This is Ilargi's intro to today's post over at The Automatic Earth:
There are two separate issues today in the US that occupy my mind. One is the Wall Street Journal revelation that at least $50 billion in taxpayer money ostensibly doled out to save AIG has gone straight to a consortium of the world's largest banks. That is worrisome because it should never have gone there. It also is because just a few days ago, Fed officials refused to tell Congress about these behemoth transfers of public funds. Yes, perhaps it’s also worrisome that the Journal found out regardless, and it certainly is that the banks' dealings with AIG consisted, purely and simply, of gambling wagers for which the once mighty insurer volunteered to be counterparty. The American taxpayer did not, and should never have been forced to pay a dime for the bets. The reason why (s)he was anyway leads to the by far most troubling part of the story. It shows that in the White House and on Capitol Hill, it's the bankers who have final control, not the people.
The second issue, which increasingly occupies my thoughts, is the Federal Deposit Insurance Corporation. Last night, the FDIC seized its 17 bank this year. Only one. The agency operates under a veil of secrecy, so it's hard to prove much of anything, but I find it very hard to believe that out of the 8500 banks the FDIC insures, there was only one in deep enough trouble this week to warrant a seizure, even if many have been handed TARP cash. What I think is happening is that the FDIC has lost control of the situation, that it can't effectively handle more then one bank at a time at this point, and a small one at that.
I'd like to know what stage of the game the previous 16 2009 takeovers are in. The recently and hastily introduced Depositor Protection Act of 2009 would give the FDIC emergency access to $500 billion in government funds. The introduction of the act is somewhat bewildering, since the agency is part of the government to start with, and already has a window at the Treasury. I can understand the fears that the funds are designated for a major bank failure in the near future, but we simply won't be allowed to know until it happens.
FDIC chief Sheila Bair may be a competent financial servant, though I would doubt it by now. What I don't doubt is that she is way below par when it comes to communication and PR (unless she's deliberately trying to create a panic). She has recently warned that the FDIC could go broke, and she has fumbled an initiative to force banks to pay more to the agency to be covered under its programs. While it's obvious that the FDIC's guarantee of $250.000 per bank account largely has a symbolic function, since it lacks both funding and manpower to execute the seizure of one or more major banks. Still, I’m sure it’s not part of Ms. Bair's job description to cast doubt on her agency's role, even on the symbolic part of it. Once people start doubting the FDIC, events could unfold very fast.
Both issues above give me the impression that it's not just the FDIC that’s losing it's grip, it's the government itself, and with it the entire political system. I started warning way before Obama was even elected that we were looking at something much bigger than a financial or an economic crisis, that the way Bear Stearns and Lehman Brothers and Paulson's TARP were handled pointed to a full-blown political crisis. I've seen very few comments since that reflect that realization, but that doesn't make it any less relevant. I’m hopeful that today more people will wake up to the flip side of the confidence issue, and the dark side of the change we can believe in.
You can't treat these things as mere words, and most certainly not while millions of people lose their homes and jobs. Words spoken about confidence and trust and pulling together as a nation to enable an economic turnaround will ring eerily hollow in the face of tens or hundreds of billions of the people's money transferred to the private accounts of global financiers and market makers who've bet on the wrong horses.
People are still willing to give the new president the benefit of the doubt, and they still have faith left that he can pull them out of the deepest of holes. But that will soon be gone if the AIG bail-out details become publicly known. Obama has a lot of credit, but he's also losing it fast. He must hope that this topic remains somehow hidden on a backburner for the time being, or he could fall fast. There are a lot of people who are already very fed up and angry, and more of this sort of thing could ignite some mighty sparks. If the president cannot shake the image of himself as condoning the bankers' robbing the public purse under the guise of rescuing the nation, he will paint himself into a very gloomy corner.
Not a penny of the $50 billion for AIG's bookies serves to alleviate the plight of the people, and they will grow less and less willing to believe otherwise. Washington politics has changed precious little since January 20, which means that for better or for worse, Obama is losing what Congress and the Senate have long since seen evaporate - political capital. The Hill today is nothing but a battlefield for hegemony over money and power. It has no connection with the interests of the people anymore. And that given situation will implode and explode all at the same moment once enough people get poor and miserable and desperate enough.
The government can't sit on its hands much longer if Citigroup shares keep on falling. It has to act, to do something, too many Americans have too much money deposited with the bank. In fact, there is at least $600 billion in Citi accounts, while the company's market cap is hardly above $6 billion. There are increasing demands to remove Treasury Secretary Tim Geithner, and I agree whole-heartedly. He's always been a wrong choice. Thing is, who's going to take his seat? The entire Obama finance team, as I've said since they were appointed, should be kicked out. You can't cleanse an economy with the same people who've soiled it. But an entire new team? I can't see that either.
After all, as I said, it's the bankers that control the government, as the AIG "rescue" abundantly and unequivocally shows. This government may well fall along with Citigroup, if only because it lacks the instruments to deal with a collapse of the order. Read my lips: all they can think of is to throw more billions and trillions at the issue, and hope some of it will stick. It's all still entirely one-dimensional. I see no answers, no ethics, no ideas that would help dig ordinary people out of the quicksand that rapidly drags them down. Well written and well-delivered speeches provide time and space to move, but real political capital comes from the proven ability to tackle issues. All I see is the image of "leaders" that draw people deeper into misery, pulling on their feet, not lifting them out by their shoulders. Political bankruptcy may be a novel term for many, but trust me, it does exist. In democracies.