Feeding the Financial Crisis

The situation is easily summarized.

In August 2007, the first clear signs surfaced that the financial sector had been piling up profits and individual payouts by greatly increasing the risk of their investments.  They did this while convincing themselves and nearly everyone else that risk had not really increased.  They used very high leverage, invented new instruments backed with dubious collatoral, etc - all this has been well analyzed in books like Econned.  When many people began to notice the AAA collatoralized debt obligations were junk, their value crashed, along with market averages overall, while highly exposed firms either went out of business (Lehman) or were bailed out by the government -- to the tune of $10-11 trillion (or maybe $29 trillion).

Government debts increased rapidly in Europe and the US.  While some government stimulus for the real economy was provided, it was not enough.  The financial crisis became an economic crisis, and there has been no real recovery -- only 16 of 100 American cities in one survey have recovered even 1/2 of the jobs lost during the initial downturn.  

Four years after the 2007 beginning, the financial sector is again (or still) in systemic trouble.

Hence austerity: austerity, laced with free-market ideology now functioning less as thought than as a paralyzing hangover, is in effect forcing governments to keep all possible government resources liquid for the next bank bailout.

In addition, most observers are convinced that the real problem is not private but public debt.  There is enormous discussion of the bad behavior of Greece, which has to scrape for every ten billion euros while private bank exposures are at least an order of magnitude larger.  Ireland is also going through a finance-created depression but it is rarely mentioned, perhaps because the bad actors there cannot be said to be tax-avoiding shopkeepers but the country's entire banking sector.

Meanwhile, bank reform has been paltry and pushed back through the concentrated efforts of the financial sector.  Regulators can't even see the majority of financial transactions, much less regulate or tax them. The head of the French banking authority recently estimated that opaque transactions form somewhere between 50% and 75% of the total.

There will be no recovery for economies, only for banks.  That is the post-feudal tradeoff that rules policy. 

Thus banks continue to make grotesque fortunes on a scale condemned by all known religions and ethical traditions in the same pre-2007 way, through junk and leverage (pious Deutsche Bank has "assets" (positions) 35x equity), added to which for several years has been essentially zero-interest public money on which they can make an automatic spread, meaning even more free money.  The banks' position seems to be that:

• the government should buy everything forever, meaning unlimited bailouts at a moment's notice
• but the financial sector should pay no tax for govermments
• hundreds of millions of ordinary people should just lower their standard of living accordingly.

There are deep cultural questions lying behind what is obviously a disgusting ethical situation: 

• where did the banks get their sense of entitlement, particularly to salaries in the tens or hundreds of millions of dollars annually for individuals?  Someone who gets mad at the idea of being taxed at more than 15% a year on $300 million, as Steven Schwarzman did, might be described as  insane.
• Why does it seem like the people protesting (e.g les "indignés" of Greece, Spain, Israel, Wall Street) are a tiny minority?  Is it only media (non)coverage or bad coverage?
• Relatedly, why is there no public or popular critique of the entire theory of economies and societies that underlay a banking system that had failed and had to be rescued?
• It is said that (most) "people don't see any alternative," but WHY NOT? There are lots of ideas out there, and even more suffering and depression, so how long will the gelling take?  Sure, the US Democrats and the French Socialists proposed nothing of any importance, but why are people waiting for them? 

The "decline of the West" is being executed from within and from the top.  It's not a conspiracy, it's just how the system's logic is now working.  Governments are protecting extraction at the expense of production.  However, had I been Chairman Mao, believing that heightening the contradictions of capitalism would hasten the system's demise, I couldn't have done better than to gut manufacturing while feeling finance.  Were I to rewrite the Terminator series, I couldn't do better than to replace the military net that generates the Schwarzenegger character with the bots behind program trading (though the pros won't help me with the script).

Nationalizers Inside the House

One of my favorite horror movies is When A Stranger Calls. The line that made my stand up and shriek in a New Jersey theater full of strangers in 1980 comes when a cop calls back the babysitter who's been getting crank calls ("have you checked the children?"). He tells her, "we've traced the call. It's coming from inside the house." Shrieeeek.

Progressive and left economists have been doing this. It's worth reading the whole transcript of Michael Hudson and Robert Kuttner on Democracy Now yesterday. Here's Kuttner:

if you look at Citigroup, the Treasury has put in $45 billion of direct equity capital into Citigroup. It’s guaranteed another $306 billion of toxic assets. You can buy all of Citigroup for about $25 billion. So the taxpayers effectively own it. What the government ought to do is exercise the rights of ownership, go in there, put a majority of public appointees on the board, get rid of existing management. I think in the case of Citigroup, the best thing you could do is break it up, because it is a zombie bank in the sense of it being insolvent. And most of the large banks are insolvent. Their debts exceed their capital. And what Geithner is doing, he’s trying to just disguise this by one more effort to double down using the same kind of financial razzle dazzle that got us into this trouble. So it would be much cleaner to put these banks into receivership.

And if that sounds radical, it is radical, but it’s important to keep in mind that the FDIC, which is the one agency that’s behaved responsibly in this whole mess, the FDIC does this every day of the week.

But here's self-described "free market economists" Matthew Richardson and Nouriel Roubini of NYU's Stern school saying "We're All Swedes Now." Why? Because they have traced the call and it's coming from inside the house:

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.

In other words, they are scared out of their minds.

Same goes for the experienced but polite-society NYT business journalist Joe Nocera, who finds members of his corporate "kitchen cabinet" saying "Nationalize It!" The process all begin with a real stress test, which I prefer to call the Banking Inquisition.

It's interesting to watch a certain kind of capitalist rationality pushing on its long-time advocates. The first element is correct accounting, the second is actual market value, and the third is rights of ownership. The first shows up when a former IMF official tells Nocera that governments must take over insolvent banks: "This is exactly what the I.M.F. tells an emerging market country to do when it is facing a crisis — like Thailand in 1997, or Russia in 1998."

The third shows up in Nocera's final salvo:

Whatever solution winds up working, it is going to cost the taxpayers billions. That’s a given. The S.& L. crisis — which was a piffle compared to what we face now — cost well over $100 billion by the time it was over. In return, shouldn’t the taxpayer be the one to hold the majority ownership stake in the banks? And shouldn’t the government have the right to decide that perhaps Ken Lewis should no longer be running Bank of America? And isn’t the best way to protect taxpayers — the mantra we heard all week long — to take control of what they are financing? It can be done right. It has been before.

We're seeing a convergence of left solutions to the crisis and moderate insider solutions. This is the inside call that is frightening Republicans.

But only the left will follow through with what we really need: a democratized banking system that is much cheaper for the overall economy than the current one. Democratization requires a distribution of knowledge about the financial system that is beyond anything seen so far in modern history.

The reorganized "sustainable economy" party will need the political organization to fend off attacks, but also a vast intellectual base. In addition to the folks mentioned above, there is William Greider on the ongoing banker squeeze on Social Security, and Dean Baker's weekly critiques of the Washington Post's relentless campaign against the big "entitlements." There are excellent longer analyzes like Peter Gowan's in the New Left Review.

Can we have some Principles from all this?

• a end to the financial double standard: a bank may be borrowing at 4% and charging you 21% on your credit card. This has to stop. End it through
• anti-usury laws. these are a subset of
• regulatory equity. Investment firms need to be part of general legal frameworks just like everybody else. And this would lead to:
• tax equity. Financial transactions are largely untaxed. The "Tobin Tax" of even 0.25% on currency trading was one example, has been completely blocked by the financial industry.
  

For any of this to happen, we need massively more consistent popular attention to the financial details coming from the 80-90% of the population that will otherwise be paying the bill. That's where the next call needs to come from.