesley Boyd, the study's lead author, found that at least $4.4 billion US in insurance company funds are invested in companies whose affiliates produce cigarettes, cigars and chewing tobacco.

"Despite calls upon the insurance industry to get out of the tobacco business by physicians and others, insurers continue to put their profits above people's health," said Boyd, a faculty member of Harvard Medical School.

"It's clear their top priority is making money, not safeguarding people's well-being," he wrote.

Tobacco is considered the leading cause of lung cancer and a major risk factor for heart attack, stroke, pulmonary disease and cancer.

According to the World Health Organization, it is a contributing factor in 5.4 million deaths a year.

Researchers first revealed that health and life insurance companies had major investments in tobacco companies in 1995 in an article in the British medical journal Lancet.

"Although investing in tobacco while selling life or health insurance may seem self-defeating, insurance firms have figured out ways to profit from both," Boyd wrote.

"Insurers exclude smokers from coverage or, more commonly, charge them higher premiums. Insurers profit - and smokers lose - twice over."

According to the study, U.S. insurer Prudential Financial Inc. has $264.3 million invested among three U.S. tobacco companies, including Reynolds America and Philip Morris.

Canadian insurer Sun Life Financial Inc., which sells life, disability and health insurance, has a stock portfolio with more than $1 billion in two tobacco companies, including $890 million in Philip Morris.

Prudential Plc, which sells health and disability insurance, has $1.38 billion in two tobacco companies, including British American Tobacco.

The study also details the substantial tobacco investments of the U.S. firms Northwestern Mutual and Massachusetts Mutual Life, and the Scottish firm Standard Life Plc.

Texas bank demolishes high end subdivision in California

World Socialist Web Site:

Bank demolishes new Southern California homes, citing low profit-potential

By Shannon Jones
8 May 2009

The bank-ordered razing of a new housing development in Victorville, California, highlights the bankruptcy of the profit system under conditions of the deepening recession and growing social misery.

Texas-based Guaranty Bank has decided to have 16 homes destroyed in the desert community because the estimated $1 million cost to complete them was more than it could make selling them. Four of the luxury homes, priced in the $280,000-350,000 range, were already finished, and the others were in various stages of completion. The estimated cost of the demolition was over $100,000.

According to a report in the Los Angeles Times, the median new home price in San Bernardino County, where Victorville is located, is $160,000, down 43 percent in one year. Banks foreclosed on 236,000 homes in California in 2008.

A video of the demolition was broadcast on You Tube. According to the report, the bank has another 20 California homes slated for demolition in Temecula, about an hour and a half to the south.

Work began on the development in 2007, before the full impact of the bursting housing bubble hit Southern California. Construction stopped last summer, and the bank took back the property from the developer in December 2008 through foreclosure.

According to a report in the May 7 Wall Street Journal, thousands of construction projects across the United States lie idle. It cites New York-based Real Analytics Inc., “which estimated that there were 3,929 distressed commercial properties across the US as of March 31—a 55 percent jump since Dec. 31, 2008.”

According to one research firm, some 250 residential developments have been halted in California, comprising over 9,300 homes.

The Journal points to environmental and health concerns over the growing number of abandoned or idle construction sites. In the case of the project demolished in California, Guaranty Bank justified the action on the grounds that it wanted to create a “safe environment” by preventing squatters from taking over the homes.

A spokesman for Guaranty Bank told the San Jose Mercury News, “The current economic environment requires difficult decisions be made by the government, by banks and by individuals. We made the difficult decision to return the site to a safe, clean and undeveloped state keeping in mind the best interests of the community and our shareholders.” The bank indicated that once the demolition is completed the property will be put back on the market.

One Victorville city official defended the bank’s decision, saying, “It just didn’t pencil out for them. They’d have to spend a lot of money to turn around and sell the houses. They just made a financial decision to demolish them.”

The demolition of the houses shocked many. Ron Willemsen, the president of Intravaia Rock and Sand, the company that handled the demolition, told the LA Times, “It’s a waste of a lot of resources and perfectly good construction.”

The federal Office of Thrift Supervision recently cited Guaranty Financial Group, the parent of Guaranty Bank, for “unsafe and unsound banking practices.” It faces a May 21 deadline to improve its capital ratios or face merger or liquidation. Guaranty has loaned large amounts to home developers and has foreclosed on many projects. Regulators are putting pressure on the bank to come up with a plan to dispose of foreclosed properties.

The decision of Guaranty Bank to destroy brand new homes based on economic calculation points to the destructive irrationality of an economic system based on private ownership and production for profit.

It calls to mind the events of the 1930s, when, in the midst of the Depression, the Roosevelt administration had farmers plough under cotton crops, leave fields fallow and slaughter hundreds of thousands of hogs, to artificially raise agricultural prices by decreasing supplies. This under conditions where millions of people were malnourished.

As in the Great Depression, the products of labor are being destroyed as need mounts. Currently there are some 4 million vacant homes in the US, 3 percent of the total housing stock. Yet the number of so-called economic homeless is on the rise across the United States.

A report titled “The New Homeless” on allgov.com notes, “Tent cities and shelters from California to Massachusetts report growing demand from the newly homeless.” The city of Sacramento, California, recently closed down a tent city after it attracted national media attention. In January, the National Alliance to End Homelessness predicted the economic crisis would force 1.5 million people into homelessness over the next two years.

Madoff's secretary not doing too badly

My FOX New York:

Annette Agrese, Bongiorno's maiden name, had humble beginnings. At John Adams High, a young Annette was a member of the business club.

Fast forward 40 years, she's a secretary married to Rudy Bongiorno -- a former New York City worker on permanent disability. But clearly the couple is living well.

She has a $2.6 million mansion in Manhasset on Long Island and the $1.25 million home in Boca, or as Annette calls it: Casa di Bongiorno.

She has some fancy cars, too, in her three-car garage: Two 2007 Mercedes-Benzes and a 2005 Bentley.

"Annette Bongiorno has millions of dollars of assets that the prosecutors have viewed as a red flag," Heim says. "Her luxury homes, her luxury cars are certainly going to be an item for close scrutiny by the prosecutors because she was a secretary and she's going to have to answer why she was making so much money from the Madoff firm and how she could not have known it was a criminal fraud."

For now Bongiorno continues to enjoy a millionaire lifestyle, secluded behind the walls and gates of her upscale Florida neighborhood.

Annette Bongiorno has not been charged with any crime. Fox 5 News has no direct evidence she committed any crime or that she knew about the Ponzi scheme. What we do know is that she was a loyal Madoff aide for many years

The Equation that Sunk the World's Economy

This reminds me of N-Rays and Flogiston...wacky ideas that were widely believed until they were proved to be mistakes... except this is just a mathematical function, an idea seized upon by financial managers who didn't understand it, but nontheless realized it could be a useful tool to help them make oodles of money. The function isn't a mistake. It's misapplication and misuse, however, have been catastrophic.

Ok, now that I think of it, it reminds me more of "The hunt for weapons of mass destruction in Iraq."

The article goes into great detail. This illustration is just the bare bones of it.

Wired.com:

Here's what killed your 401(k) David X. Li's Gaussian copula function as first published in 2000. Investors exploited it as a quick—and fatally flawed—way to assess risk. A shorter version appears on this month's cover of Wired.

Probability Specifically, this is a joint default probability—the likelihood that any two members of the pool (A and B) will both default. It's what investors are looking for, and the rest of the formula provides the answer.	Survival times The amount of time between now and when A and B can be expected to default. Li took the idea from a concept in actuarial science that charts what happens to someone's life expectancy when their spouse dies.	Equality A dangerously precise concept, since it leaves no room for error. Clean equations help both quants and their managers forget that the real world contains a surprising amount of uncertainty, fuzziness, and precariousness.
Copula This couples (hence the Latinate term copula) the individual probabilities associated with A and B to come up with a single number. Errors here massively increase the risk of the whole equation blowing up.	Distribution functions The probabilities of how long A and B are likely to survive. Since these are not certainties, they can be dangerous: Small miscalculations may leave you facing much more risk than the formula indicates.	Gamma The all-powerful correlation parameter, which reduces correlation to a single constant—something that should be highly improbable, if not impossible. This is the magic number that made Li's copula function irresistible.

The Language of Looting —Michael Hudson

Hudson dismantles the neoliberal corruption of the term "free market"—

more CounterPunch.org:

By MICHAEL HUDSON

"Banking shares began to plunge Friday morning after Senator Dodd, the Connecticut Democrat who is chairman of the banking committee, said in an interview with Bloomberg Television that he was concerned the government might end up nationalizing some lenders “at least for a short time.” Several other prominent policy makers – including Alan Greenspan, the former chairman of the Federal Reserve, and Senator Lindsey Graham of South Carolina – have echoed that view recently.”

--Eric Dash, “Growing Worry on Rescue Takes a Toll on Banks,” The New York Times, February 20, 2009

How is it that Alan Greenspan, free-market lobbyist for Wall Street, recently announced that he favored nationalization of America’s banks – and indeed, mainly the biggest and most powerful? Has the old disciple of Ayn Rand gone Red in the night? Surely not.

The answer is that the rhetoric of “free markets,” “nationalization” and even “socialism” (as in “socializing the losses”) has been turned into the language of deception to help the financial sector mobilize government power to support its own special privileges. Having undermined the economy at large, Wall Street’s public relations think tanks are now dismantling the language itself.

Exactly what does “a free market” mean? Is it what the classical economists advocated – a market free from monopoly power, business fraud, political insider dealing and special privileges for vested interests – a market protected by the rise in public regulation from the Sherman Anti-Trust law of 1890 to the Glass-Steagall Act and other New Deal legislation? Or is it a market free for predators to exploit victims without public regulation or economic policemen – the kind of free-for-all market that the Federal Reserve and Security and Exchange Commission (SEC) have created over the past decade or so? It seems incredible that people should accept today’s neoliberal idea of “market freedom” in the sense of neutering government watchdogs, Alan Greenspan-style, letting Angelo Mozilo at Countrywide, Hank Greenberg at AIG, Bernie Madoff, Citibank, Bear Stearns and Lehman Brothers loot without hindrance or sanction, plunge the economy into crisis and then use Treasury bailout money to pay the highest salaries and bonuses in U.S. history.

Terms that are the antithesis of “free market” also are being turned into the opposite of what they historically have meant. Take today’s discussions about nationalizing the banks. For over a century nationalization has meant public takeover of monopolies or other sectors to operate them in the public interest rather than leaving them so special interests. But when neoliberals use the word “nationalization” they mean a bailout, a government giveaway to the financial interests.

Doublethink and doubletalk with regard to “nationalizing” or “socializing” the banks and other sectors is a travesty of political and economic discussion from the 17th through mid-20th centuries. Society’s basic grammar of thought, the vocabulary to discuss political and economic topics, is being turned inside-out in an effort to ward off discussion of the policy solutions posed by the classical economists and political philosophers that made Western civilization “Western.”

Today’s clash of civilization is not really with the Orient; it is with our own past, with the Enlightenment itself and its evolution into classical political economy and Progressive Era social reforms aimed at freeing society from the surviving trammels of European feudalism. What we are seeing is propaganda designed to deceive, to distract attention from economic reality so as to promote the property and financial interests from whose predatory grasp classical economists set out to free the world. What is being attempted is nothing less than an attempt to destroy the intellectual and moral edifice of what took Western civilization eight centuries to develop, from the 12th century Schoolmen discussing Just Price through 19th and 20th century classical economic value theory.

Any idea of “socialism from above,” in the sense of “socializing the risk,” is old-fashioned oligarchy – kleptocratic statism from above. Real nationalization occurs when governments act in the public interest to take over private property. The 19th-century program to nationalize the land (it was the first plank of the Communist Manifesto) did not mean anything remotely like the government taking over estates, paying off their mortgages at public expense and then giving it back to the former landlords free and clear of encumbrances and taxes. It meant taking the land and its rental income into the public domain, and leasing it out at a user fee ranging from actual operating cost to a subsidized rate or even freely as in the case of streets and roads.

Nationalizing the banks along these lines would mean that the government would supply the nation’s credit needs. The Treasury would become the source of new money, replacing commercial bank credit. Presumably this credit would be lent out for economically and socially productive purposes, not merely to inflate asset prices while loading down households and business with debt as has occurred under today’s commercial bank lending policies.

How neoliberals falsify the West’s political history

The fact that today’s neoliberals claim to be the intellectual descendants of Adam Smith make it necessary to restore a more accurate historical perspective. Their concept of “free markets” is the antithesis of Smith’s. It is the opposite of that of the classical political economists down through John Stuart Mill, Karl Marx and the Progressive Era reforms that sought to create markets free of extractive rentier claims by special interests whose institutional power can be traced back to medieval Europe and its age of military conquest.

Economic writers from the 16th through 20th centuries recognized that free markets required government oversight to prevent monopoly pricing and other charges levied by special privilege. By contrast, today’s neoliberal ideologues are public relations advocates for vested interests to depict a “free market” is one free of government regulation, “free” of anti-trust protection, and even of protection against fraud, as evidenced by the SEC’s refusal to move against Madoff, Enron, Citibank et al.). The neoliberal ideal of free markets is thus basically that of a bank robber or embezzler, wishing for a world without police so as to be sufficiently free to siphon off other peoples’ money without constraint.

The Chicago Boys in Chile realized that markets free for predatory finance and insider privatization could only be imposed at gunpoint. These free-marketers closed down every economics department in Chile, every social science department outside of the Catholic University where the Chicago Boys held sway. Operation Condor arrested, exiled or murdered tens of thousands of academics, intellectuals, labor leaders and artists. Only by totalitarian control over the academic curriculum and public media backed by an active secret police and army could “free markets” neoliberal style be imposed. The resulting privatization at gunpoint became an exercise in what Marx called “primitive accumulation” – seizure of the public domain by political elites backed by force. It is a free market William-the-Conqueror or Yeltsin-kleptocrat style, with property parceled out to the companions of the political or military leader.

All this was just the opposite of the kind of free markets that Adam Smith had in mind when he warned that businessmen rarely get together but to plot ways to fix markets to their advantage. This is not a problem that troubled Mr. Greenspan or the editorial writers of the New York Times and Washington Post. There really is no kinship between their neoliberal ideals and those of the Enlightenment political philosophers. For them to promote an idea of free markets as ones “free” for political insiders to pry away the public domain for themselves is to lower an intellectual Iron Curtain on the history of economic thought.

[. . .]

How the Economy Was Lost - Paul Craig Roberts

...how it could easily have been fixed, and why it's not going to be...

A long article from CounterPunch.org:

February 24, 2009

Doomed by the Myths of Free Trade

How the Economy was Lost

By PAUL CRAIG ROBERTS

The American economy has gone away. It is not coming back until free trade myths are buried six feet under.

America’s 20th century economic success was based on two things. Free trade was not one of them. America’s economic success was based on protectionism, which was ensured by the union victory in the Civil War, and on British indebtedness, which destroyed the British pound as world reserve currency. Following World War II, the US dollar took the role as reserve currency, a privilege that allows the US to pay its international bills in its own currency.

World War II and socialism together ensured that the US economy dominated the world at the mid 20th century. The economies of the rest of the world had been destroyed by war or were stifled by socialism [in terms of the priorities of the capitalist growth model. Editors.]

The ascendant position of the US economy caused the US government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with America’s cold war and foreign policies. For example, Turkey’s US textile quotas were increased in exchange for over-flight rights in the Gulf War, making lost US textile jobs an off-budget war expense.

In contrast, countries such as Japan and Germany used industrial policy to plot their comebacks. By the late 1970s, Japanese auto makers had the once dominant American auto industry on the ropes. The first economic act of the “free market” Reagan administration in 1981 was to put quotas on the import of Japanese cars in order to protect Detroit and the United Auto Workers.

Eamonn Fingleton, Pat Choate, and others have described how negligence in Washington DC aided and abetted the erosion of America’s economic position. What we didn’t give away, the United States let be taken away while preaching a “free trade” doctrine at which the rest of the world scoffed.

Fortunately, the U.S.’s adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to America’s diminishing economic prowess.

This furlough from reality ended when Soviet, Chinese, and Indian socialism surrendered around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly, American and other first world corporations discovered that a massive supply of foreign labor was available at practically free wages.

To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.

As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.

“Free market economists” covered up the damage done to the US economy by preaching a New Economy based on services and innovation. But it wasn’t long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs. In America, the hardest hit have been software engineers and information technology (IT) workers.

The American corporations quickly learned that by declaring “shortages” of skilled Americans, they could get from Congress H-1b work visas for lower paid foreigners with whom to replace their American work force. Many US corporations are known for forcing their US employees to train their foreign replacements in exchange for severance pay.

Chasing after shareholder return and “performance bonuses,” US corporations deserted their American workforce. The consequences can be seen everywhere. The loss of tax base has threatened the municipal bonds of cities and states and reduced the wealth of individuals who purchased the bonds. The lost jobs with good pay resulted in the expansion of consumer debt in order to maintain consumption. As the offshored goods and services are brought back to America to sell, the US trade deficit has exploded to unimaginable heights, calling into question the US dollar as reserve currency and America’s ability to finance its trade deficit.

As the American economy eroded away bit by bit, “free market” ideologues produced endless reassurances that America had pulled a fast one on China, sending China dirty and grimy manufacturing jobs. Free of these “old economy” jobs, Americans were lulled with promises of riches. In place of dirty fingernails, American efforts would flow into innovation and entrepreneurship. In the meantime, the “service economy” of software and communications would provide a leg up for the work force.

Education was the answer to all challenges. This appeased the academics, and they produced no studies that would contradict the propaganda and, thus, curtail the flow of federal government and corporate grants.

The “free market” economists, who provided the propaganda and disinformation to hide the act of destroying the US economy, were well paid. And as Business Week noted, “outsourcing’s inner circle has deep roots in GE (General Electric) and McKinsey,” a consulting firm. Indeed, one of McKinsey’s main apologists for offshoring of US jobs, Diana Farrell, is now a member of Obama’s White House National Economic Council.

The pressure of jobs offshoring, together with vast imports, has destroyed the economic prospects for all Americans, except the CEOs who receive “performance” bonuses for moving American jobs offshore or giving them to H-1b work visa holders. Lowly paid offshored employees, together with H-1b visas, have curtailed employment for older and more experienced American workers. Older workers traditionally receive higher pay. However, when the determining factor is minimizing labor costs for the sake of shareholder returns and management bonuses, older workers are unaffordable. Doing a good job, providing a good service, is no longer the corporation’s function. Instead, the goal is to minimize labor costs at all cost.

Thus, “free trade” has also destroyed the employment prospects of older workers. Forced out of their careers, they seek employment as shelf stockers for Wal-Mart.

I have read endless tributes to Wal-Mart from “libertarian economists,” who sing Wal-Mart’s praises for bringing low price goods, 70 per cent of which are made in China, to the American consumer. What these “economists” do not factor into their analysis is the diminution of American family incomes and government tax base from the loss of the goods producing jobs to China. Ladders of upward mobility are being dismantled by offshoring, while California issues IOUs to pay its bills. The shift of production offshore reduces US GDP. When the goods and services are brought back to America to be sold, they increase the trade deficit. As the trade deficit is financed by foreigners acquiring ownership of US assets, this means that profits, dividends, capital gains, interest, rents, and tolls leave American pockets for foreign ones.

The demise of America’s productive economy left the US economy dependent on finance, in which the US remained dominant because the dollar is the reserve currency. With the departure of factories, finance went in new directions. Mortgages, which were once held in the portfolios of the issuer, were securitized. Individual mortgage debts were combined into a “security.” The next step was to strip out the interest payments to the mortgages and sell them as derivatives, thus creating a third debt instrument based on the original mortgages.

In pursuit of ever more profits, financial institutions began betting on the success and failure of various debt instruments and by implication on firms. They bought and sold collateral debt swaps. A buyer pays a premium to a seller for a swap to guarantee an asset’s value. If an asset “insured” by a swap falls in value, the seller of the swap is supposed to make the owner of the swap whole. The purchaser of a swap is not required to own the asset in order to contract for a guarantee of its value. Therefore, as many people could purchase as many swaps as they wished on the same asset. Thus, the total value of the swaps greatly exceeds the value of the assets.*

The next step is for holders of the swaps to short the asset in order to drive down its value and collect the guarantee. As the issuers of swaps were not required to reserve against them, and as there is no limit to the number of swaps, the payouts could easily exceed the net worth of the issuer.

This was the most shameful and most mindless form of speculation. Gamblers were betting hands that they could not cover. The US regulators fled their posts. The American financial institutions abandoned all integrity. As a consequence, American financial institutions and rating agencies are trusted nowhere on earth.

The US government should never have used billions of taxpayers’ dollars to pay off swap bets as it did when it bailed out the insurance company AIG. This was a stunning waste of a vast sum of money. The federal government should declare all swap agreements to be fraudulent contracts, except for a single swap held by the owner of the asset. Simply wiping out these fraudulent contracts would remove the bulk of the vast overhang of “troubled” assets that threaten financial markets.

The billions of taxpayers’ dollars spent buying up subprime derivatives were also wasted. The government did not need to spend one dime. All government needed to do was to suspend the mark-to-market rule. This simple act would have removed the solvency threat to financial institutions by allowing them to keep the derivatives at book value until financial institutions could ascertain their true values and write them down over time.

Taxpayers, equity owners, and the credit standing of the US government are being ruined by financial shysters who are manipulating to their own advantage the government’s commitment to mark-to-market and to the “sanctity of contracts.” Multi-trillion dollar “bailouts” and bank nationalization are the result of the government’s inability to respond intelligently.

Two more simple acts would have completed the rescue without costing the taxpayers one dollar: an announcement from the Federal Reserve that it will be lender of last resort to all depository institutions including money market funds, and an announcement reinstating the uptick rule.

The uptick rule was suspended or repealed a couple of years ago in order to permit hedge funds and shyster speculators to rip-off American equity owners. The rule prevented short-selling any stock that did not move up in price during the previous day. In other words, speculators could not make money at others’ expense by ganging up on a stock and short-selling it day after day.

As a former Treasury official, I am amazed that the US government, in the midst of the worst financial crises ever, is content for short-selling to drive down the asset prices that the government is trying to support. No bailout or stimulus plan has any hope until the uptick rule is reinstated.

The bald fact is that the combination of ignorance, negligence, and ideology that permitted the crisis to happen still prevails and is blocking any remedy. Either the people in power in Washington and the financial community are total dimwits or they are manipulating an opportunity to redistribute wealth from taxpayers, equity owners and pension funds to the financial sector.

The Bush and Obama plans total 1.6 trillion dollars, every one of which will have to be borrowed, and no one knows from where. This huge sum will compromise the value of the US dollar, its role as reserve currency, the ability of the US government to service its debt, and the price level. These staggering costs are pointless and are to no avail, as not one step has been taken that would alleviate the crisis.

If we add to my simple menu of remedies a ban, punishable by instant death, for short selling any national currency, the world can be rescued from the current crisis without years of suffering, violent upheavals and, perhaps, wars.

According to its hopeful but economically ignorant proponents, globalism was supposed to balance risks across national economies and to offset downturns in one part of the world with upturns in other parts. A global portfolio was a protection against loss, claimed globalism’s purveyors. In fact, globalism has concentrated the risks, resulting in Wall Street’s greed endangering all the economies of the world. The greed of Wall Street and the negligence of the US government have wrecked the prospects of many nations. Street riots are already occurring in parts of the world. On Sunday February 22, the right-wing TV station, Fox “News,” presented a program that predicted riots and disarray in the United States by 2014.

How long will Americans permit “their” government to rip them off for the sake of the financial interests that caused the problem? Obama’s cabinet and National Economic Council are filled with representatives of the interest groups that caused the problem. The Obama administration is not a government capable of preventing a catastrophe.

If truth be known, the “banking problem” is the least of our worries. Our economy faces two much more serious problems. One is that offshoring and H-1b visas have stopped the growth of family incomes, except, of course, for the super rich. To keep the economy going, consumers have gone deeper into debt, maxing out their credit cards and refinancing their homes and spending the equity. Consumers are now so indebted that they cannot increase their spending by taking on more debt. Thus, whether or not the banks resume lending is beside the point.

The other serious problem is the status of the US dollar as reserve currency. This status has allowed the US, now a country heavily dependent on imports just like a third world or lesser-developed country, to pay its international bills in its own currency. We are able to import $800 billion annually more than we produce, because the foreign countries from whom we import are willing to accept paper for their goods and services.

If the dollar loses its reserve currency role, foreigners will not accept dollars in exchange for real things. This event would be immensely disruptive to an economy dependent on imports for its energy, its clothes, its shoes, its manufactured products, and its advanced technology products.

If incompetence in Washington, the type of incompetence that produced the current economic crisis, destroys the dollar as reserve currency, the “unipower” will overnight become a third world country, unable to pay for its imports or to sustain its standard of living.

How long can the US government protect the dollar’s value by leasing its gold to bullion dealers who sell it, thereby holding down the gold price? Given the incompetence in Washington and on Wall Street, our best hope is that the rest of the world is even less competent and even in deeper trouble. In this event, the US dollar might survive as the least valueless of the world’s fiat currencies.

*(An excellent explanation of swaps can be found here.)

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com

Wonder why it seems we have less disposable money?

Surely bankruptcies rates are high because of all that stuff we buy, right? Now that we have two income families, Americans have more money to buy stuff than ever, even adjusted for inflation, don't they?

Things have gotten much worse since this interview was made.

Frontline interview conducted with Elizabeth Warren, professor of law at Harvard University and bankruptcy expert, on Sept. 20, 2004:

Isn't it really simplistic to say that credit cards, ... if you will, ... [are] pushing the bankruptcy rate higher and higher? Isn't it America's lifestyle? Isn't it in the ... consumer culture that we want all these things?

I wish it were. I went into this research with my finger out and sharpened, ready to say to American families, "Bankruptcies are up because you're spending too much on stuff." ... The problem is, when you look at the data, you really actually look at the numbers ... what were a mom, dad and two kids in the early 1970s spending on clothing compared with what a mom, dad and two kids are spending on clothing today? You know what I found? Adjusted for inflation, today's family is spending 22 percent less than the family a generation ago.

How about food, eating out? Surely families are spending much more today than they did a generation ago. No. What the numbers actually show is that they're spending about 21 percent less than they spent a generation ago. Appliances -- today they're buying microwave ovens and espresso machines. ... Turns out, families today are spending 44 percent less on appliances than they spent a generation ago. We could go through the whole list -- furniture, ... floor coverings, tobacco. ... We spend a little more on alcohol, but all those other things are down, down, down. ...

In other words, families aren't going broke because of ordinary consumption. It's just not what the numbers show. Where are families going broke? The mortgage, that's up about 70 times faster than a man's wages over the last 30 years. Health insurance, also up about 70 times faster. A second car, because now Mom and Dad are both in the workforce, and they're more likely to live in a more distant suburb. Child care ... and after-school care, college tuitions. ... Today's family has put two people into the workforce, but for the medium-earning family, they've got 75 percent more money than their parents had a generation ago. But by the time they make those four basic purchases -- the mortgage, their health insurance, their cars and their child care -- they have less money to spend on everything else than their parents had a generation ago. American families are under the gun financially, but they're under the gun because of big purchases, mortgages, health insurance ... two cars, child care. ... They're not under the gun because they spent too much when they went to the mall. Families are just trying to make it in the heart of the middle class, and expenses have just shot out of the reach of the medium-earning family.