February 12, 2009

The Change You've Been Waiting For: Full-On Russian Kleptocracy

Reinforcing the argument made here the other day, as well as in many of my articles about the economic collapse, Michael Hudson writes:
The only policies deemed politically correct these days are those that make the situation worse: yet more government money in the hope that banks will create yet more credit/debt to raise house prices and make them even more unaffordable; credit/debt to inflate a new Bubble Economy #2.
The ultimate meaning of this phenomenon is precisely the point I make repeatedly:
The crisis may be ameliorated to a degree, and the worst of the consequences may be postponed for a while. But whatever "solutions" are implemented, whatever reorganization and reregulation is imposed, it will all be done in accordance with the ruling class's desires and goals. It will all be to protect their own wealth and power to whatever extent is possible, and to expand their wealth and power still more, if that remains at all feasible.
Hudson's article is very long, and it is also very well-worth your time. I wish Hudson would more explicitly make the point that the "free market" so celebrated by many adherents of the Chicago School is nothing remotely close to a market free of government interference and manipulation. But Hudson himself puts "free market" in quotes when referring to the Chicago School, so it would appear he fully appreciates that what these "free market" economists actually celebrate is corporatism or what Gabriel Kolko calls "political capitalism":
If you take away only one sentence from these excerpts [from Kolko], it should be this one: "It was not a coincidence that the results of progressivism were precisely what many major business interests desired." In other words: major business interests captured government and state power, and used that power for their own ends. Those ends included "stabilization" of market forces, which meant that already vested business interests would not be threatened by new competitors (of which there had been many, until progressive policies squelched those found most troubling by already favored business interests), and the entrenchment of the ruling class into the foreseeable future.

This amalgamation of major business interests with state power, this system of oligopoly and governance of, by and for the ruling class, has metastasized beyond imagining since the Progressive era. It has expanded in every direction and subsumed virtually every industry and business in America, large and small. It is this system of "political capitalism" that dictates domestic and foreign policy, including a foreign policy of endless war, preparation for war, and various forms of "cleaning up" after war. You the ordinary citizen, you "the people," figure nowhere in this -- except to provide the necessary labor and, when required, your blood and your life.
Most of today's progressives are ignorant about all the critical aspects of our own history, and about the origins of the system that is now killing us. Their ignorance usually begins with their complete failure to understand what actually happened during that historic period which they drench with their nostalgic fantasies, the Progressive era. See the earlier post for much more on this, and for much more from Kolko.

Here are a few key excerpts from Hudson's article:
Having promised “change,” Mr. Obama is giving us more Clinton-Bush via Robert Rubin’s protégé, Tim Geithner. Tuesday’s $2.5 trillion Financial Stabilization Plan to re-inflate the Bubble Economy is basically an extension of the Bush-Paulson giveaway – yet more Rubinomics for financial insiders in the emerging Wall Street trusts. The financial system is to be concentrated into a cartel of just a few giant conglomerates to act as the economy’s central planners and resource allocators. This makes banks the big winners in the game of “chicken” they’ve been playing with Washington, a shakedown holding the economy hostage. “Give us what we want or we’ll plunge the economy into financial crisis.” Washington has given them $9 trillion so far, with promises now of another $2 trillion– and still counting.

A true reform – one designed to undo the systemic market distortions that led to the real estate bubble – would have set out to reverse the Clinton-Rubin repeal of the Glass-Steagall Act so as to prevent the corrupting conflicts of interest that have resulted in vertical trusts such as Citibank and Bank of America/Countrywide/Merrill Lynch. By unleashing these conglomerate grupos (to use the term popularized under Pinochet with Chicago Boy direction – a dress rehearsal of the mass financial bankruptcies they caused in Chile by the end of the 1970s) the Clinton administration enabled banks to merge with junk mortgage companies, junk-money managers, fictitious property appraisal companies, and law-evasion firms all designed to package debts to investors who trusted them enough to let them rake off enough commissions and capital gains to make their managers the world’s highest-paid economic planners.


Solvent local banks are the sort that were normal prior to repeal of Glass Steagall. They are to be bought by the large “troubled” banks, whose “toxic loans” reflect a basically toxic operating philosophy. In other words, small banks who have made loans carefully will be sucked into Citibank, Bank of America, JP Morgan Chase and Wells Fargo – the Big Four or Five where the junk mortgages, junk CDOs and junk derivatives are concentrated, and have used Treasury money from the past bailout to buy out smaller banks that were not infected with such reckless financial opportunism. Even the Wall Street Journal editorialized regarding the Obama Treasury’s new “Public-Private Investment Fund” to pump a trillion dollars into this mess: “Mr. Geithner would be wise to put someone strong and independent in charge of this fund – someone who can say no to Congress and has no ties to Citigroup, Robert Rubin or Wall Street.”

None of this can solve today’s financial problem. The debt overhead far exceeds the economy’s ability to pay. If the banks would indeed do what Pres. Obama’s appointees are begging them to do and lend more, the debt burden would become even heavier and buying access to housing even more costly. When the banks look back fondly on what Alan Greenspan called “wealth creation,” we can see today that the less euphemistic terminology would be “debt creation.” This is the objective of the new bank giveaway. It threatens to spread the distortions that the large banks have introduced until the entire system presumably looks like Citibank, long the number-one offender of “stretching the envelope,” its euphemism for breaking the law bit by bit and daring government regulators and prosecutors to try and stop it and thereby plunging the U.S. financial system into crisis. This is the shakedown that is being played out this week. And the Obama administration blinked – as these same regulators did when they were in charge of the Clinton administration’s bank policy. So much for the promised change!


The problem for today’s financial elites is that it is not possible to inflate another bubble from today’s debt levels, widespread negative equity, and still-high level of real estate, stock and bond prices. No amount of new capital will induce banks to provide credit to real estate already over-mortgaged or to individuals and corporations already over-indebted. Moody’s and other leading professional observers have forecast property prices to keep on plunging for at least the next year, which is as far as the eye can see in today’s unstable conditions. So the smartest money is still waiting like vultures in the wings – waiting for government guarantees that toxic loans will pay off. Another no-risk private profit to be subsidized by public-sector losses.

While the Obama administration’s financial planners wring their hands in public and say “We feel your pain” to debtors at large, they know that the past ten years have been a golden age for the banking system and the rest of Wall Street. Like feudal lords claiming the economic surplus for themselves while administering austerity for the population at large, the wealthiest 1 per cent of the population has raised their appropriation of the nationwide returns to wealth – dividends, interest, rent and capital gains – from 37 per cent of the total ten years ago to 57 per cent five years ago and it seems nearly 70 per cent today. This is the highest proportion since records have been kept. We are approaching Russian kleptocratic levels.


So here’s the situation as I see it. The first objective is to preserve the wealth of the creditor class – Wall Street, the banks and the other financial vehicles that enrich the wealthiest 1 per cent and, to be fair within America’s emerging new financial oligarchy, the richest 10 per cent of the population. Stage One involves buying out their bad loans at a price that saves them from taking a loss. The money will be depicted to voters as a “loan,” to be repaid by banks extracting enough new debt charges in the new rigged game the Treasury is setting up. The current loss will be shifted the onto “taxpayers” and made up by new debtors – in both cases labor, onto whose shoulders the tax burden has been shifted steadily, step by step since 1980.

An “aggregator” bank (sounds like “alligator,” from the swamps of toxic waste) will buy the bad debts and put them in a public agency. The government calls this the “bad” bank. (This is Geithner’s first point.) But it does good for Wall Street – by buying loans that have gone bad, along with loans and derivative guarantees and swaps that never were good in the first place. If the private sector refuses to buy these bad loans at prices the banks are asking for, why should the government pretend that these debt claims are worth more. Vulture funds are said to be offering about what they were when Lehman Brothers went bankrupt: about 22 cents on the dollar. The banks are asking for 75 cents on the dollar. What will the government offer?

Perhaps the worst alternative is that is now being promoted by the banks and vulture investors in tandem: the government will guarantee the price at which private investors buy toxic financial waste from the banks. A vulture fund would be happy enough to pay 75 cents on the dollar for worthless junk if the government were to provide a guarantee. The Treasury and Federal Reserve pretend that they simply would be “providing liquidity” to “frozen markets.” But the problem is not liquidity and it is not subjective “market psychology.” It is “solvency,” that is, a realistic awareness that toxic waste and bad derivatives gambles are junk. Mr. Geithner has not been able to come to terms with how to value this – without bringing the Obama administration down in a wave of populist protest – any more than Mr. Paulson was able to carry out his original Tarp proposal along these lines.
Hudson has much, much more, and I recommend you read it. One of the more repellently intriguing aspects of the continuing Washington Charade of Horrors is that the only real solution is so astonishingly, blindingly obvious. I've put the point this way:
I start with the point I have made in a number of posts: There Is No Fix -- not for the problem the government bailout purportedly addresses. From Mike Whitney's latest article:
Surely, the cure for hyperbolic "credit excesses and reckless behavior" cannot be "more of the same." In fact, Paulson's bailout does not even address the core issues which have been obscured by demagoguery and threats. The worthless assets must be written-down, insolvent banks must be allowed to go bust, and the crooks and criminals who engineered this financial blitz on the nation's coffers must be held to account.
But the point of this exercise is not to address the massive real problems that confront the country: rather, it is to further enrich the ruling class, to protect their existing wealth and power, and to increase their wealth and power still more. You, the "ordinary" American, will pay for all of it.
Hudson states this basic principle as follows: "The only real solution to today’s debt overhang is a debt write-down." He has much more on this subject, too.

Not so by the way: for any liberals or progressives who pretend astonishment at the already lengthy list of "betrayals" by Obama -- and only in office a few weeks, for his miraculous nature truly is beyond the comprehension of mere mortals! -- this might be a good time to put your brains back in gear. In fact, you should have expected all of this. As I said in a post from early May of last year:
Given this system and its nature and complexity, it is only ignorance, a failure to understand history, politics, economics and culture, and/or repeated, habitual dishonesty and manipulation that can permit anyone to believe that a single individual could reverse these developments over more than a century, or alter them in any significant manner whatsoever. You may wish to engage in magical thinking -- as even liberals and progressives like to do these days, when they repeat with straight faces that Barack Obama's goal is "changing the very nature of politics" -- but deluding yourself that miracles will happen will not alter the nature or direction of our political system. Liberals and progressives correctly and severely criticize the Republicans for believing in such miracles with regard to Iraq, yet when it comes to their chosen savior on the domestic front, they themselves now sound like the worst kind of fundamentalist. Their capacity for critical thinking and analysis has vanished entirely, and they are capable of believing anything. Such people are exceptionally dangerous, especially to all the rest of us; I will be exploring some of the more particular dangers involved later in this series.

Even if we assume that Obama genuinely wishes to alter our political system, the critical point is unchanged: one individual cannot do it. It is folly to believe otherwise. More bluntly: it is deeply, profoundly stupid. And the truth is very different from this idiotic fantasy: Obama is the perfect embodiment of the system as it now exists. He will challenge it on no issue of importance. To the contrary, he will advance the goals of the ruling class and ensure that the powerful are fully protected. He will lie to you about all of this, as he already has on numerous occasions -- but as I have noted, many Americans, including many liberals and progressives, are enthusiastically willing to believe anything.
Read this blog, and know the future. That may strike you as unforgivably arrogant. Peruse the archives. I've more than earned the right to be arrogant in this particular way.