$7.7 Trillion to Banks Minus $7.4 Trillion from Homeowners = Debt Slavery

IDEAS ARE MORE POWERFUL THAN MONEY.

THAT’S WHY THE OCCUPY WALL STREET, ETC. PEACEFUL DEMONSTRATORS ARE TREATED SO HARSHLY.

THEY LAY BARE THE HYPOCRISY AND HOLLOW FOUNDATIONS OF OUR “DEMOCRACY”. 

An unelected group accompanied by bankers as their board of directors, The Federal Reserve secretly lent $7.7 trillion to financial institutions during the economic collapse, according to Bloomberg News, which has been trying to get Fed records since 2009.  The Fed and the banks have fought disclosure all the way to the Supreme Court, which turned down the case.  Congress didn’t know about the money, even when it was debating TARP, the controversial $700 billion bank bailout pushed by then-Treasury Secretary Hank Paulson.  Many Treasury employees under Hank Paulson didn’t know about the secret lending program.  Even some Fed governors didn’t know about it:

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.”

$7.7 trillion is more than half the U.S. annual GDP.  One can only conclude:

a)      The too-big-to-fail banks were in much worse shape than they told their shareholders, depositors and the world;
b)      If the extent of their insolvency was known, Congress might have pushed for greater restrictions, such as breaking up the banks.
c)   We should have shut them down and started new banks like the North Dakota State Bank.

During one day (12/5/2008) banks required a $1.2 trillion infusion.

The six “too-big-to-fail” banks (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley received $160 billion from TARP but borrowed as much as $460 billion from various Fed lending facilities, including the Term Auction Facility (TAF).   

In a letter to shareholders, Jamie Dimon, the CEO of JPMorgan Chase, said the only reason it borrowed any money from the Fed was to encourage other banks to borrow to lessen the “stigma”:

He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on 2/26/2009 came more than a year after the program’s creation.

The Fed justified its actions by claiming that its programs prevented a collapse of the financial system and “[kept] credit flowing to American families and businesses.”  This was not true.  Most businesses had trouble borrowing even with good credit.  Despite their easy access to funds, banks became extremely risk-averse.  The credit lines of small businesses and individuals were cut.  The Fed also said, “all loans were backed by appropriate collateral.”  If the collateral was “appropriate”, why would the banks need so much money?

At the same time that they were accepting so much money and lying to their shareholders and the world, the big banks fought fiercely against regulation, particularly the idea that they should be broken up.  The epithet “too-big-to-fail” meant that a collapse in one sector would cause a chain reaction leading to systemic financial meltdown.

By keeping the true nature of their insolvency secret, the Fed and the banks conspired to maintain and enhance their monolithic power.  This is moral hazard on a global scale.  The market perceives that the government won’t let these banks fail because of their size.  Therefore, the big banks borrow money at lower rates than other businesses that don’t jeopardize the world financial system.  The bankers speculate wildly because they know the losses will be borne by the taxpayers, thus ensuring a future collapse.

The Federal Reserve, an unelected body, basically decided which businesses would live or die.

Here are two figures:

The Fed acting in secrecy plugged a $7.7 trillion hole in the rapidly collapsing banks.  At the same time,

$7.4 trillion was lost in housing wealth by the middle class when bubble burst.

That’s the amount of wealth that’s been lost from the bursting of the housing bubble according to the Federal Reserve’s comprehensive Flow of Funds report.  It’s how much homeowners lost when housing prices plunged 30% nationwide.

Nobody stood by to bail out the homeowner.  The middle class, the engine of prosperity, was being destroyed.  Wage gains over the past few decades were negligible or declining.  Households kept up with spending with two working adults instead of one.  Then housing came into play as a tradeable asset and asset prices rose.  Values soared far beyond objective touchstones.  You couldn’t get a raise or make money in the stock market, but you could refinance your house in order to spend.  That bubble spending spawned auxillary businesses and jobs, all of which are now gone with the wind.

 “[O]n average, American homeowners lost 55% of the wealth in their home.” :

For the 22 million families right in the middle of the income distribution (those making between $39,000 and $62,000 before taxes) about 90% of their assets was in the house.  Now half of their wealth is gone and it will never come back as long as they live.

The engine has sputtered to a stop.  The middle class is mired in debt.  28% of all U.S. mortgages are underwater.  People are faithfully making their mortgage payments with no hope they will get out from under their enormous overhang of debt, praying that they don’t get sick or fired.  There is no extra money to spend.  The American consumer, responsible for 70% of GDP, is tapped out.

Our leaders aren’t acting or even talking seriously about this crisis.  But why should they?

With the upper classes prospering and global markets booming, they don’t need the U.S. middle class anymore.  The market is up, profits are soaring and the corporate jet is fueled and ready for takeoff.

And the middle class can’t buy bread?  Let them eat cake.

When the bubble burst for the homeowner, the value of his house went down.  His mortgage, however, stayed the same.  Commercial real estate debt could be restructured in the courts; not so for residential mortgages.  Ordinary market rules don’t apply.  William C. Dudley, the president of the Federal Reserve Bank of New York (Tim Geithner’s old haunt) contrasted the separate systems of working out troubled debts:

”In contrast to the efficient mechanisms in place in the commercial property market…the infrastructure of the residential mortgage market is wholly inadequate to deal with a systemic shock to the housing market.  Left alone, this flawed structure will destroy much more value in housing than is necessary.”

Many homeowners resent any sort of substantial mortgage modification or heaven forbid, principal reduction because they perceive themselves as responsible and the others irresponsible.  They did not borrow more than they could afford.  Others lied about their income, bought McMansions on a janitor’s salary and were otherwise profligate.  This is the same moralizing that cuts off your nose to spite your face. 

The housing story is a tawdry one, starting with poorly explained and badly underwritten subprime mortgages given to unqualified borrowers sometimes financing 100% of the cost.  Wince while following the chain of private-label securitizations which enriched every link with fat fees starting with the mortgage broker who was paid for every loan he made however rotten, the investment banks pooling the toxic mortgages together and slicing the sausage slapped with a phony triple-A rating and sold to investors who didn’t do their due diligence.  The securitization machine was so fast and sloppy that proper recordkeeping wasn’t done and papers proving ownership were lost or forged.  However, if you focus on the tree, you can’t see the forest.  Take another case: Germany’s self-righteousness may lead it into poor bond auctions and credit rating downgrades:

[F]ocusing on such outrages can obscure what needs to be done.  By now we should understand that the problems went far beyond the subprime market.  There are many prime loans, made to responsible borrowers with good credit, that are in deep trouble.  Property values did not collapse only in the neighborhoods where dubious loans were being made.

Housing prices are still falling.  Banks are still making fees servicing mortgages, delinquencies and foreclosures.  Over the last two quarters the percentage of underwater homeowners has increased by 25%.  As housing equity declines, the homeowner groans under more and more debt until it becomes “unsustainable”; that is, all his excess income is going to pay the mortgage.  He has no job mobility because he can’t sell his house.  Federal, state and local governments are slashing their budgets, laying off millions of workers.  The private sector has moved its operations overseas to emerging markets, local labor and consumers with discretionary income.  They’re hiring over there, and cutting jobs here.

Moral superiority and righteousness can drag us down the road of austerity just as it’s doing in the Eurozone.  Just as the Fed made its choice with its unlimited secret trillion-dollar lending program, so too do unelected banking representatives put in place in the Troika, Greece and Italy make their decisions based on austerity for the underclass.  As an economic growth engine, austerity is genocide for the people.  For the banksters seeking to wring every dime from a pauper, it’s manna from heaven.  For the self-righteous like Jens Weidmann, head of the Bundesbank, it’s tough love and just desserts for the wastrel “Club Med” countries. 

It’s as though The Merchant of Venice had a new ending: Shylock gets his pound of flesh on a platter.  In exchange for a neat billion-dollar package, the dutiful country will slash salaries and hike taxes on the working and middle class.

You can see an example of the two sides of the coin within Ireland:

The German chancellor, Angela Merkel, recently praised the Irish prime minister, Enda Kenny, for setting an “outstanding example” while the French president, Nicolas Sarkozy, declared that Ireland was already “almost out of the crisis.”

The Troika and other financial powerhouses (I’m sure Geithner and the president are there, too) are happy.  But the Irish people are suffering:

Salaries of nurses, professors and other public sector workers have been cut around 20% [that’s in 1 year].  A range of taxes, including on housing and water, have increased.  Investment in public works is virtually moribund.

On Monday and Tuesday, Mr. Kenny’s government is announcing an additional 3.8 billion euros in tax increases and spending cuts for 2012 that will affect health care, social protections and child benefits.

There are glimmers of statistical recovery which are belied by the lack of demand and unemployment ticking up to 14.5%.  The rate would be even higher if it weren’t for so many natives leaving for other countries and the hope for more opportunities.  Highly trained professionals such as accountants, engineers and dentists are moving with their families for Australia and Canada and they’re not looking back.

The Economic and Social Research Institute, based in Dublin, “cited an expected recession in the wider euro zone, in part because the austerity being pressed on much of Europe by German and the ECB is seen as worsening the prospect for recovery rather than improving them.”:

”The present situation contains elements reminiscent of policy during the Great Depression, when a mounting crisis was confronted by an orthodoxy that resulted in great poverty that could have been avoided,” the institute wrote in a report.

The only thing the powerful care about in the developed world, the U.S., the UK and Europe, is reverse Robin Hood.  Take from ordinary folk, the taxpayer, to pay off the creditor.  Everything else has no importance.  Only money and debt have value.  In this cruel, cold, pitiless and deadly world, only the vulnerable are attacked because in essence the power structure is craven and cowardly.  It goes after the easy marks, the powerless and gladly bends on its knees to those who can shower it with gold.  Simon Johnson, the professor at MIT’s Sloan School of Management and a former economist at the IMF, predicted the global takeover of predatory finance in his essay The Quiet Coup, comparing the capture by financial oligarchs to emerging market behavior and emerging market-crises:

”The euro zone is entering a very serious slump…Why Ireland would want to send its time being a model student in the context of the broader European mishandling of the situation, I don’t know.”

In the meantime, the Irish are shining their lights on the Occupy movement:

On a recent frosty night in Dublin, David Johnson, 38, an IT consultant, stepped outside a makeshift camp set up by the Occupy Dame Street movement in front of the Irish Central Bank.

“This is all new to Ireland,” he said, pointing to tarpaulins and protest signs that urged the government to boot out the IMF and require bondholders to share Irish banks’ losses that have largely been assumed by taxpayers.  “The feeling is that the people who can least afford it are the ones shouldering the burden of this crisis.”

Here ye, here ye!  An I.T. consultant sympathetic to the Occupy movement!  How can that be, when we are all told that we are ignorant and must be reborn as software engineers or else we cannot stay?  Well, what kind of system is this?

 

 

The Bloodless Coup in the Eurozone: Financial Totalitarianism Disguised as Democracy

Thousands of years and countless rivers of blood and treasure to decide European hegemony.  Athens was the birthplace of democracy.  Italy was the Renaissance capital of feuding royal states.

Now there is no need for bloody wars to decide the fate of European sovereignty.  The all-powerful Troika (the European Commission, the ECB and the IMF) has pulled off a bloodless coup , pushing out democratically elected officials in both Greece and Italy to replace them with unelected “technocrats” from a cozy financial network.

The word “technocrat” is efficient and innocuous.  It hides illegitimate leadership.  The word also disguises the incestuous relationships between the money men and women.

The bankers are in charge because the elected leaders of the Greek and Italian people couldn’t meet the demands of investors in their government bonds.  It’s not that the leaders didn’t try.  They were willing to face riots, strikes and vociferous opposition to do their bidding.  But all their efforts couldn’t calm the markets.  So the Troika put their own people in charge.

Lucas Papademos replaced Greek Prime Minister Papandreou, who had the temerity to suggest that the Greek people vote on austerity.  Papademos had been head of the Greek Central Bank when it joined the Eurozone:

Papademos was in charge when Greek officials lied about their fiscal position to the EU authorities and he presided over the failure of the Greek government to collect taxes from rich Greeks (like himself)…Greece is to be run by the very man responsible for getting them in this mess.

Even though Italy didn’t get a bailout, Prime Minister Berlusconi was pushed out and Mario Monti, another “technocrat”, took his place.    Monti worked briefly for Goldman Sachs, then became EU Commissioner for years, where he insisted on “liberalizing and deregulating” markets.  He is a close friend of the new head of the ECB, Mario Draghi, another Italian banker:

In the 1990s, when a number of countries, including Italy and Greece, engaged deliberately in credit swap transactions to take part of government debt and deficits off the official accounts with the connivance and help of Goldman Sachs in particular, Draghi was director general of the Italian Treasure and then joined Goldman Sachs (2002-2005).  Not even two degrees of separation: Draghi and Papademos both got their doctorates in economics at MIT in 1978.

Ex-French finance minister Christine Lagarde leads the IMF.  She headed up a global law firm that advised on “creative accounting” schemes for government debt.  Her deputy, David Lipton, used to work at Moore Capital, a global hedge fund.  Klaus Regling, who also worked at Moore Capital, runs the European Financial Stability Facility (EFSF), an entity created to provide bailouts. 

There is barely a quarter of the money needed for a true bailout fund in the EFSF (440 billion euros versus an estimated 2 trillion euros) but many investment houses have imaginative ideas of how to create a structured, tranched vehicle leveraged at four times the size of the fund.  These are the same ideas that demolished the housing market.  But no matter:

Fees from EFSF bond issuance will be worth 1% of a likely $100-billion of issuance to the big European banks and the likes of Goldman Sachs.  So they will be making good money out of the “bailout” funding.

The Greek people are not happy with their plight.  Says Alexandros Moraitakis, president of the Nuntius stock brokerage firm, most of whose employees have been laid off (in the past two years, the Greek stock market has lost 75% of its value):

“Greece does not decide, now the troika people decide, and they make experiments in the Greek market,” he says.  “Up to now they were unsuccessful.  Without growth, nothing will be done.”

Unemployment has doubled.  Even after two years of harsh measures, Greece is in recession and spiraling downward.  Not only has the Troika demanded austerity in exchange for bailouts, it has also put its own people in the indebted countries to oversee their progress:

[T]here’s widespread criticism that the troika is going to have a permanent office in Athens for the rest of the decade.

German Chancellor Angela Merkel has made clear that over-indebted eurozone countries must be closely overseen by international inspectors.

To lose sovereignty because of economic bumbling leading to German domination is the kind of poisonous tonic that topples governments.

Newspaper publisher and journalist George Kirtsos points out that statements by German politicians disparaging the Greek people have revived old memories of the brutality of the German occupation during World War II.

The Troika’s severe, almost punitive quid pro quo demanding not merely creditor sovereignty but crippling austerity is in stark contrast to the Marshall Plan (aka The European Recovery Plan or ERP), which was a large-scale American program to aid European economies devastated by World War II.  The U.S. allotted $13 billion for the plan.  In addition to the $12 billion it spent as a bridge covering the time until the plan came into affect, its cost was 10% of U.S. GDP of $258 billion.  17 countries were included.  The

European recipients didn’t receive the goods and services as a gift; they were loans to be paid back in local currency, usually on credit.

The Marshall Plan money was in the form of grants that did not have to be repaid.  In addition to ERP grants, the Export-Import Bank (an agency of the U.S. government) at the same time made long-term loans at low interest rates to finance major purchases in the U.S., all of which were repaid.

 In the case of Germany there also were 16 billion marks of debts from the 1920s, which had defaulted in the 1930s, but which Germany decided to repay to restore its reputation. This money was owed to government and private banks in the U.S., France and Britain. Another 16 billion marks represented postwar loans by the U.S. Under the London Debts Agreement of 1953, the repayable amount was reduced by 50% to about 15 billion marks and stretched out over 30 years, and compared to the fast-growing German economy were of minor impact.


As Kirstos said, “[I]f you want to do nation-building and force the Greeks to pay the price for the German nation-building in Greece, this is something that cannot be done in political terms.”


Anti-German statements are everywhere:

There are growing fears that Germans are plotting to buy Greek monuments and islands on the cheap, and there’s a revival of anger over Greek demands for compensation for Nazi atrocities

The occupying overseer from the Troika is referred to as the Gestapo.

Now that the “technocrats” are in charge, what’s the plan?  More public sector spending cuts, higher taxes, massive privatization of state assets and other measures to ensure that all the bonds held by the European financial sector are paid back in full and there is no default. 

Even though Greek private sector debt got a 50% haircut, the average Greek will still suffer a 30% reduction in living standards over the next decade.  And government debt will be at least 120% of GDP by the end of the decade at best, burdening the next generation with repayment into the following generation. 

The same problem besets Italy.  As 58-year-old Pietro Pappagallo, an Italian citizen from Bari, said:

”I’m worried about my savings that could become waste paper.  All the efforts to put something aside and I won’t get anything for it.  I’ve already faced four changes of my pension.  I had planned my life out and now they say I have to work more.  As a father, I worry for my children, who will probably never have a pension.”

The Troika (de facto, German Chancellor Merkel) wants many things: financial capital paid in full, no default, punitive measures against profligate nations “to toe the line on fiscal prudence and run balanced budgets and get their debt down so that the burden of taxation on the profits of the capitalist sector can be reduced.” 

Does it matter that the very people calling the shots today were the ones helping these governments hide their debts for fat fees?  It should be recognized and shouted to the rooftops that democracy is merely a cover for financial totalitarianism.  A sharp rebuke from the Troika and both democratically-elected Papandreou and Berlusconi were ejected.  Generations of the lower 99% who had little or nothing to say about complex financial transactions disgorgin fees here and there will live out diminished lives with little expectation of change.

The sick joke of it all is that austerity as a program of economic growth doesn’t work:

The reality is that, despite all the efforts of the social democrat leaders in adopting “neoliberal” policies of fiscal austerity, privatization, reduction in pension benefits and the destruction of labor protection laws, Greece will still not meet the targets set by the Troika.

Maybe the endgame isn’t austerity.  Maybe it’s privatization: picking off priceless assets for fire sale prices.  The vultures are circling.