FacebookTwitterGoogle+RedditEmail

Paulson’s Cascade of Lies

by MICHAEL HUDSON

On Thursday, November 20, Treasury Secretary Henry Paulson presented, even by his own lamentably low standards, an amazingly deceptive speech at the Ronald Reagan Presidential Library in Simi Valley, California. In its false  framing of Washington’s financial giveaway to Wall Street it rivaled some of the outstanding fables created by the Master Imagineer himself, for whom the library is named.

What prompted the speech seems have been Congressional criticism of Mr. Paulson’s bait-and-switch transfer of public funds to Wall Street, and the Federal Reserve’s transfer of an amount twice as high as Congress’s $700 billion. His most urgent aim was to ward off accusations that the Treasury and Federal Reserve have acted illegally. “Federal law, and in particular the Anti-Deficiency Act, prohibits Treasury from spending money, lending money, and guaranteeing or buying assets without Congressional approval. The Federal Reserve can and does lend on a secured basis, but only if it expects not to realize losses.” (Italics added.)

But Congress did not approve the Treasury’s $250 billion of “preferred” stock investments in Wall Street banks. The  happy recipients, their stockholders and officers evidently worried precisely that this “investment” would end up taking losses. That is why the Treasury stands in back of bona fide creditors. That is why “preferred” stock was preferred by existing stockholders to loans and guarantees (which have priority in case of bankruptcy), not to mention the conditions that Congress thought it had laid down calling for these institutions to renegotiate mortgages to bring them in line with the debtor’s ability to pay.

The Fed has refused to let Congress know any details – any details at all – about its cash-for-trash swaps with these institutions. This is what concerns Congress, and what has prompted  reporters at Bloomberg to bring a lawsuit in order to discover and publicize the details. It is not hard to see why this curiosity exists. The only reasonable explanation as to why investment banks, American International Group (A.I.G.) and commercial banks apparently headed by Citibank (whose shares plunged yet  another 26 per cent on Thursday) have turned over a trillion dollars worth of illiquid mortgage securities, junk bonds and who knows what other junk to the Fed is to avoid taking a loss on these bad loans and investments. As Mr. Paulson explained matters, “the Federal Reserve has statutory authority to lend against a pool of mortgage loans on a fully secured basis. The Fed was able to assist the JPMorgan purchase because they believed that there was a reasonable prospect of avoiding losses.”

What time frame are we talking about here? Evidently one in which Mr. Paulson will have left the administration, sticking his successor with the losses and, presumably, the blame.

Everything seems to have been unexpected to Mr. Paulson – as if ignorance is a defense. “When I came to Washington in 2006,” he reminisced, “markets were benign.” We were still in Alan Greenspan’s idea that inflating asset prices on credit constitutes “wealth creation.” At that time I myself was only one of many who warned that the real estate market had come to rest on a foundation of junk mortgage lending. Every banker with whom I spoke at the time knew this. But most were still seeking to make hay while the making was good, and it was still quite good – for the banks, that is. Matters were not benign for the increasingly debt-ridden U.S. economy, but at least they were rosy for Wall Street. Bank executives were paying themselves enormous salaries and even larger stock options. Meanwhile, the smarter money managers were beginning to shift their funds out of the U.S. economy in a wave of capital flight of a magnitude not seen since Russia in the mid-1990s.

Acting as if all this could not have been foreseen, Mr. Paulson assured his mistake-friendly audience, “There was no playbook for responding to a once or twice in a hundred year event.” A kind of random historical earthquake seems to have been at work, a financial San Andreas fault. Mr. Paulson then trivialized this, however, with the euphemism “housing correction.”

The key is, what is to be corrected? Is it not the financial market itself?

Mr. Paulson then set about dissembling the character of the U.S. and global financial system. “Our financial system,” he claimed, “is built on the hard work of our citizens; it is built on the savings of our citizens.”

This is where he seeks to spread the disinformation about the explosion of debt that now burdens the U.S. economy, which  is the result of autonomous credit-creation by the commercial banking system and has nothing to do with the savings habits of “our citizens”. The basic financial principle of modern banking is that “loans create deposits.” The bank loan comes first – then the deposit or “saving.”

Here’s how it works. A bank’s marketing department seeks to drum up customers for debt. A borrower will go into a bank and sign a promissory note, and the bank then creates a checking account in the amount that is stipulated. The note calls for a specific rate of interest to be paid – a rate much higher than that which the bank can borrow from the Federal Reserve or in the money market in general. One benchmark global rate to bankers is the London Interbank Borrowing Overnight Rate (LIBOR), and the other is the Federal Reserve’s discount rate to banks. (Japanese banks also provided loans to large financial institutions at under 1% per year, spurring the international “carry trade,” borrowing cheap in yen and then converting the funds into other currencies and lending at a higher rate.)

None of this involves saving. It involves credit creation in which banks have a legal monopoly, with funding monetized by the U.S, Japanese and other major foreign central banks. This free credit creation is at the root of the problem, not the natural growth of savings.

What have banks done with this credit-creating privilege? Nearly all their loans have been to enable buyers to purchase assets (real estate, stocks and bonds or entire companies) already in place, or to enable hedge funds to play the mathematical games that have come to characterize today’s casino capitalism. Mr. Paulson depicts the resulting financial system as being essential for the good functioning of “Main Street.” But surely he must know some lawyer who might explain to him that only very, very wealthy speculators are allowed to play the hedge fund game of financial derivatives that lies at the heart of today’s financial breakdown and negative equity for banks that have made bad gambles. The legal reality is that in order to invest in hedge funds and similar casino capitalism gambles (or in Broadway plays and other high-risk ventures, for that matter), prospective financiers must sign releases attesting to the fact that they can afford to lose their money.

“If the financial system were allowed to collapse,” Mr. Paulson warned, “it is the American people who would pay the price. This has never been just about the banks; it has always been about continued prosperity and opportunity for all Americans.” Not really. Wall Street is hardly  so altruistic. It has increasingly made its money off Americans by engaging in increasingly predatory, extractive lending to the economy. That is what has caused the U.S. debt burden to soar so far ahead of the ability of debtors to pay. It also is what is now diverting spending away from consumption and (for companies) new capital investment to pay creditors.

Not content with misrepresenting how the U.S. economy works, Mr. Paulson then drew a picture of the global economy that also is a travesty. “The world was awash in money looking for higher return,” he explained, “and much of this money was invested in U.S. assets.”

Not exactly. The world economy has been awash in the U.S. payments deficit, which has swollen the reserves of central banks in the creditor nations from Asia to Western Europe. These central banks have recycled $4 trillion of their dollar inflows to the United States under dollar hegemony. Rather than seeking a “higher return,” central banks have found themselves obliged to invest in low-yielding U.S. Treasury securities, or somewhat higher Fannie Mae and Freddie Mac securities. These returns are much lower than U.S. investors have sought in buying up foreign companies and their stocks, whose price appreciation far exceeded the rate that foreign economies were able to recoup on their dollar recycling to the United States.

Mr. Paulson wants above all to deter foreign economies from breaking away from this dysfunctional system. “The second important priority,” he explained to his Reagan Library audience, “must be continued reform of the International Financial Institutions like the World Bank and the IMF to allow for greater participation of developing nations.” The aim here is to make the financial sector’s lobbying control over the world’s financial system global. “A final reform priority must be consistent liberalization of policies on trade and investment, with an emphasis on avoiding new protectionist measures and achieving a breakthrough in the Doha round of global trade talk.”

“New protectionist measures”! Even as U.S. auto companies are advocating special subsidies for the U.S. auto industry in Detroit and pursuing beggar-my-neighbor financial policies (let foreign banks and economies absorb the financial loss from playing in the Wall Street casino), foreign countries are not to develop a financial system more highly regulated, an agriculture more aimed at feeding their own people. They are not to block capital outflows from the United States based on “free” credit creation to buy out the commanding heights of their economies as the IMF imposes austerity plans and forced privatization sell-offs on Third World and post-Soviet countries, while cutting taxes at home in the face of an escalating U.S. trade deficit and rising foreign military spending.

Mr. Paulson’s speech looks like a major salvo in the Bush Administration’s attempt to make both the Wall Street bailout and the U.S. predatory finance irreversible, while the government replaces public debt (Treasury bonds) for Wall Street’s bad gambles. His errors are calculated to misinform, as are most lobbying efforts by the banking and financial sector. One can only hope that Congress will question his testimony that has repeatedly followed this line with more acumen than prompted its earlier acceptance of the Treasury’s bailout act. It’s time to clean up this act.

PS: As I watched  Citibank’s stock (C ) take yet another plunge  of 10 per cent in the firsthour of Thursday morning, my wife showed me something that a Citibank advertiser was handing out to students at New York University yesterday afternoon: A flyer begging them to put their money in at 3.10 per cent per year. (Vanguard’s Treasury-money market fund offers under 1 per cent at present.) I told Grace that our net worth was higher than Citibank’s, but I’m not able to draw down a $10 million a year salary like their jokers do.

The Citibank handout (when have you ever heard of street hawkers for banks says, “You’ll have the safety of FDIC insurance and your CD’s term is just 6 months. So you can keep your money secure at a great rate. …Citi never sleeps.”

Citi’s stock has fallen 84 per cent this year, and the company is on the rocks. I’d be sleepless too, if I were them!

MICHAEL HUDSON is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

 

 

 

 

Michael Hudson’s new book, Killing the Host is published in e-format by CounterPunch Books and in print by Islet. He can be reached via his website, mh@michael-hudson.com

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
December 09, 2016
Friday - Sunday
Jeffrey St. Clair
Roaming Charges: Nasty As They Wanna Be
Henry Giroux
Trump’s Second Gilded Age: Overcoming the Rule of Billionaires and Militarists
Andrew Levine
Trump’s Chumps: Victims of the Old Bait and Switch
Chris Welzenbach
The Forgotten Sneak Attack
Lewis Lapham
Hostile Takeover
Joshua Frank
This Week at CounterPunch: More Hollow Smears and Baseless Accusations
Paul Street
The Democrats Do Their Job, Again
Vijay Prashad
The Cuban Revolution: Defying Imperialism From Its Backyard
Michael Hudson - Sharmini Peries
Orwellian Economics
Erin McCarley
American Nazis and the Fight for US History
Mark Ames
The Anonymous Blacklist Promoted by the Washington Post Has Apparent Ties to Ukrainian Fascism and CIA Spying
Yoav Litvin
Resist or Conform: Lessons in Fortitude and Weakness From the Israeli Left
Conn Hallinan
India & Pakistan: the Unthinkable
Andrew Smolski
Third Coast Pillory: Nativism on the Left – A Realer Smith
Joshua Sperber
Trump in the Age of Identity Politics
Brandy Baker
Jill Stein Sees Russia From Her House
Katheryne Schulz
Report from Santiago de Cuba: Celebrating Fidel’s Rebellious Life
Nelson Valdes
Fidel and the Good People
Norman Solomon
McCarthy’s Smiling Ghost: Democrats Point the Finger at Russia
Renee Parsons
The Snowflake Nation and Trump on Immigration
Margaret Kimberley
Black Fear of Trump
Michael J. Sainato
A Pruitt Running Through It: Trump Kills Nearly Useless EPA With Nomination of Oil Industry Hack
Ron Jacobs
Surviving Hate and Death—The AIDS Crisis in 1980s USA
David Swanson
Virginia’s Constitution Needs Improving
Louis Proyect
Narcos and the Story of Colombia’s Unhappiness
Paul Atwood
War Has Been, is, and Will be the American Way of Life…Unless?
John Wight
Syria and the Bodyguard of Lies
Richard Hardigan
Anti-Semitism Awareness Act: Senate Bill Criminalizes Criticism of Israel
Kathy Kelly
See How We Live
David Macaray
Trump Picks his Secretary of Labor. Ho-Hum.
Howard Lisnoff
Interview with a Political Organizer
Yves Engler
BDS and Anti-Semitism
Adam Parsons
Home Truths About the Climate Emergency
Brian Cloughley
The Decline and Fall of Britain
Eamonn Fingleton
U.S. China Policy: Is Obama Schizoid?
Graham Peebles
Worldwide Air Pollution is Making us Ill
Joseph Natoli
Fake News is Subjective?
Andre Vltchek
Tough-Talking Philippine President Duterte
Binoy Kampmark
Total Surveillance: Snooping in the United Kingdom
Guillermo R. Gil
Vivirse la película: Willful Opposition to the Fiscal Control Board in Puerto Rico
Patrick Bond
South Africa’s Junk Credit Rating was Avoided, But at the Cost of Junk Analysis
Clancy Sigal
Investigate the Protesters! A Trial Balloon Filled With Poison Gas
Pierre Labossiere – Margaret Prescod
Human Rights and Alternative Media Delegation Report on Haiti’s Elections
Charles R. Larson
Review:  Helon Habila’s The Chibok Girls: the Boko Haram Kidnappings and Islamist Militancy in Nigeria
David Yearsley
Brahms and the Tears of Britain’s Oppressed
FacebookTwitterGoogle+RedditEmail