FacebookTwitterGoogle+RedditEmail

The Obama "Dream Team"

by MIKE WHITNEY

Things are getting crazier by the day. On Tuesday, Treasury Secretary Henry Paulson announced that the Fed would commit another $800 billion to fight the financial crisis which has spread to the broader economy and is causing sharp declines in consumer spending.  The Fed plans to buy $600 billion of mortgage-backed securities (MBS) from Fannie Mae and Freddie Mac and another $200 billion of Triple A bonds from non-bank financial companies that provide financing for consumers. There’s just one little hitch, Fannie and Freddie are already owned by the government, so buying the bad paper is like moving the figures from one ledger to another. It’s pointless, except for the fact, that by shuffling the paperwork, Bernanke can drive down long-term interest rates and (hopefully) rekindle flagging home sales. It’s quite a trick.

And with the other $200 billion he can kick-start the securitization market by purchasing bundles of student loans, credit cards and car loans. Investors have been boycotting the asset-backed securities (ABS) markets for months now, which has choked off the flow credit to consumers. So the Fed is trying to unclog the plumbing by stepping in as the lender of last resort. Of course, if the Fed really wanted to get money to consumers there are much easier ways to do it, like cutting the payroll tax or mailing out stimulus checks or issuing tax rebates to couples making under $60,000 per year. But that’s not what Bernanke wants to do. The real objective is to reignite securitization because that’s the vehicle the investment banks and hedge funds use to increase profits through leveraged bets on odd-sounding derivatives. (CDO, MBS, CDS.) But no one is buying dodgy securities anymore because no one knows their true value. Until that can be worked out, investors will stay away. That’s why Bernanke and Paulson would be better off with a little less liquidity and a little more transparency. Price discovery for structured investments is critical. If investors know the market price, then they’ll jump in. If not, it’s no dice.

Bernanke and Paulson are trying to tackle the financial crisis from the wrong end. This isn’t about liquidity or “access to credit”, it’s about confidence. The public’s trust has been betrayed a million times over. They’ve been tricked with WMD, bamboozled with phantom enemies, and cheated with bogus securities. All the surveys say the same thing; public confidence is at an all-time low. As a result, fear and pessimism are more widespread than any time in recent history. People no longer expect tomorrow to be better than today. In fact, they expect it to be worse, and for good reason. The country has broken loose from its moorings and is adrift. There’s no accountability at any level of government anymore; it doesn’t matter how big or heinous the crime, no one pays. The justice system is a sham. In fact, the D.O.J. is just a weapon for destroying political enemies; that’s it. The one noteworthy conviction in the last 8 years was home-decorating guru Martha Stewart. What a joke. In his memoirs, Bush can boast, “At least we got Martha Stewart off the streets.”

And it’s not just the justice system that lacks credibility either; it’s the financial system, too. The stampede out of the stock market to US Treasuries shows how quickly trust can turn to panic. The downward spiral of the economy reflects the mood of the country; dark and gloomy. That’s not something that can be changed with more liquidity. After all, the economy is more than the sum of its parts, just like people are more than just consumption machines that can be zapped like rats into spending themselves into oblivion. They’re sentient beings who can see the deteriorating economic conditions closing in on them and threatening their security. They’re scared. Bernanke — the academic — sees the economy through the lens of his research on the Great Depression. He, like many other monetarists, believe that the depression was the result of the one-third contraction in the money supply during the 1930s. It is a widely held view and it could be true. But if that’s the case, than why haven’t the Fed’s myriad lending facilities–which have flooded the financial system with trillions of dollars of liquidity — stopped the markets from crashing and the recession from deepening. Could it be that there were other factors besides just money supply? People are hunkering down for a reason, and its not just lost revenue. They’ve lost faith in their institutions–the government, the banks, and the media; everybody is in it for themselves, and it shows. Even now, with the economy teetering at the brink of disaster, high-ranking officials like Paulson are still diverting hundreds of billions of dollars from the Treasury to their Wall Street buddies leaving nothing behind but a few scraps for the working stiffs. And Paulson isn’t alone either; his “dog eat dog” creed is the prevailing ethos of the corrupt oligarchy that runs the country, Republican and Democrat alike, it makes no difference. It’s “me first” and the public be damned.

If Bernanke really wants to know how the economy is doing, he should pay a visit to any town or city in America. Business is off everywhere; it’s not just retail. The restaurants, the gas stations, the dry cleaners; even the casinos are hurting. The lines at the food banks are longer than the unemployment lines, and the only business that’s booming is the pawn shops where the family silver is traded away for gas money or a few bucks to blow on groceries. This is what recession looks like from the ground floor where people are struggling to just make ends meet. No more 3-course dinners at Olive Garden and no more $5.25 lattes and cranberry scones at Starbucks. It’s Campbells for lunch, Spam for dinner and plenty of wool blankets for evening TV.

Does Paulson think he can “turn off” the public’s pessimism like a light switch? Does Bernanke think he can get people to spend themselves further into debt by lowering interest rates? It can’t be done. And the Obama camp is going to run into the same brick wall. The nation’s confidence has been shaken and people are developing a bunker mentality.

The truth is, Obama was shoehorned into the White House because the ruling elite saw that the country was slipping into a consumer-led depression. They needed a bright new face to restore confidence and spark optimism during the tough times ahead. But now that he’s been elected, they’ve surrounded him with the very men who, to great extent, created the present crisis. Lawrence Summers pushed for the repeal of the laws which prevented commercial banks from merging with the Wall Street casinos and he also helped to deregulate derivatives trading which now threatens to bring down the entire financial system if a major player, like Citigroup, goes under.

Timothy Geithner and Lawrence Summers were central figures in the bubble-driven growth and deregulation mania of the last decade. Their influence factored heavily into the speculation that was brought on by low interest rates, easy credit and massive leverage; the lethal combo that created the present crisis. Their elevation to the top positions in the administration –along with Paul Volcker–proves that the Obama presidency is just more political fakery; a charming and charismatic figurehead placed in front of the executive podium to conceal the machinations of deeply-entrenched interests who are busy rebuilding the trickle-down system from the ground up. There’s nothing new here, and certainly nothing progressive. The much-celebrated “Dream Team” is an amalgam of Rubin-clones who used Obama as a land-bridge to the White House to strengthen the status quo and get on with the task of shifting the nation’s wealth to Wall Street’s economic royalists.

The fact is, the Obama star-studded economic recovery team emerges from the same ideological petrie-dish as Bernanke and Paulson. Their world view is shaped by the same strong sense of entitlement which will ultimately prevent them from enacting the regulatory reforms that need to be put in place to restore transparency, confidence and credibility. Instead, they will unleash a torrent of stimulus spending (infrastructure and green technology mainly) followed by unorthodox monetarist/fiscal chicanery (like purchasing stocks on the equities market or buying long-term Treasurys) all of which will hide the fact that they are not forcing the bad debts out into the open so they can be written down and the markets can reestablish equilibrium.

No one disputes that Geithner, Summers and Volcker are smarter and more competent than Team Bush, and that, their Keynesian plan to inject massive doses of stimulus into the economy will have a positive effect. But that’s as far as it goes. The men behind these remedies are limited by institutional loyalties that will keep them from overhauling the system in meaningful way.  Neither Summers, nor Geithner nor Volcker would ever dare to tamper with the revenue-producing system which maintains the orderly division between rich and poor. That just won’t happen.

So, after the fanfare subsides and Obama’s economic team puts its stimulus plan in motion, there should be some marginal uptick in economic activity. But unless the underlying problems are addressed, there’s little hope of any lasting recovery. The banks need to take their medicine and write down the losses. Regulators have to decide which institutions are solvent and can be saved, and which are underwater and will have to be shut down.  The Obama administration will have to open a bank morgue like the Resolution Trust Corporation (RTC) so the bad assets from failed banks can be sold at auction to the highest bidder. That’s the only way to put this whole mess behind us and start to dig out.  Putting the securities up for bid will restore confidence and, eventually, lure investors back into the stock market. It will also remove the zombie banks from hanging on and depending on government bailouts.  There’s a method for unwinding sick banks through restructuring debt. It needs to be put to use.

Regardless of what the new administration does, the stock markets will take another leg down between the end of 2009 to early 2010, finding a bottom on the Dow of 4,500 or thereabouts. 70 per cent plus declines took place on the NASDAQ following the dot.com bust, Japan during the 1990s “lost decade” and the Great Depression. In none of these cases was the bottom reached in the first year. Hedge fund redemptions will force more deleveraging and more wild swings in volatility. The banks, which have accounted for nearly half of their losses, will need to write off another $800 to $900 billion before its all over. No one knows where they’ll get the capital. Unemployment will skyrocket, housing will overshoot to the downside, and there will be the first random incidents of political instability in major US cities. The economy will remain flat on its back for some years into the future. How quickly the markets rebound depends on whether Obama’s team understands that the system needs deep structural changes and a banking system that is not paralyzed with debt.

MIKE WHITNEY lives in Washington state and can be reached at fergiewhitney@msn.com

 

 

 

 

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

More articles by:
Weekend Edition
May 27, 2016
Friday - Sunday
John Pilger
Silencing America as It Prepares for War
Rob Urie
By the Numbers: Hillary Clinton and Donald Trump are Fringe Candidates
Andrew Levine
Hillary’s Gun Gambit
Paul Street
Feel the Hate
Daniel Raventós - Julie Wark
Basic Income Gathers Steam Across Europe
Gunnar Westberg
Close Calls: We Were Much Closer to Nuclear Annihilation Than We Ever Knew
Jeffrey St. Clair
Hand Jobs: Heidegger, Hitler and Trump
S. Brian Willson
Remembering All the Deaths From All of Our Wars
Dave Lindorff
With Clinton’s Nixonian Email Scandal Deepening, Sanders Must Demand Answers
Pete Dolack
Millions for the Boss, Cuts for You!
Peter Lee
To Hell and Back: Hiroshima and Nagasaki
Karl Grossman
Long Island as a Nuclear Park
Binoy Kampmark
Sweden’s Assange Problem: The District Court Ruling
Robert Fisk
Why the US Dropped Its Demand That Assad Must Go
Martha Rosenberg – Ronnie Cummins
Bayer and Monsanto: a Marriage Made in Hell
Brian Cloughley
Pivoting to War
Stavros Mavroudeas
Blatant Hypocrisy: the Latest Late-Night Bailout of Greece
Arun Gupta
A War of All Against All
Dan Kovalik
NPR, Yemen & the Downplaying of U.S. War Crimes
Randy Blazak
Thugs, Bullies, and Donald J. Trump: The Perils of Wounded Masculinity
Murray Dobbin
Are We Witnessing the Beginning of the End of Globalization?
Daniel Falcone
Urban Injustice: How Ghettos Happen, an Interview with David Hilfiker
Gloria Jimenez
In Honduras, USAID Was in Bed with Berta Cáceres’ Accused Killers
Kent Paterson
The Old Braceros Fight On
Lawrence Reichard
The Seemingly Endless Indignities of Air Travel: Report from the Losing Side of Class Warfare
Peter Berllios
Bernie and Utopia
Stan Cox – Paul Cox
Indonesia’s Unnatural Mud Disaster Turns Ten
Linda Pentz Gunter
Obama in Hiroshima: Time to Say “Sorry” and “Ban the Bomb”
George Souvlis
How the West Came to Rule: an Interview with Alexander Anievas
Julian Vigo
The Government and Your i-Phone: the Latest Threat to Privacy
Stratos Ramoglou
Why the Greek Economic Crisis Won’t be Ending Anytime Soon
David Price
The 2016 Tour of California: Notes on a Big Pharma Bike Race
Dmitry Mickiewicz
Barbarous Deforestation in Western Ukraine
Rev. William Alberts
The United Methodist Church Up to Its Old Trick: Kicking the Can of Real Inclusion Down the Road
Patrick Bond
Imperialism’s Junior Partners
Mark Hand
The Trouble with Fracking Fiction
Priti Gulati Cox
Broken Green: Two Years of Modi
Marc Levy
Sitrep: Hometown Unwelcomes Vietnam Vets
Lorenzo Raymond
Why Nonviolent Civil Resistance Doesn’t Work (Unless You Have Lots of Bombs)
Ed Kemmick
New Book Full of Amazing Montana Women
Michael Dickinson
Bye Bye Legal High in Backwards Britain
Missy Comley Beattie
Wanted: Daddy or Mommy in Chief
Ed Meek
The Republic of Fear
Charles R. Larson
Russian Women, Then and Now
David Yearsley
Elgar’s Hegemony: the Pomp of Empire
FacebookTwitterGoogle+RedditEmail