Infinite Debt

Thomas Geoghegan (pronounced ja-hay-gun) has an article in Harper's called Infinite Debt: How Unlimited Interest Rates Destroyed the Economy. He was on Amy Goodman's Democracy Now show last Tuesday. You hear it or read the transcript here. It's well worth the time.

It reads, quote, “no amount of New Deal regulation or SEC-watching could have stopped what happened…The problem was not that we ‘deregulated the New Deal’ but that we deregulated a much older, even ancient, set of laws.” The article goes on to say, quote, “We dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter’s term.”

And who came after Carter? Why, yes, that would be Saint Ronnie of the Ray-Gun. He refers to a SCOTUS decision in 1978: Marquette National Bank v. First of Omaha Service Corp.

Sure, that’s the Brown versus Board of Deregulation for the financial sector. The case—Justice Brennan, of all people, opinion said that banks that operate—out-of-state banks that were subject to the National Banking Act of 1864, signed by President Lincoln in the middle of the Wilderness Campaign, effectively preempted any state regulation capping the interest rates of those banks when they sent their credit cards in from out of state. Now, back in 1864, banks in Delaware weren’t operating out in Nebraska or handing out credit cards across the country, and there was no such thing as Visa or MasterCard.

The effect of this was that the big national banks were not subject to any state usury law, because the Banking Act of 1864 had no interest rate cap on it, not contemplating the kind of situation that we’re in today. And in effect, this sealed what had been a trend throughout the country, which is lifting these interest rate caps for banks and giving consumers easy credit on the premise that they would just pay tons and tons of interest so that the banks were protected if the loan weren’t repaid. In fact, the banks had incentive to hand out credit cards and hope that the loans would not be repaid, because the interest rates on these credit cards were so high.

So the capital in this country began to shift in the financial sector. That’s why the financial sector began to bloat up. That’s why we ended up, by 2006, having a third of all profits going into the banks and the financial firms and not into the real economy.

This is nothing less than the banksters waging economic war, class war, on the rest of us.

I feel one of the reasons I am in favor of the bailout of the auto industry is, aside from all the other reasons, a sense of guilt that we set up all the returns in this economy in favor of financial firms and really disinvested from industry. And even worse, we began to turn industry into a banking itself. General Motors, General Electric began to operate banks, because that’s where they made the big profit, in the loans to consumers, uncapped interest. It’s a very destructive situation.

And this isn’t some left-wing progressive critique circa 2009. Adam Smith, in The Wealth of Nations, warned how important it is to have interest rate caps on the financial sector, or all the money will gush into there and out of productive uses. Keynes, in The General Theory of Employment, Interest, and Money, the great classic, 1936, has a little chapter at the end saying, “Yes, we have deficit spending. I’ve got this way of getting out of the Depression. By the way, we’ve got to keep the interest rate caps on the banks.”

...Many economic historians, see history as nothing but a turf war between three groups: the manufacturers, workers and the bondholders, or the financial sector. So where does labor fit in in all of this? People lost the ability to get wage increases and got the ability, an incredible ability, really unknown in previous times, to get credit cards with which they had high rates of interest. So, unable to get wage increases, people—or unable to get union cards, really, people got credit cards and began running up these great debts, which addicted the country to high rates of return in the financial sector, so that people were kind of spending their way out of the real economy, pushing more and more money, by the fact that they were going into debt, into this virtual financial sector economy. So, really, the inability of people to raise their own wages and the incredible ease with which they could get credit instead helped create this flow of capital out of manufacturing and into finance. You know, we, the little people in this country, helped finance the bloating up of this financial sector and really the downsizing of our own jobs in the real economy. We sent the signals, you know, to investors to put money into the financial sector and not into the manufacturing sector.

Check it out.

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The Big Takeover.

If you haven't seen Matt Taibbi's The Great Takeover in Rolling Stone, it is absolutely must read.

You gotta love an article about the Wall Street mess that begins,

It's over — we're officially, royally fucked.

And goes on to,

The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people's money would make his dick bigger.

That guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington's deregulation of the Wall Street casino.

It goes on to explain collateralized debt obligations (CDO) and credit default swaps (CDS),

In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can't make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope's mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job.

Secondly, Cassano was selling so-called "naked" CDS deals. In a "naked" CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A's mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else's house would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the kick went wide.

He goes on to talk about Phil Gramm, the scumbag former senator from Texas, who led the charge in 1999 with two pieces of legislation that effectively overturned the safeguards put in place by FDR to prevent this sort of nonsense.

In the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn't going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?

The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities. Commercial banks — which, thanks to Gramm, were now competing directly with investment banks for customers — were driven to buy credit swaps to loosen capital in search of higher yields. "By ruling that credit-default swaps were not gaming and not a security, the way was cleared for the growth of the market," said Eric Dinallo, head of the New York State Insurance Department.

You really should read it.

As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.

The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.

"But wait a minute," you say to them. "No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what's left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?"

But before you even finish saying that, they're rolling their eyes, because You Don't Get It. These people were never about anything except turning money into money, in order to get more money; valueswise they're on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.

Good luck with that, America. And enjoy tax season.

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AIG Guy Quits. World Goes On...

The New York Times printed a resignation letter from a guy at AIG, one Jake DeSantis, who worked in the Financial Products Division, heading units in "equities and commodities," that earned the company $100 million in profits.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

Poor baby... Let down by Suits and Politicians, imagine that. At least he didn't claim to be working when he said he spent ten, rwelve, fourteen hours away from his family. Excuse me? What do you think the rest of us do out here? We're all pretty much working those kind of hours and I guarantee we are making no where near that kind of money. My guess is that he still has well into seven figures in his portfolio.

I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

You expected your management to back you up? What planet have you been living on? Talk about living in a privileged bubble!

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

No shit Sherlock! You don't think all those hefty paydays aren't directly related to the mess we're in? You admit, you're set, you have a lot of money saved up. It wasn't from "hard work" that got you that money. It's from skimming the profits that working people deserved. Most of us aren't as fortunate, and WE'RE NOT TO BLAME EITHER!

What a whiner!!! Don't let the door hit you in the ass on the way out, Mr. DeSantis.

And if people in your "profession" are feeling fear, WELL THEY SHOULD! You should get down on your knees at night and thank God that we aren't socialists or communists or whatever the right wing and other Suits like yourself want to call us. If we were, you wouldn't be afraid. You'd be dead.

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This is Not Good

China, who is probably the largest holder of US dollars is going to be pushing to move away from the dollar as the default world reserve currency.

Right now, all nations need to have dollars in their reserves mostly to pay for oil which is denominated in dollars. It was one of the reasons they attacked Iraq - Saddam was moving to get paid in euros. Iran has also talked about this publicly, which is one of the reasons for the bad press.

If this happens, we're talking about bigtime inflation, which may actually mitigate against it, it may not be possible now without huge affects hitting the worldwide economy.

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Yep, the World Has Changed

You all remember how things were back a few years ago?  I'm afraid we'll be thinking how good those days were some years from now.

I'm not holding out any hope that the old paradigm is going to return.  It really can't, because like the Soviet system there's a fatal flaw in the theory, but it's only going to go kicking and screaming every step of the way.

The last thirty years have shown us just what happens when you let Wall Street, so-called "free enterprise", run things.  When Wall Street crashed the system big time resulting in what we now call the First Great Republican Depression, we got a president that took on the banksters of his day, overthrowing their power and implementing policies that favored working people greater than has ever been seen in this country. In his acceptance speech to the Democratic Convention in 1936, his "Rendevous With Destiny" speech, FDR spelled out what he considered the greatest threat to the nation that he was calling on Americans to turn back:

I cannot, with candor, tell you that all is well
with the world. Clouds of suspicion, tides of ill-will and intolerance
gather darkly in many places. In our own land we enjoy indeed a
fullness of life greater than that of most nations. But the rush of
modern civilization itself has raised for us new difficulties, new
problems which must be solved if we are to preserve to the United
States the political and economic freedom for which Washington and
Jefferson planned and fought.

That very word freedom, in itself and of
necessity, suggests freedom from some restraining power. In 1776 we
sought freedom from the tyranny of a political autocracy - from the
eighteenth-century royalists who held special privileges from the
crown. It was to perpetuate their privilege that they governed without
the consent of the governed; that they denied the right of free
assembly and free speech; that they restricted the worship of God; that
they put the average man's property and the average man's life in pawn
to the mercenaries of dynastic power; that they regimented the people.

Since that struggle, however, man's inventive genius
released new forces in our land which reordered the lives of our
people. The age of machinery, of railroads; of steam and electricity;
the telegraph and the radio; mass production, mass distribution - all
of these combined to bring forward a new civilization and with it a new
problem for those who sought to remain free.

For out of this modern civilization economic
royalists carved new dynasties. New kingdoms were built upon
concentration of control over material things. Through new uses of
corporations, banks and securities, new machinery of industry and
agriculture, of labor and capital - all undreamed of by the Fathers -
the whole structure of modern life was impressed into this royal
service.

There was no place among this royalty for our many
thousands of small-businessmen and merchants who sought to make a
worthy use of the American system of initiative and profit. They were
no more free than the worker or the farmer. Even honest and
progressive-minded men of wealth, aware of their obligation to their
generation, could never know just where they fitted into this dynastic
scheme of things.

It was natural and perhaps human that the privileged
princes of these new economic dynasties, thirsting for power, reached
out for control over government itself. They created a new despotism
and wrapped it in the robes of legal sanction. In its service new
mercenaries sought to regiment the people, their labor, and their
property. And as a result the average man once more confronts the
problem that faced the Minute Man.

The hours men and women worked, the wages they
received, the conditions of their labor - these had passed beyond the
control of the people, and were imposed by this new industrial
dictatorship. The savings of the average family, the capital of the
small-businessmen, the investments set aside for old age - other
people's money - these were tools which the new economic royalty used
to dig itself in.

Those who tilled the soil no longer reaped the
rewards which were their right. The small measure of their gains was
decreed by men in distant cities.

Throughout the nation, opportunity was limited by
monopoly. Individual initiative was crushed in the cogs of a great
machine. The field open for free business was more and more restricted.
Private enterprise, indeed, became too private. It became privileged
enterprise, not free enterprise.

An old English judge once said: "Necessitous men are
not free men." Liberty requires opportunity to make a living - a living
decent according to the standard of the time, a living which gives man
not only enough to live by, but something to live for.

For too many of us the political equality we once
had won was meaningless in the face of economic inequality. A small
group had concentrated into their own hands an almost complete control
over other people's property, other people's money, other people's
labor - other people's lives. For too many of us life was no longer
free; liberty no longer real; men could no longer follow the pursuit of
happiness.

Against economic tyranny such as this, the American
citizen could appeal only to the organized power of government. The
collapse of 1929 showed up the despotism for what it was. The election
of 1932 was the people's mandate to end it. Under that mandate it is
being ended.

The royalists of the economic order have conceded
that political freedom was the business of the government, but they
have maintained that economic slavery was nobody's business. They
granted that the government could protect the citizen in his right to
vote, but they denied that the government could do anything to protect
the citizen in his right to work and his right to live.

Today we stand committed to the proposition that
freedom is no half-and-half affair. If the average citizen is
guaranteed equal opportunity in the polling place, he must have equal
opportunity in the market place.

These economic royalists complain that we seek to
overthrow the institutions of America. What they really complain of is
that we seek to take away their power. Our allegiance to American
institutions requires the overthrow of this kind of power. In vain they
seek to hide behind the flag and the Constitution. In their blindness
they forget what the flag and the Constitution stand for. Now, as
always, they stand for democracy, not tyranny; for freedom, not
subjection; and against a dictatorship by mob rule and the
over-privileged alike.

Welcome back.

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What's a Trillion Dollars, Daddy?

Check out this graphic on what a trillion dollars looks like.

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