The Street of Broken Dreams greeted the new Treasury Secretary's plan for rescuing zombie banks with a decisive thumbs down. The almighty Dow Jones Index dropped nearly 400 hundred points when the plan was announced last week. The important reason for the brickbats is that there was no explanation of how the trillions of worthless assets now held by financial institutions would be revalued by the government. Just before Lehman Bros. went belly up, speculators in devalued paper were offering 22 cents on the dollar. Now, the banks are asking for 75 cents on the dollar! The banks and the traders want the government to guarantee the price at which private funds buy toxic assets from the banks. Just how the government can afford to pay this extortion without people marching on Washington is the question left unanswered by Secretary Tim Geithner. Citigroup, Bank of America, JP Morgan Chase and Wells Fargo are holding two-thirds of all the toxic mortgage backed paper by some estimates. The government must swallow perhaps half a trillion in losses within the next 18 months if the zombies are to survive. The Obama campaign received $10 million in contributions from Wall Street, the largest source by far. From purely an efficiency and cost viewpoint nationalization is the way to go. Sweden followed this path successfully when it faced a deep banking crisis in 1992.It is also clear that the proposed public-private "bad asset" bank is the new market mechanism by which the Geithner and economic advisor Larry Summers[1] hope to re-inflate the economy. But the financial crisis will have to get even more dire for their partnership bank plan to be successfully foisted on outraged taxpayers as the savior of our national economy. The "aggregator" bank is supposed to be funded to about $5 trillion by the big banks now receiving tax money for their own recapitalization. So far each major bank has received about $25 billion in public funds. The government will guarantee the new bank's bonds with its power to tax future generations of Americans ad infinitum, thereby socializing the risk of capitalist failure. The bad asset bank will have the power to buy and renegotiate mortgages, hopefully saving desperate homeowners now "upside down" and facing foreclosure. However, the plan is once the economy re-inflates through rising prices and new debt creation--possible after the toxic assets from round one have been removed from the balance sheets of imprudent capitalists--the bad bank's private owners will reap the reward of any capital gains above the amount of debt written off when the loans were renegotiated. Trading away the "equity kicker" to the post-industrial buccaneers will be the price of salvation, according to Michael Hudson, a former Wall Street economist and professor at the University of Missouri. To make the scheme perfectly clear: the captains of finance who created the mess by expanding credit imprudently using arcane securitization techniques will use taxpayer money to shift their losses to the government, and reap still more profit by appropriating from surviving homeowners any gains realized once the government inflates prices again. Such a deal. Thus, for the free market schemers on the Street of Broken Dreams, the free market should only be free of financial regulation, free of tax on unearned wealth, and free of market consequences for gambling with other people's money. The new Secretary has indeed proven himself a friend of the wealthy one-percenters, but this is bad news for the rest of us debt ridden proles. It is not the big bank niche of the FIRE sector that is essential to our economy. It is consumer spending, responsible for 72% of our GDP, that is essential to our economy. Joe the Plumber and Jane the Clerk are in debt over there heads with no paychecks coming in because all the good jobs have been transported to low wage countries. Until they get some relief, they have got no money to spend (they do not pay taxes either). The government so far has offered homeowners about $50 billion in relief-- just .5% of the $10 trillion given to the Street to date, and less than half what AIG got to repay its derivative gambling losses. So the bubble goes up, the bubble goes down, round and round it goes, and were it stops nobody knows including Rep. Kanjorski of Pennsylvania.[2]
[1]Carl Rove told the Wall Street Journal that both Geithner and Summers were "market oriented" and "solid picks" by 44--euphemisms for committed corporatist. Geithner as president of the New York Federal Reserve Bank did nothing to address the impeding trouble in the credit markets in late 2007. Larry Summers as Clinton's deputy secretary of the Treasury joined with Secretary Robert Rubin and Chairman Alan Greenspan to force the resignation of Brooksley Born, chair of the Commodities Futures Trading Commission, who had the wrongheaded idea of urging regulation of the exploding new derivatives market.
[2]http://www.youtube.com/watch?v=_NMu1mFao3w In the video Kanjorski partly justifies the initial decision to bail out Wall Street on an "electronic run on the banks" in September 2008 of $550 billion within just a few hours. What's up with that? Economist James Galbraith says of the effort to save the banks, "I think it's fair to conclude that the large banks, which the Treasury is trying very hard to protect, cannot in fact be protected, that they are in fact insolvent, and that the proper approach for dealing with them is for the Federal Deposit Insurance Corporation to move in and take the steps that the FDIC normally takes when dealing with insolvent banks." Nouriel Roubini, the New York University economist who predicted a major crisis two years ago, says: "Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end."