President Obama gave a stirring speech announcing several things that will be popular among the broad economy (i.e., all us small timers). Using $30 Billion of the TARP repayments to disseminate to regional banks means, on a 10:1 reserve basis, making $300 Billion available through loans to American businesses who are not on Lloyd Blankfein’s speed dial, and do not have mass quantities of questionable collateral that Ben Bernanke will happily accept in exchange for throwing out our tax dollars like beads at a Mardi Gras parade.
There is also removing the banking system from financial aid for college students will also remove huge fees charged by the banks; reinstituting taxes on corporations that move jobs overseas; pushing for a progressive tax on the top 10% of income tax filers; initiatives for farmers and small businesses to increase exports.
These are all to be applauded, nor will I indulge arguments about rhetoric vs. action, but here’s what he didn’t talk about.
He said the US Government has already received most of the TARP money back. That is only partially true on its face and completely false in its inference. TARP has been repaid by just over half. But the gorilla in the room is the all the financial instruments of mass destruction that the Fed hoovered up by the guy who just got a majority vote for another 4 year term, as the thanks of grateful hostages to Wall Street.
I’d like to be able to tell you that there is a dollar number for the value of those instruments, CDO’s which are bonds that hold bundled house mortgages by the millions. These instruments have a value assuming everybody pays their mortgages off, by monthly checks or selling the digs and giving the banks their cash, but everybody aren’t doing that. They either can’t make the payments, or they’re standing pat instead of participating in the housing market because they don’t think they can get an acceptable offer, or they’re worried sick about keeping their paychecks rolling in. That is why, with a near normal "housing surplus," the housing market is still tanking: everybody is frozen in place; the banks don’t know what to do with the empty houses, and the money is sitting on the sidelines.
Those CDO’s literally could be worthless, but assuming they aren’t, what are they worth? Assume the Fed has a loan out to a bank and is holding its CDO’s. The mortgages backing those CDO’s turn into foreclosed properties, or they lose 25% of their value, or even 50% as many have already done. What’s to stop the banks from whistling by the Fed and dropping the keys off to Bernanke just like homeowners are doing with their banks now, and the Fed is left holding the bag?
And how big is that bag? Good estimates place it in the neighborhood of the annual GDP of the United States.
This is not a Ponzi scheme. Ponzi schemes don’t collapse national economies. This is on the order of John Law and the Mississippi Company in 18th century France which did in fact collapse that national economy.
This is what Obama did not talk about, that the US Treasury via the Fed is in hock and knows it can’t print money to double the national debt virtually overnight in the event of another bubble crisis.
Obama said he would go after the bankers, both for repayments, and via taxes. There is talk of new taxes for hedge funds – you know like John Paulson who bet $20,000,000 of his investors’ money, made a deal with Goldman Sachs, and then cashed in when the market collapsed and made $15,000,000 ,000 ($3,000,000,000 personally!) (and where, oh where, did that money come from???).
But Obama did not say he would alter the law to reflect the change in the housing market. Hell no he won’t say that! The effort to allow bankruptcy courts to "cram down" mortgage amounts owed by desperate homeowners so they could stay in their houes was killed in the Senate for the same reason. It isn’t that just the banks would take a huge hit. The Fed who is holding all those CDO’s would be the guy with no chair when the music stopped, which would then leave the US Treasury, the US Government as a whole, and ultimately all us working schmucks holding a bag too heavy to lift.
Here’s the tradeoff.
Now that the investment banking industry has been consolidated into even fewer players, like Goldman, J P Morgan, Wells Fargo, Bank America, and the CDO and credit default swap markets remain unregulated even in the House Banking Reform Bill, which has no assurance it can get past the same Senate that refused to help us little guys in its banking bill, the risk profile for the American economy is arguably worse than it was before the Collapse, and the same guys who bailed it out are in the pilot seat.
So, Obama is nibbling around the edges. I think the deal was confirmed at the White House meeting when Lloyd Blankfein couldn’t be bothered to show up. Why should he? He already knew what was happening anyway. The banks have to look like assholes and take their lumps, but little lumps, not the Big Lump.
In exchange Obama gets to push programs like those mentioned above which the Treasury can probably afford so long as the music doesn’t stop. That doesn’t mean the banks won’t lobby, it just means they won’t put on the full court press until the November elections when they can vomit money all over the United States to get their boys into office and stop all this baloney about fixing a broken system that is keeping them in business.
That is why there will be fewer FDR references in progressive discussions, no WPA, no CCC, nothing that will pull the American workforce back to 4% unemployment anytime soon, no dramatic restructuring of the banking system, except possibly for some firewalls, but the firewalls will protect the investment banks as much as they protect commercial banks. Any serious separating of those, because of the commingling of funds, could easily pull the rug out from under the very delicate dance the Republican morons and their plundering patrons started and which, as long as we can keep dancing, maybe, if we light enough candles and pray hard enough, and the sun keeps coming up, maybe the American economy can breathe a sigh of relief in about 10 to 15 years.
Until then, Obama has a big bag of shit that George Bush left on his desk and he needs backhoe just to make room on it for the next crisis.