What's Going On

On November 4th, 2008, I, like the majority of the voting electorate, voted for "Change." Over five months later, I'm beginning to wonder if we will ever see that "Change." In the last few weeks, it has become apparent, that the current administration's answer to the financial crisis is to continue the plan developed by the previous administration; namely, propping up the zombie banks through taxpayer funded bailouts.

Geithner's recently unveiled plan for the toxic assets amounts to nothing more then the transfer of risk from the banks to the taxpayer. Thankfully for us, there is no chance of this plan working. Because even with the non-recourse 85% levered FDIC loans (didn't leverage get us into this mess?), and the generous 7.5% taxpayer subsidies, the bids still won't come in high enough for the banks to be able to accept without sinking their balance sheets. Or so I thought. As Jeffrey Sachs points out, the banks will figure out a way to bid on their own toxic assets (with no transparency, of course) and then quietly unload them onto the taxpayer in the not too distant future. Doh!

But all of this is a moot point. You all heard the good news. Banks reported big profits in the 1st quarter, far above analysts expectations. The financial sector and our economy is on its way to recovery. Sure, if your willing to ignore that much of the profits came from a change in the mark-to-market accounting rules (who needs transparency in accounting anyways) and from a one-time payoff on AIG's credit default swaps (aka CDS. basically insurance for the toxic assets). Oh, and yes, the AIG taxpayer financed bailout was just another non-transparent way to funnel money to insolvent banks. Conveniently for the banks, both of these fortuitous events happened prior to the conclusion of the government's stress test; designed by the administration to determine which banks are insolvent (I'm guessing all the major banks are going to pass).

Look, I'm not a pessimist, but rather a realist. I want the bank rescue plans to succeed and want to believe that the latest rally is a reflection of improving market conditions. But the more research I do, the more it becomes apparent to me that many of the major banks are insolvent and the governments solution is to slowly transfer losses and debt from the banks to the taxpayers and hope that asset prices trend upward. Whereas, the most efficient (and beneficial to the taxpayer) way to deal with the economic crisis is to put all the insolvent banks in a temporary receivership; liquidate the good assets off to well capitalized super-regional banks and institutions and throw all the bad assets into a RTC type entity.

So, what's going on? Why are the banks receiving special accommodations? From my perspective, the government and large financial institutions interests are so commingled that they have formed a symbiotic relationship. Seriously, of the people in the government who are really running the show, what percentage are former employees of the financial institutions? I'm sure the number is extraordinarily high. What percentage of former government officials are currently employees or "Advisors" of the financial institutions? How is is possible to not have conflicting interests in dealing with the current mess?

For a more in depth look, I highly recommend you read " The Quiet Coup" from MIT professor and Atlantic writer Simon Johnson and "The Big Takeover" from Rolling Stone writer Matt Taibbi. They both do a brilliant job of giving a detailed account of how 146 years after President Lincoln delivered us a "government of the people, by the people, for the people," President Obama is on slippery slope to delivering us a government of the banks, by the banks, for the banks.

Quick tangent. For an administration that ran on transparency, you would think this would present a golden opportunity for the Republicans to make some legitimate criticism of team Obama's opaque handling of the banking crisis. But no, they would rather throw a tea party (protest on government stimulus spending and taxes). I'm not going to get into the merits of the tea party, but rather comment that the ECONOMY is not going to recover until the banks are once again well capitalized and lending money. This IS the ISSUE of the day. And every other issue is secondary in nature until the economy is headed down the right path. Yet the Republicans are still spewing out the same ideological company line. But why am I surprised? The Republican couldn't lead their way out of a paper bag right now.

OK, now back to What's Going On. Looking beyond my superficial conspiracy theory that the banks are now running the government, recently, Brad DeLong, economics professor at U.C. Berkeley and Matthew Yglesias, associate editor of the The Atlantic Monthly, have proposed four different narratives on what the administration is up to. But seeing as how I'm obviously much wiser than any economics professor or any editor (yes, I realize my posts are riddled with grammatical errors), I'll propose my own narrative. And if this narrative is true, in many ways, it makes me feel better about the administration's true agenda and largely renders everything I wrote above almost completely meaningless (which, I guess, would not make me very wise after all):

The people who are running our government; namely, Larry Summers, Tim Geithner, Ben Bernanke and formerly Hank Paulson, stared into the abyss, as Zerohedge points out, on September 18th, three days after the failure of Lehman Brothers. U.S. Representative Paul Jankorski paraphrases disclosures from Bernanke and Paulson:

On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.

This event so traumatized them, that they are fearful that nationalizing the major banks may lead to another run on the banks; one in which they can not stop, resulting in the collapse of the world's financial and political system. And this fear has dictated every major economic policy since. Faced with the unthinkable,the administration has decided to do everything in their power to keep the insolvent banks afloat. Even if that means being disingenuous with the public and reckless with their money.