There are two sides to every coin and current digital illusory money on the cloud, is no different…
Much like the two faces of Janus we are looking at the same coin yet from differing perspectives and need to reconcile these views in order to be able to deal with this economic and resultant environmental crisis.
Let’s look at the record first and the response of policy and finance…
During Obama’s tenure, Wall Street has roared back even as the larger economy has struggled. Same can be said about the City… Fat cats, got fatter.
Because the largest banks are even larger today than when Obama took office, and are certainly fatter by more than 10% as are returning to the record levels of profits they were making before the depths of the financial crisis in 2007-2008, they themselves caused due to their very own greed avarice and sloth, according to government data.
Wall Street firms, either independent companies or the high-flying trading arms of banks — are doing even better. They’ve made more profits in the first two and a half years of the Obama administration than they did during the entire eight year Cheney’s bush administration, according to all the industry data. Obama’s 2009 stimulus program according to the Congressional Budget Office, also created or saved two million jobs in America.
Yet behind this turnaround there are robust government policies that saved the financial sector from collapse and then gave banks and other financial firms huge advantages on the path to recovery. The infamously secret $ 7.7 Trillion boost by the FED to the biggest banks without recourse as the lender of last resort – is just the tip of the iceberg. And even when the federal government invested hundreds of billions of taxpayer dollars directly through the TARP program in banks, more than $ 1.3 Trillion of your money — the banks used this boon for their own trading and in order to further investments on which they actually made good profits but they didn’t share those profits with the taxpayer and most crucially they didn’t invest in the job growth economy at all. Further they failed to invest in their primary business which is to lend to businesses and consumers, the so called prime borrowers.
Of course reviving the financial system was necessary for preventing an even deeper economic recession. But the Obama administration, which ultimately strengthened and stabilized the financial system took a far more tepid approach to helping ordinary Americans and boosting the job growing economy.
“There’s a very popular conception out there that the bailout was done with a tremendous amount of firepower and focus on saving the largest Wall Street institutions but with very little regard for Main Street,” said Neil Barofsky, the former federal watchdog for the Troubled Assets Relief Program, the $700 billion fund used to bail out banks. “That’s actually a very accurate description of what happened.”
Neither Obama, nor Bernanke, Paulson or Geithner, compelled banks to increase lending to ordinary businesses or consumers, known as “prime borrowers.” How can this important DETAIL has escaped their otherwise thoughtful plan is beyond anyone’s rational explanation…
A recent study by two professors at the University of Michigan found that banks, instead of significantly increasing lending after being bailed out, used taxpayer money to invest in risky securities to profit from short-term price movements. The study found that bailed-out banks increased their returns by nearly 10 percent as a result.
“If the goal was to support lending, it would have been sensible to require a portion of the money to support credit origination,” said Ran Duchin, a finance professor who completed the study. “Lending to prime consumers in the mind of the bankers was not the most profitable use of their capital.”
Some of Wall Street’s success has moderated in recent months, mostly reflecting the slowdown in the U.S. economy earlier this year and the European debt crisis buffetting global markets. This might just focus banks on the eager business borrowers at hand but don’t count on it..
Because the representatives of the financial industry are looking still backwards to the financial debacles of securitization and fancy instruments and derivatives to create toxic profits and not at their prime borrowers. They want to play the old games again and to drive up markets of hot air to make another round of profits. Because of that they abhor regulation. Contrary to reason, they say that the regulations included in last year’s Dodd-Frank legislation, which Obama strongly advocated and signed into law, have crimped bank profits. Obviously the data of current bank profitability do not support this view. The Dodd-Frank legislation, for instance, requires banks for instance to maintain a greater capital cushion to withstand losses during bad economic times. The bill also created a regulator whose sole purpose is to police lending to ordinary Americans. Many analysts credit the Dodd-Frank law overhauling financial regulations with making the financial system much more stable than in the past, but the fat cats don’t like it. Why?
Because when they drive forward with their eyes firmly fixed in the rear view mirror, they can’t see the road ahead, let alone the healthy future. Even though the majority of the bill’s most significant measures have yet to be put into place, and their ultimate impact on the bottom line remains unclear, the Banks still want none of it, and finance lobbying efforts to remove them, so they can go back and do the financial crisis all over again hoping for a different result. Once you get bailed out you get hooked. Because bail outs are like crack cocaine. You get it first and then you get to like it and hope for another fix. And another and another and you are likely to do anything to get it…
To be true, all Financial firms have raised major concerns about one of the largest structural changes made by the bill, the so-called Volcker Rule. This measure would bar banks from engaging in trading and other speculative activity on their own behalf rather than to profit customers. But the rule’s impact could prove limited because of loopholes and exceptions allowed by both lawmakers and regulators working to implement it.
But while the party is going on in Wall Street there is a great fear surrounding the champagne, cocktail and cake crowd. And this is the fear of the Great Depression.
Because old Janus has another face and so does this coin of “Mo Money” for the profligate bankers and the ones who caused this crisis…
And on the other side is the stark face of fear. The ultimate fear of a double dip W recession or even a great depression coming on the heels of this financial debacle. What with the global volatility, the Eurozone crisis, the global sovereign debt crisis, the slow down, the currency wars, the incoming economic decline data, huge unemployment, and above all else the theory of Sonnenschein-Mantel-Debreu about the incoming falling of the sky…
Of course that doesn’t mean it will arrive tomorrow, but then again it’s good to be prepared for the inevitable, because if their mathematical and econometric analysis is correct, a Great Depression is looming. And it’s all but inevitable. Sonnenschein-Mantel-Debreu Theory and the accompanying 41-line differential equation points that we’re probably screwed to a degree that scarcely anyone yet appreciates.
Professor Steve Keen was one of the few economists to predict the financial crisis. While the OECD and the US Federal Reserve foresaw a “great moderation”, unprecedented stability and steadily rising wealth, he warned that a crash was bound to happen. Now he warns that the same factors which caused the crash show that what we’ve heard so far is merely the first rumble of the storm. Without a radical change of policy, another Great Depression is all but inevitable.
The problem is spelt out at great length in his book Debunking Economics which is marred by some unattractive graphs and figures yet it contains a more persuasive account of the causes of the crash and of its likely evolution than anything which has yet emerged from Constitution Avenue in Washington or Threadneedle Street in London.
In the US the official view, as articulated by Ben Bernanke, chairman of the Federal Reserve, is that both the first Great Depression and the current crisis were caused by a lack of base money. Base money, or M0, is money that the central bank creates. It forms the reserves held by private banks, on the strength of which they issue loans to their clients. This practice is called fractional reserve banking: by issuing amounts of debt several times greater than their reserves, the private banks create money that didn’t exist before. Conventional economic theory predicts that when the central bank raises M0, this triggers a “money multiplier”: private banks generate more credit money, M1, M2 and M3, thus in turn boosting economic growth and employment.
Bernanke, echoing claims by Milton Friedman, believed that the first Great Depression in the US was propelled by a fall in the supply of M0, which, he said, “reinforced … declines in the money multiplier.”
But, Keen shows, there is a weak association between M0 money supply and depression. There were six occasions after World War Two when M0 money supply fell faster than it did in 1928 and 1929. On five of these occasions there was a recession, but nothing resembling the scale of what happened at the end of the 1920s. In some cases unemployment rose when the rate of M0 growth was high and fell when it was low: results which defy Bernanke’s explanation. Steve Keen argues that it’s not changes in M0 which drive unemployment, but unemployment which triggers changes in M0: governments issue more cash when the economy runs into trouble.
He proposes an entirely different explanation for the Great Depression and the current crisis. Both events, he says, were triggered by a collapse in debt-financed demand. Aggregate demand in an economy like ours is composed of GDP plus the change in the level of debt. It is the sudden and extreme change in debt levels that makes demand so volatile and triggers recessions. The higher the level of private debt, relative to GDP, the more unstable the system becomes. And the more of this debt that takes the form of Ponzi finance – borrowing money to fund financial speculation – the worse the impact will be.
Keen shows how, from the late 1960s onwards, private sector debt in the US began to exceed GDP. It built up to wildly unstable levels from the late 1990s, peaking in 2008. The inevitable collapse in this rate of lending pulled down aggregate demand by 14%, triggering recession.
This should be easy enough to see with the benefit of hindsight, but what lends weight to Keen’s analysis is that he saw it with the benefit of foresight. In December 2005, while drafting an expert witness report for a court case, he looked up the ratio of private debt to GDP in his native Australia, to see how it had changed since the 1960s. He was astonished to discover that it had risen exponentially. He then did the same for the United States, with similar results. He immediately raised the alarm: here, he warned, were the conditions for an economic crisis far greater than those of the mid-1970s and early 1990s. A massive speculative bubble was close to bursting point. Needless to say, he was and still is fully ignored by policy-makers. As a matter of fact he is treated as the man with the plague…
Because now, he has taken to telling us that a failure to address these problems will ensure that this crisis will run and run for decades on end and spell the doom of our economic system… Well nobody invites Doomsayers to the polite dinner party, but he is worth listenng to at least i the lecture and debate halls. Because as he says, is also true that the “debt-deflationary forces” unleashed today “are far larger than those that caused the Great Depression.” In the 1920s, private debt rose by 50%. Between 1999 and 2009, it rose by 140%. The debt-to-GDP ratio in the US is still much higher than it was when the Great Depression began.
If Keen is right, and this is a big IF, then the crippling sums spent on both sides of the Atlantic on refinancing the banks are a complete waste of money. They have not and they will not kickstart the economy, because M0 money supply is not the determining factor. They will simply fatten the banks as they have already done and once the banks grow bigger and more corpulent, in reality they also become weaker, moribund and unable to be agile enough on their feet in order to fight and fend for themselves in an incoming stormy financial crisis. Fat cats don’t catch mice…
President Obama justified the bailout of the banks on the grounds that “a dollar of capital in a bank can actually result in $8 or $10 of loans to families and businesses. So that’s a multiplier effect.” But the money multiplier didn’t happen. The $1.3tn that Bernanke injected scarcely raised the amount of money in circulation: the 110% increase in M0 money led not to the 800 or 1000% increase in M1 money that Obama predicted, but a rise of just 20%. The bail-outs failed because M0 was not the cause of the crisis. The money would have achieved far more had it simply been given to the public. But, as Angela Merkel and Nicholas Sarkozy demonstrated over the weekend, governments have learnt nothing from this failure, and seek only to repeat it.
Instead, Keen says, the key to averting or curtailing a second Great Depression is to reduce the levels of private debt, through a unilateral write-off, or jubilee. The irresponsible loans the banks made should not be honoured. This will mean taking many banks into receivership. Otherwise private debt will sort itself out by traditional means: mass bankruptcy, which will generate an even greater crisis.
These are short-term measures. I would like to see them leading to a radical reappraisal of our economic aims and moves to develop a steady-state economy, of the kind proposed by Herman Daly and Tim Jackson.
Governments and central bankers now have an unprecedented opportunity to learn from the catastrophic mistakes they’ve made. Especially in Europe where they are neither heeding the robust American response nor are they focused on solving their house mess, thus endangering the whole edifice of the World’s economic system…
But the European leaders have all the money in the world to sort this crisis out now, and they sit on it. Or rather they bury their heads into it. Yet only if they were to get their heads out of the sand and remember the need to be more like a Giraffe rather than an ostrich in their economic approach to saving the House of Europe with it’s own double sided coinage, they could be seen as leaders seeing far from a great height and a clear vantage point. But Giraffes they are not… more like Nimbys and dwarvesthey are.
Still we need to drum up the message: Simply, Mo Money is needed to have money in the future with your own flag on it. Otherwise we can all go to the Renminbi and save the exchange fees altogether.
Yours,
Pano
PS:
Yet, this is an opportunity to save the Euro and the European Free market Monetary Union zone, all European leaders seem determined not to take.
And if economic counsel is needed, the public debate about economics within the boundaries of accepted science, from all great economic thinkers such as Friedrich Hayek and Milton Friedman who have become conservative icons of the Tories and Republicans, and John Maynard Keynes and Paul Samuelson who are the bedrocks of the liberal Democrats, they all give us converging evidence for the textbook way to fix our current mess. It really is not rocket science…
Here is the long term and the short term Solution:
Stay Simple & Act Forcefully… but you need robust public policy.
Short-term stimulus will work to help our economies recover from the recession. Some kinds of stimulus pay off more quickly than others. Once the economic heart is pumping again, we need to get our deficits under control. The way to do that is a balance of spending cuts, increased tax revenues and entitlement reforms. There is room to argue about the proportions and the timing, and small differences can produce large consequences, but the basic formula is not only common sense, it is mainstream economic science, tested many times over, in the real world.
You my leaders, my friends, can you handle this?
And where does this leave the Environment?
Basically nowhere, because the Climate Debt crisis is constantly overlooked since the emphasis of all the people is on the main line economy on Life Support and they forget that this Life Support is the Environment we are trashing constantly…
