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Pol/Econ Government
Pol/Econ: Our Kleptocracy: Saving the American economy by looting it
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Tuesday, 05 May 2009 Written by Garrett Johnson

Paul Krugman recently pointed out that wages are falling across America. A week earlier the Treasury Department reported that tax revenue was collapsing at a 14% rate.

  It's easy to see the correlation between these two trends. But what do they have to do with this statement? Everything.
  Sen. Dick Durbin (D-Ill.) has been battling the banks the last few weeks in an effort to get 60 votes lined up for bankruptcy reform. He's losing.
      "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place,"

  The first thing to understand is that the banking industry adds nothing to the economy. It doesn't sow crops, make widgets, build homes, or fix your computer. The financial industry sits on top of the real economy in the same way a fungus grows on a tree. In fact, as famous investor John Bogle said a few years before the massive bailouts, the financial sector actually subtracts from the economy.
  "My estimate is that the financial sector takes $560 billion a year out of society," Bogle explains to Bill Moyers. "Banks, money managers, insurance companies, certainly annuity providers. They're all subtracting value from the economy."
  If you add Senator Durbin's comments with John Bogle's, you have a classic case of the tail wagging the dog. The real problem happens when the tail has no regard for the welfare of the dog. We passed that point in the 1980's and only now we are seeing the effects of making that decision.
   Sixteen years ago Nobel-prize economist George Akerlof wrote that investors in the S&L scandal “acted as if future losses were somebody else’s problem. They were right.” Someone trying to make an honest buck would have "operated in a completely different manner." Instead, they looted.

  Does this sound familiar? If it doesn't, you haven't been paying attention.

Living with our choices

  Economists are already floating the concept that Americans better get used to a lower standard of living.
  Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.
...
  Layoffs now taking place are similar to those in the 1981-1982 recession, when unemployment peaked at 10.8 percent and 2.8 million jobs disappeared, leaving industries such as durable-goods manufacturing permanently smaller. Some 14 percent of durable-goods positions vanished in that slump, and the sector never regained the employment level of June 1981.
  It's funny that they should mention the 1981-82 recession. The obvious implication is that this is simply a matter of the periodic creative destruction of capitalism, and that we should just accept it.
   However, as William Greider describes in his excellent book The Secrets of the Temple, the fallout from that deep recession was so bad because the Federal Reserve made choices. They chose to leave real interest rates at abnormally high levels.
   Manufacturing and farming was destroyed while financial assets boomed during the the mid-80's because of one reason and one reason alone: the Federal Reserve decided who was going to be the winners and who was going to be the losers.

   The same is true this time around.

The Predator Class

“When a woman thinks that her house is on fire, her instinct is at once to rush to the thing which she values most. It is a perfectly overpowering impulse, and I have more than once taken advantage of it. . . . A married woman grabs at her baby; an unmarried one reaches for her jewel-box.”
  -- Sherlock Holmes from A Scandal in Bohemia

  When a central bank is on fire it will rush to save what it thinks is most important - the bonuses and dividends of the Wall Street clientele. It never considers what will happen to the real economy.
  Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia. Instead, predation has become the dominant feature—a system wherein the rich have come to feast on decaying systems built for the middle class. The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth. But it is the defining feature, the leading force. And its agents are in full control of the government under which we live.

  Our rulers deliver favors to their clients...For in a predatory regime, nothing is done for public reasons. Indeed, the men in charge do not recognize that “public purposes” exist. They have friends, and enemies, and as for the rest—we’re the prey.

  In a predatory economy, the rules imagined by the law and economics crowd don’t apply. There’s no market discipline. Predators compete not by following the rules but by breaking them. They take the business-school view of law: Rules are not designed to guide behavior but laid down to define the limits of unpunished conduct. Once one gets close to the line, stepping over it is easy. A predatory economy is criminogenic: It fosters and rewards criminal behavior.
   - James K. Galbraith
  Galbraith might sound a little melodramatic, but he still hits the nail on the head.
   Bernie Madoff was a piker. Why? Because he thought small. The real Wall Street thieves buy the lawmakers to pass laws to turn their looting into legality.

  It's no secret that a significant part of the Treasury Department and some of Obama's economic advisers are old Goldman Sachs executives (aka Government Sachs). Since the Treasury Department is supposed to be regulating out of control banks like Goldman Sachs, this is a ethical and criminal conflict of interest. Yet no one bats at eye anymore. Why?
   What isn't as well known is the connections between the House and Goldman Sachs.
  Goldman Sachs' new top lobbyist was recently the top staffer to Rep. Barney Frank, D-Mass., on the House Financial Services Committee chaired by Frank.
  Congress is supposed to be the watchdogs of the executive branch, but now it is obvious that both branches of government are owned by the banks they are supposed to regulate.
   Given all this it shouldn't be a surprise that the largest beneficiary of the AIG bailouts was Goldman Sachs.

  Another good example of the rewards of owning the Treasury Department is the Public-Private Investment Program or “PPIP”.
  Investors, which under the original plan would have included Treasury, get to borrow FDIC’s money to buy toxic assets.  This borrowed money comes with no strings attached:  If the assets increase in value, investors get all the upside, proceeds of which they use to pay off the debt.  If assets keep declining, then investors are out their small equity stake, but no more.  FDIC is left holding the bag.

   The WSJ has come out and bluntly said that Congress won't investigate Wall Street. They could be right. Bear Stearns collapsed more than a year ago, and there still hasn't been a real investigation of the banking industry. Have you ever known politicians to be so reluctant to get in front of a camera to fake outrage? They are dragging their feet after trillions of taxpayer dollars in bailouts.

"...our deepest problem is the ascendancy of finance in national policymaking as well as in the gross domestic product, and the complicity of politicians who really don’t want to talk about it.”
   - Kevin Phillips

  In fact, attempts at real regulatory reforms are being effectively blocked by the same banks that were saved with taxpayer money.
  “the banksters are eagerly, shamelessly, and openly harvesting their pound of flesh from financially stressed average taxpayers, and setting off a chain reaction in the auto industry which has the very real risk of creating even larger scale unemployment than the economy already faces. It’s reckless, utterly irresponsible, over-the-top greed.”
  Even the relatively modest "stress test", which was already rigged with unaudited bank information, was delayed by the bankers because it wasn't showing exactly what they wanted it to show.
   These banks can borrow from the Fed at 0% and lend at 4% with little risk, and yet still can't make a profit. Hell, I could make a profit!

The Peasant Mentality

  In places like France, Latvia, Hungary, Greece, and Iceland, the populace is outraged and taking to the streets. Yet here in America a recent Zogby poll found a majority of the public thinks the news media made things worse by reporting the economic collapse.
   It's an amazing disconnect that I found baffling until I read this:
      After all, the reason the winger crowd can’t find a way to be coherently angry right now is because this country has no healthy avenues for genuine populist outrage. It never has. The setup always goes the other way: when the excesses of business interests and their political proteges in Washington leave the regular guy broke and screwed, the response is always for the lower and middle classes to split down the middle and find reasons to get pissed off not at their greedy bosses but at each other. That’s why even people like [Glenn] Beck’s audience, who I’d wager are mostly lower-income people, can’t imagine themselves protesting against the Wall Street barons who in actuality are the ones who fucked them over. . . .

    Actual rich people can’t ever be the target. It’s a classic peasant mentality: going into fits of groveling and bowing whenever the master’s carriage rides by, then fuming against the Turks in Crimea or the Jews in the Pale or whoever after spending fifteen hard hours in the fields.  You know you’re a peasant when you worship the very people who are right now, this minute, conning you and taking your shit. Whatever the master does, you’re on board. When you get frisky, he sticks a big cross in the middle of your village, and you spend the rest of your life praying to it with big googly eyes. Or he puts out newspapers full of innuendo about this or that faraway group and you immediately salute and rush off to join the hate squad.  A good peasant is loyal, simpleminded, and full of misdirected anger.  And that’s what we’ve got now, a lot of misdirected anger searching around for a non-target to mis-punish . . . can’t be mad at AIG, can’t be mad at Citi or Goldman Sachs. The real villains have to be the anti-AIG protesters! After all, those people earned those bonuses! If ever there was a textbook case of peasant thinking, it’s struggling middle-class Americans burned up in defense of taxpayer-funded bonuses to millionaires. It’s really weird stuff.
  It makes one think that the American people would be better off with a monarchy. We seem to want to grovel and bow to our wealthy betters.