Dark Skinny

Not long ago, it was suggested that the limping, insolvent but  dollar-insatiable American Bank behemoths should be nationalized. But both American citizens and the US government have recoiled from this idea — What!! — And become a Socialist State, lose all our freedoms, expand government unnecessarily, eventually becoming a welfare state etc….!!?

When we take a steadier, closer look at the current mess of US financial problems and beyond this limiting socialist paranoia, the question inevitably comes up - What are the current policies actually achieving - if anything -  from the present extension of the blurry shovel-as-much-money-into-Wall-Street-Banks-and-let’’s-see-what-happens strategy from the Bush/Bernanke/Paulson  legacy? Has it worked? Or is it working?

Apparently not. Corruption, distrust and fraud are all alive and well  in Wall Street whose natural greed accepts all such rescue donations without conscience, never failing to give  a big fat zero in return. AIG, that derivative leviathan with a too-big-to-fall rep, is a prime and dirty example. The US govt. gave billions of US  taxpayer’s money in support of this financial institution, those billions quickly disappearing out the backdoor of AIG and onto the balance sheets of the likes of Goldman Sachs and JP Morgan Chase who both - quite remarkably and so unexpectedly - reported a surprising rise in profits last month against all expectations.  Ah yes, I keep forgetting, this is all normal and acceptable Wall Street behaviour. Yes, yes, I forgot - it’s all about the Free Market principle isn’t it? Well I guess we must all be in a Bull market then….

OK, let’s get back to considering nationalizing the insolvent US banks. Let’s look at this as a possible way of saving the big US banks. The main arguments against this strategy, as I’ve already said,  are that it is apparently a dangerously socialist policy, and very un-American. I’ve said it before and I’ll say it again - economics is a fairly pure science, politics is a dirty science at best. Good economics has little or nothing to do with politics. To disallow a policy - bank nationalization - that could well save both the financial infrastructure as well as the major financial institutions within the US must be considered against all the questionable socialist paranoia that is so aptly promoted by the US media.

The engendered paranoia of turning the US into a socialist state seems to blind people to the great advantages of temporary nationilization. Maybe we should look at history.

In the ’90s there was a major bank crisis in Europe, which badly affected the Swedish, Norweigian and Netherland banking systems - forcing many of their major banks towards the edge of bankruptcy. The solution — you’ve guessed it — was to nationalize these all important banks. But it didn’t stop there, because after the banks returned to proper economic balance and the crisis passed, all these banks were then re-privatized when they  bought-back — by contractual agreement — all holding shares from their various governments. Result: Full banking recovery and no taxpayer money lost or ill-spent by these governments. Therefore unquestionably in this instance, this economic  strategy cannot be defined as a Socialist policy at all - because the banks were re-privatized soon after recovery. So, to call the outcome of this temporary nationaization a Socialist policy is a little unfair, somewhat amusing, and bears no thought or consideration for the fact that this very strategy is what economically saved the banks in these European countries in the ’90s. Indeed, other European governments are implementing these same temporary bank nationalization policies in the current crisis.

And now let’s take a peek at the current Obama financial policies which leads me quickly to another question. Can anyone out there, an economic guru or academic, name me one successful applicable instance in economic history or indeed any convincing evidence at all  where endlessly shoveling of taxpayer’s money into failing, insolvent  banks, changing the “fair value” rules to “cheat” bank insolvency, constant tax cuts, reshuffling wealth distribution, trickle-down economics(not a drop has reached US citizens in nearly 2 years), a massive increase in infrastructure and Medicare projects - has actually worked to successfully recover any economy?  Even Roosevelt’s expansive New Deal policies in 1933 - very similar to the current  US mega-spend policies now -  were never considered as a successful economic tactic against the deflation of the 1930’s.  Most economists now freely admit that it was WW ll — about 14 years later  — that pulled the US out of its Depression. The only recent historic and economic  parallel that comes close to the current US financial crisis is the continuing financial crisis in Japan which began over 18 years ago - and their economy  is still stagflating. The Japanese government similarly threw billions at the wall, and kept interest rates low - just like the Fed are doing now. Deja vu ?

Or is the US government aiming its strategy solely at another misty economic mark? Perhaps their clumsy Keynesian economics has re-sighted its intellectual popguns  in an attempt to appeal to and sucker that most elusive of all market entities - Market Confidence - back into the bull-ring. Trouble is that the US government’s policies are all biased towards investors - that’s Wall Street - and very few of the US government’s current policies are likely to enveigle or encourage any its citizen into spending their hard earned salaries.  At the moment and understandably, these citizen salaries are being used to desperately pay off debts and mortgages, and any savings are being hoarded in a similar way as all the Wall Street investment banks. So we finally have the situation where the big financial institutions aren’t lending to each other because they don’t know to what extent their own brother banks own toxic debt. Similarly, the ordinary US citizen has also changed their behaviour, now saving and hoarding, in full knowledge that  wages and salaries will probably remain static for a long time(if they still even have a job) amidst the constant erosion of  dollar value from inflation due to the Fed’s blessed and incessant Quantitative Easing policies.

So the banks still aren’t lending, and the ordinary, bewildered US citizen is similarly desperately hoarding what’s left of their pennies - but the CPI inflation chart shows no positive change, continuing to nose-dive ever closer to the bane of negative inflation(deflation).  And the velocity of money is at a  precarious standstill - all have taken flight into US Treasuries - nobody is spending or lending,  so disinflation is likely to continue unabated while the production of vast quantities of US fiat notes steadily  hits the streets at a completely uninspiring, breakneck pace. And still the US government hurls truckloads of these paper dollars into the hungry coffers of the tight Wall Street brotherhood - just government debt feeding  Wall St  debt when you think about it - very little ever meeting the ordinary US citizen’s needs. That’s trillions and billions of dollars that have been thrown at the Wall Street banks, while  the US government gives nothing but notional promises, meagre pennies and horrific generational debt back to its own peoples.

What price The Bull now ?

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Herewith is an economic paper written by two professors of Economics at the University of Boston. This paper describes the fiscal debt situation as it was back in 2003 while the country was under the leadership of Bush Jnr. It is an enlightening read. Bye the way, all quoted fiscal debt - everytime you see $44 trillion dollars, please now read $59 trillion dollars, since this little noticed paper was written in 2003 (The situation is, of course, much worse now). What follows is a critique of those fiscal measures necessary to pay back the fiscal debt, herein referred to as the Menu of Pain.

By Laurence J. Kotlikoff and Jeffrey Sachs, 5/19/2003

“OUR GOVERNMENT is going broke. The feds face bills that are far beyond our capacity to pay — by $44 trillion to be precise. The longer we ignore them, the bigger they get. Yet President Bush is working overtime to deepen our fiscal trap. This $44 trillion figure is not ours. Nor is it some other academics’ calculation. It was produced last fall by economists and budget analysts at the US Treasury, the Federal Reserve, the Office of Management and Budget, and the Congressional Budget Office. The study was ordered by then Treasury Secretary Paul O’Neil and was slated to appear in the president’s budget, released in February.

O’Neil instructed his team, led by Jagadeesh Gokhale, Federal Reserve senior economist, and Kent Smetters, then deputy assistant secretary for economic policy at the Treasury, to answer the following question: Suppose the government could, today, get its hands on all the revenue it can expect to collect in the future, but had to use it, today, to pay off all its future expenditure commitments, including debt service net of any asset income. Would the present value (the value today) of the future revenues cover the present value of the future expenditures?

The answer is no, and the fiscal gap is the $44 trillion. Now, that is big bucks by anyone’s definition. It’s four times current GNP and 12 times official debt. Imagine everyone in the country working for four years and handing over every penny earned to pay this bill, and you’ll grasp its size.

Unfortunately, we can’t ascribe the $44 trillion calculation to overly pessimistic assumptions. On the contrary, the assumptions are optimistic with respect to future longevity as well as growth in federal health expenditures, discretionary spending, and labor productivity.

Gokhale and Smetters asked a follow-up question: By how much would taxes have to be raised or expenditures cut on an immediate and permanent basis to generate, in present value, the $44 trillion? Their ”menu of pain” is mind-boggling. Entree A is raising federal income tax collections (individual and corporate) by 69 percent. Entree B is raising payroll tax collections by 95 percent. Entree C is cutting Social Security and Medicare benefits by 56 percent. Entree D is cutting federal discretionary spending by more than 100 percent, which, of course, is not feasible. Combination platters are also available. For example, we might select quarter portions of entrees A through D. But no matter what combination we order, digesting this medicine is going to be plenty painful.

Why are the nation’s fiscal affairs in such a mess? The reason is straightforward. Baby boomers are just five years from starting to collect Social Security retirement benefits and eight years from starting to collect Medicare benefits. When all 76 million boomers are retired, we’ll have twice the number of elderly beneficiaries, but only 15 percent more workers to pay their benefits.

If the fiscal gap and its associated menu of pain are unfamiliar, there’s a reason. You can scour the thousands of pages of the president’s FY 04 budget, and you won’t find the analysis. It never made it in. When Secretary O’Neill was replaced last December, the analysis was yanked from the budget.

To be clear, limiting our need to know is not just a Republican responsibility. When it came to publishing a generational accounting analysis in the FY 92 budget, President Clinton’s political watchdogs overruled OMB and pulled the same trick. And bankrupting has been a collective effort of all postwar administrations, each of which has cared more about the next election than the next generation.

Our current team leader, President Bush, is doing his part. Taken together, his first tax cut and his proposed second tax cut, which is about to be passed by Congress, account for roughly a sixth of the fiscal gap. The president, an ardent believer in voodoo economics, is convinced his tax cuts will stimulate growth and dramatically raise revenues. Neither economic theory nor economic facts supports this view. In fact, the president is not only burying us in explicit and implicit debt, he’s undermining the economy’s future performance.

The stakes are now too high for more political games and flaky economic theories. Democrats and Republicans alike need to send our leaders a firm message: Deal responsibly with the coming generational obligations! If we don’t, we can look forward to massive cuts in future Social Security and Medicare benefits, tax hikes, high inflation, and bitter political strife. Putting aside the president’s latest tax cut would be an excellent start on the road to responsibility.”

Laurence J. Kotlikoff is chairman of the Department of Economics at Boston University. Jeffrey Sachs is professor of economics at Columbia University.”