By Mike
Whitney
November 13,
2008 "Information
Clearinghouse"
--
Henry
Paulson's
time at
Treasury has
been one
pratfall
after
another.
Even so, on
Tuesday he
managed to
out-due
himself.
Paulson held
a "surprise"
press
conference
where he
announced
that the
$700 billion
Troubled
Asset Relief
Program
(TARP)
wouldn't be
used to buy
troubled
assets after
all.
Instead, the
money will
used to bail
out
insurance
giant AIG,
provide
extra
capital for
the banks to
hoard, and
now (this is
new
part) give
money to
"nonbank
financial
institutions,
like
insurers and
specialty-finance
companies"
so they can
lend to
credit-worthy
consumers.
(Isn't that
why we gave
money to the
banks?)
Paulson's
announcement
was like
tossing a
hand-grenade
in a
San-i-can;
it blew the
stock market
to Kingdom
come. Just
minutes
after the
opening bell
on the New
York Stock
Exchange
(NYSE)
stocks
plummeted to
new lows
ending the
session in a
400 point
death-spiral.
Wall Street
doesn't like
uncertainty
and
Paulson's
sudden
about-face
sent jittery
investors
running for
cover. The
message to
investors is
clear, the
government
doesn't have
the foggiest
idea of what
it's doing
and is just
grasping at
straws.
But
Paulson's no
fool; he
knew exactly
what the
reaction
would be on
Wall Street.
He simply
decided that
blowing up
the equities
market was
worth the
price of
reviving
"securitization"--the
transformation
of loans
into
securities.
You see,
securitization
is Wall
Street's
Golden
Goose. It's
the
foundation
block upon
which
structured
finance and
all its
complex
credit-enhancing
derivatives
rests. Keep
in mind,
that all
these
exotic,
financially-engineered
products--the
CDOs, MBS,
and
CDS--were
all created
with one
goal in
mind;
to maximize
leverage
with minimum
capital so
that profits
can be
skimmed off
the top.
That's how
Paulson
managed to
walk away
from Goldman
Sachs with
hundreds of
millions of
dollars in
his pockets.
It's a
racket.
There's a
myth that
credit is
contracting
because the
banks won't
lend. But,
in truth,
total bank
credit
expanded by
$575 billion
over the
past 10
weeks. The
real problem
is that the
securitzation
market
remains
frozen.
So now
Paulson
wants to
breathe new
life into
securitization
by providing
liquidity
for nonbank
financial
institutions
who get
their money
from the
wholesale
market. Of
course, no
one really
knows how
this will
work since
these
operations
are
completely
unregulated
by the
federal
government.
No worries;
the charade
will persist
behind the
dodgy claim
that "it's
needed to
get credit
to the
consumer".
Baloney.
What the
consumer
needs job
security and
a pay-raise,
not more
debt. This
is just more
Paulson
flim-flam.
It was clear
that the
Treasury
Secretary
was
concocting a
new swindle
a couple
weeks ago
when Fed
chief
Bernanke
defended
"securitzation
in a speech
where he
said:
"The ability of financial intermediaries to sell the mortgages they originate into the broader capital market by means of the securitization process serves two important purposes: First, it provides originators much wider sources of funding than they could obtain through conventional sources, such as retail deposits; second, it substantially reduces the originator's exposure to interest rate, credit, prepayment, and other risks associated with holding mortgages to maturity, thereby reducing the overall costs of providing mortgage credit."
Nonsense. What it really does is create the optimal environment for speculative leveraging, debt-pyramiding and massive profit-taking. But, that's beside the point. The real issue is that securitization is dead already because Paulson and his ilk poisoned the well by adding subprime garbage and Alt As to the mix. Now investors are steering clear of any securities that bundle debt. It's a confidence issue.
According to the Wall Street Journal:
"Banks and other finance companies making loans for autos, credit cards and college tuition are having virtually no success in selling those loans to other investors, a potent sign of just how tight credit markets remain.
The market for selling such loans — by packaging, or securitizing, them into bonds — had just one $500 million deal for all of October, according to Barclays Capital. That compares with $50.7 billion worth of deals made one year earlier, according to market-research firm Dealogic. The overall market for so-called asset-backed securitization is estimated at $2.5 trillion. (Bond Woes Choke off some Credit to Consumers, Wall Street Journal, Robin Sidel)
$500 million is just 1 percent of $50 billion! Securitization will be dead for a decade or so; it was destroyed by lax lending standards and easy credit. Paulson and his fellows will have to find a new way to fleece gulible investors.
The TARP is most expensive boondoggle in history. No one even knows what the banks are doing with the money. There's neither accountability nor transparency. As a result, investor confidence has deteriorated and stocks have continued to fall. No one trusts Paulson to do the right thing anymore; it's that simple.
The Treasury's new Financial Stability Oversight Board has met four times, but they still can't say how the banks are using the money. It's a joke. Congress has been missing in action, too. They promised to create their own oversight board, but five weeks have passed and still nothing has happened. Apparently, the idea throwing $700 billion down rathole isn't enough to prod Ms. Pelosi and her congressional cohorts into action. All that really matters to them is getting reelected and nuzzling ever-closer to the public trough.
The TARP fiasco is not taking place in a vacuum either; the country is at the beginning of the deepest consumer-led recession in the last half century. Retail spending and automobile sales have been following the same grim flightpath as housing, while unemployment is at a 7 year high soaring to nearly 4 million. Household debt is at record levels of $14 trillion. The job market is steadily weakening while the consumer is more vulnerable than ever. Meanwhile, Paulson has dragged his feet on rewriting mortgages to slow foreclosures, stalled on providing another stimulus package, and diverted all the money from the $700 billion bailout to his friends in the financial industry. Not one dime has gone to a working man or woman. Paulson continues to play games while Rome burns even though, according to his colleague, former G-Sax chairman John Whitehead, the current downturn will be worse than the Great Depression.
According to Reuters:
"The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead ...
"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system. ... I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. ... I just want to get people thinking about this, and to realize this is a road to disaster. I've always been a positive person and optimistic, but I don't see a solution here."
There is no solution. The first thing to realize is that it is not a matter of "fixing" the economy. The economy is fixing itself by purging the unsustainable debt from the system. That's how markets work. Greenspan's low interest rates created a subsidy for debt which--along with the alphabet soup of leveraged derivatives--buoyed the economy along on the biggest wave of speculative financing the world has ever seen. The distortions that were caused by the unprecedented credit expansion stimulated artificial demand that created the appearance of growth and prosperity but, in truth, was nothing more than an equity bubble. Now the bubble has popped and the financial system is returning to the mean. That means that credit will probably contract by 30 to 40 percent putting us on the path to another Great Depression. Unless the government takes preventative action to get money into the hands of consumers and restore confidence, the nation will face (what David Brooks called) "grueling scarcity" and widespread panic. That's probably why all the voting machines and exit polls finally matched up with the election results in the 2008 presidential balloting for the first time in 8 years; because the ruling elites know that they need a popular executive to put in front of the cameras when they try to calm the crowds and keep the country from disintegrating into anarchy. It also explains the nervous smiles on the faces of the money-lenders and graybeards assembled on the stage behind Obama at his first press conference. The American establishment is placing all its hopes for economic survival on the narrow shoulders of their newest posterboy, Barak Hussein Obama.
There's more pain to come, but the suffering can be mitigated by sound decision-making and Keynesian policies. That means public work programs, bankruptcy reform, and extensions on unemployment. Nobel prize winner Paul Krugman recommends a stimulus package of $600 billion. That's a good start, but it will take much more than that. And foreign investors will have to be confident in our choices or the sale of Treasurys will slip and the US will face a funding crisis. The Fed's lending facilities have already loaned $2 trillion while the Treasury's bailout is $700 billion. By the end of 2010, fiscal deficits will be nearly $2 tillion and the total cost to the US taxpayer will be at least $5 trillion. That means rising interest rates, flagging growth and hard times ahead.
The present financial crisis is a self-inflicted wound. It started at the Federal Reserve with their cynical neoliberal monetary policies. Any solution, that does not involve the dismantling of the Fed, is unacceptable.
