Friday, February 27, 2009

• America’s Overnight Transformation

The centerpiece of the Administration’s rushed, colossal bailout and stimulus program is the taxpayer support of the nation’s 20 largest banks. Treasury Secretary Geithner, former Federal Reserve Bank of New York President, is Obama’s point man on the aggressive plan to bolster the financial system. As he leads the charge to inject hundreds of billions into banks, he cringes from applying the term, “nationalization,” to his strategy.

In the American lexicon and consciousness, nationalization of corporations steps across the threshold of socialism. Obama and his team are being careful not to overtly to be taking that gambit so early in the game.

By allowing this strategy to move forward, taxpayers are betting their futures that the collective mediocrity which mismanaged the financial institutions into an incomprehensible mess, will suddenly become masters of rational thought, and will transform into diligent financial management. Are there any taxpayers in America who would independently place their hard earned cash with any of these failed speculators? Not likely, so why is the greater collective mindset rushing into the abyss?

While he is not an economist, Geithner is supposedly an expert in monetary policy, yet he has no idea of the depth of the banking problem and cannot evaluate the viability of the financial institutions. He is also unable to establish their near term or long term solvency. Unfortunately, neither can anyone else, it seems. America is looking for guidance from a man who was one of those who not so long ago believed the banks were strong and their risks were distributed broadly enough to satisfy expectations for long term stability.

Bottom line, the government’s approach for instilling a return to “confidence in America,” means taking mountains of debt raised dollars, and placing them into giant unfathomable baskets of risk. Countries around the world are looking to America for a return to stability, but do they really care if the U.S. taxpayers drown in debt as the U.S. government rushes into territory it knows nothing about?

We are subjected to emphatic statements that the government must take these drastic measures of a scale never experienced, because the alternative will hold consequences of a far worse crisis. How can the Administration make such absolute and foreboding claims, when the government doesn’t fully comprehend the problem. It has also been unable to satisfactorily explain the specifics of its plan, or the expected outcome. Is the problem really insurmountable, or is this a massive cash grab and a government bloating exercise being quickly actualized while the historically unique opportunity presents itself?

It appears everyone in the MSM supporting the current plan uses Lehman Brothers in the argument, suggesting that its collapse almost destroyed the global financial system. That is a fabrication based on vacant assumptions, fuelled with panic. Are we expected to accept that the calamitous repercussions awaiting us are so overwhelming, they must be true? Surely Obama, Geithner and a list of well-educated experts along with NYT can’t be wrong, nor would they lie. When they tell Americans that Citigroup, Bank of America and Morgan Stanley hold the future of the world in their hands, surely they must know what they’re talking about.

On the surface, adding capital to an undercapitalized bank might seem to make sense. Unfortunately, the capital is coming from the taxpayer, and however the Administration camouflages it, this will be a nationalization of banks because the capital injections will exceed current market values of these financial institutions. In any case, this nationalization has already begun under the FDIC, and will accelerate as the largest banks get bailed. Equally disturbing is that the degree of undercapitalization enjoyed by all these banks is unknown. The taxpayer is being forced into guaranteeing the credit and balance sheets of these banks without any measure of as to the size of liabilities awaiting them. Such guarantee of unknown obligations isn’t even “throwing good money after bad,” it’s worse. And don’t believe them when they tell you taxpayers will get money back when the distressed assets are sold.

This panic driven overreaction will siphon an anticipated $3 trillion or $4 trillion from taxpayers over the coming three or four years. The strategy, being energized by Wall Street and its stockowners, reminds us of placer gold miners using overpowered firehoses that completely destroyed the landscape in the hope that it would render an occasional nugget and some gold dust. Somewhere on the side of that mountain, might be some gold. Somewhere out there, if trillions are immediately thrown at financial and other institutions, some jobs will be generated. The parallel isn’t quite appropriate of course, because miners of nineteenth century Northern California actually knew which hillsides sheltered the wellhead to their fortunes.

The administration suggests that once the economy recovers and these banks become viable once again, they will be returned to private status once again. Given the degree to which these banks are undercapitalized, such anticipation would appear to be an impossibility, and is therefore either disingenuous or lacks basic knowledge.

It would be more prudent for the Administration and Congress to reign in the panic, take control of The Fed and regain control of the U.S. dollar. The Fed did not do its job, and did not step in to restrain the out-of-control leveraging that allowed the crisis to bubble. Showing the world that the U.S. is changing the ways of its wayward financial community with specific plans, would bring back some confidence. It would also be more responsible to apply measured responses to specific pressure points in the financial industry, as the extreme demands surface, that are not efficiently answerable with bankruptcy protection. Taking the term “bankruptcy” out of the financial lexicon is a mistake regardless the size of the institution. Such attitude will only lead to further inappropriate consolidations such as the many we have already witnessed. There are many viable and well-capitalized banks remaining that will gladly lend, with minor inducement to take on risk from The Fed and the FDIC, but without bailout capital.

In its rush, the new administration does not appear to have come up with any creative or novel programs to address the financial industry’s decay. We appear to be coaxed into a dark alley, still drunk from two decades of profligate spending, and expecting magical overnight answers hoping the walls will keep us upright. Much more had been anticipated from this Presidency, or at least much more had been hoped for from a majority of the voting public. Much more, and certainly not the short-term uncreative thinking Taxpayers are being presented with. We are, however, witnessing a rapid transformation of America.


  1. If you can't even use the term "nationalization" correctly, why should we believe your analysis?

    Hint: Just injecting more money into the banks doesn't "nationalize" them. The government actually has to declare ownership.

    I can't believe you dragged me off Salon for this.

  2. Anonymous,

    I understand why you would make such a comment under the veil of anonymity, since the term "nationalize" is so distasteful to all Americans, and your comment adds little to the discussion.

    Denial that the process that has already begun is "nationalization," is simply either misunderstanding what the government is doing, or is based on an overwhelming ideological need to support anything the Administration and Congress decide to implement.

    America deserves better than unquestioning support of misguided and out-of-control government spending.

  3. Great post. Thanks.

    We're already major shareholders in Citigroup Inc., America's biggest bank. Where will this end?

  4. adam_infrequentlyMarch 1, 2009 at 5:50 PM

    I'm amused Obama talks about people who are afraid of a changing status quo, when bailing out banks clearly lets weaker institutions remain powerful. This is not capitalistic! However, Obama's boldest critics don't seem to recognize there is a worldwide status quo as well. When other nations inject capital into their economies, it makes it more difficult for us to resist doing the same, in case the world balance should tip in their favor. If a notion of global supremacy is to be maintained, I believe there is no choice but to follow suit and bail out. It's gonna suck either way, whether it's runaway inflation or giant corporations going under. IMO, the "economy" is an unmanageable monster. But if we were truly a capitalist nation, we wouldn't worry at all about managing it.
    BTW, what happened to Disqus interface?

  5. What happened to Disqus interface?

  6. The only private enterprise that has been natiionalized were the coal mines during WWII. The United Mine Workers, under John L.Lewis. were going to walk out in a strike against the mine owners. President Truman nationalized all the mines under a Presidential Order justified by the needs of of military efforts. The strike didn't take place, the order was rescined and and the owners took back their properties.
    Obama would have to make such an order and justify it in a real national interest to be able to nationalize, say the auto industry, in a legitimate manner.
    Socialism has always been a bane to Americans, a political-economic system it does not want in any way or shape. Therefore, to hide its real political goals, the formerly named Liberal Democrats have taken the title of Progressives.
    Lastly, some changes are just best left alone. No point in continuing your foolishnes by hiding behind the Progressive label.

  7. adam_infrequentlyMarch 3, 2009 at 11:27 AM

    Has anyone also noticed the effectiveness of bailouts? Take AIG, which was "lent" (yeah right) $85bn, with this: "It's too big to fail!" And it continues to lose money, now more than ever, because people are afraid to pay insurance premiums to a company that might go out of business!