Three Wise Men

Three Wise Men

Ben Bernanke, Timothy Geithner and Henry Paulson all voiced varying degrees of concern about America’s ability to combat another financial meltdown 10 years after they played prominent roles battling the last one.

While agreeing that the banking system is a lot stronger than it was back then, they saw some weak spots in the country’s crisis-fighting arsenal that didn’t exist a decade ago. The trio also decried the nation’s ballooning budget deficits in a joint briefing with reporters.

-       Bernanke, Geithner, Paulson Voice Some Concern About Next Crisis, Bloomberg

By J.M. Hamilton  (7-22-2018)

Amidst the denial, fury, and hubris surrounding many of the elites at the center of the 2008 Financial Crisis, and the subsequent bailout (a bailout that arguably continues to this very day, especially via accommodative monetary policy), were solemn assurances that: this must not happen again; banks & financials institutions should no longer be bailed out by the taxpayer; and Dodd-Frank and subsequent rule making – written in large part, behind closed doors - would prevent the next crisis (or certainly mitigate the possibility of a reoccurrence). 

We were also told the Fed’s multi-trillion dollar – money printing -  largesse to The Street (banks, hedge funds, private equity, multinationals, etc. etc.) was an opportunity for everyone to deleverage, which did not transpire.

Now, the three wise men – on point during the Fall of 2008 –are back again, to warn us that the country is ill equipped to handle the next financial crisis.

To which JMH responds, what do Messrs. Bernanke, Geithner, and Paulson know that we don’t?  The fallout from the 2008 financial Armageddon continues, like the bailout itself, to this very day.  Among repercussions from the Fall of 2008:

Businesses - and the country itself - are leveraged to the hilt, as is much of the globe.

The Banks have only grown more consolidated, powerful, and too big to fail.

The M&A activity leading up to the financial crisis has only picked up, so that the US economy, indeed the world economy, is now – in many major sectors – dominated not by competition, but rent-seeking cartels and monopolies.

Debt securitization & asset backed securities are the rage again, as investors and a surfeit of global liquidity travel the world in search of yield.  (Yields that have been suppressed by central banks.)

Due to global central bank intervention, junk debt is grossly underpriced, and often covenant free.

The sword of Damocles, the 1.2 quadrillion (notional value) swaps and derivatives market (moral hazard defined), guarantees that the taxpayer will be on the hook yet again.  And that if something does go wrong - debt, derivatives, and swaps will likely be the epicenter of the next crisis.  Here, keep your eye on emerging markets, in particular.

And the fallout for the public, as a result of the Wall St. bailout: wage and wealth inequality have only grown worse.  Despite being very late into the current “recovery,” wages – thanks in large part to collusion, non-compete agreements, and cartel dominated biz sectors – remain stagnant.  As a result, the public has turned against establishment political parties, throughout the West, who are in supranational banks' pockets.

JMH has written extensively about The Federal Reserve, and its awesome and unaccountable power, as the fourth branch of government.  Despite its dual mandate, the Fed is accountable to no one but Wall Street, which is the primary conduit for executing monetary policy.  The Fed board and chairperson are not popularly elected.  Presidents have been known to jawbone the Fed, often w/ no or at best, mixed success.

(To see what JMH has written about the Fed in the past, read: here, here, here, here, and here.)

Three Wise Men

A sad state of affairs indeed, brought to you by establishment Treasury Secretaries: Paulson (GOP) & Geithner (Dem)…  and the former Fed Chairman, Bernanke.

More importantly, when the next financial crisis hits – and my guess is the root cause will be debt, asset backed securities, or swaps – what should be the country’s response?  Will the US – and our legislative body - respond to yet another financial crisis, like a frightened band of sheep (a la circa 2008); or will the country finally take proactive measures, this time, to insure that our banks and financial sector are, finally, placed on a very short leash? 

And what might those steps look like.

For starters, all financial institutions at the center of the next financial crisis – including the Fed – should give up its C-Suite management teams, immediately, w/out bonus or pay.  These management teams should be investigated to the fullest extent of the law for criminal, fiduciary, RICO, and malfeasance activities and failings, and if appropriate, prosecuted (or sued) to the fullest extent of the law.  Don’t cry too much for Wall St. bank execs.  The law is rigged against prosecuting white-collar crime, especially for the exceptionally wealthy.

These failed institutions should be nationalized, run as not-for-profits (so as to remain out of the hands of corrupt public officials), and broken up, so that they are no longer TBTF.  Any profits accruing from these nationalized institutions would be allocated to the US taxpayer – not just for the inevitable recapitalization, but for the resulting collateral damage throughout the US economy.  Here, be thinking decades of public sector ownership (under not-for-profit governance/stewardship), particularly in regards commercial banking.

Bond & stockholders of the failed institutions should take the hit, and their bonds and shares eliminated and rendered valueless (in perpetuity): Capitalism 101. No coming back later (like Mr. Greenberg or Freddie/Fannie shareholders), and demanding future earning, or ownership, from institutions recapitalized by the public.

Glass-Steagall should be put in place, Dodd/Frank should be, largely, abandoned, and investment-banking houses shorn clean from commercial lending institutions, so that there is NO FEDERAL BACKSTOP FOR SPECULATION.

The derivatives and swaps market must be cut down to size, so that only parties, and counterparties, who have a direct holding in the commodity or bond – covered by the derivative or swap contract – are allowed to purchase the insurance product.  Swaps and derivatives issued purely for speculation: done, finito, as in – hence forth – never more. 

Rehypothecation, offshore LLCs and subsidiaries - utilized to skirt future financial reform, rules & regs - should no longer be allowed.  And on that note, outlaw countries – where speculation is rampant and laws, rules & regs found lax or wanting (e.g. The City in London) – US institutions should no longer be allowed to operate w/in; and likewise, foreign based financial institutions, who do not hold up to US standards, globally, should not have access to US markets.

And here’s the kicker, any future bailout/recapitalization should be laden w/ covenants, so that those first to be bailed out are the 99% (that is, those most scrod over by the last financial crisis).  Fiscal & monetary largesse from the federal government, and the Federal Reserve, would be directly allocated to the American taxpayer.  Placing money in the hands of the people, in lieu of the financial elite, would increase aggregate demand, and in turn, spur a weakened economy, hit by another financial crisis.

Given the state of the nation's fiscal & monetary affairs, how on earth could the US afford such as bailout?  Quite easy, the Fed should absorb the national debt, and slowly and methodically begin to forgive/write down said national debt, starting w/ the trillions, in public debt, presently held on the Fed’s balance sheet.

To deal w/ the inevitable economic fallout from the next financial crisis, all student debt should be forgiven, and a UBI (universal basic income) should be installed, immediately.

Paint me crazy, but perhaps I’m one of those few souls in the world that believes we should learn from our past mistakes.  Bernanke (who immediately went on the Wall St. speaking circuit, post-Fed career), Geithner (now head of a private equity firm, the incarnation of all things evil), and Paulson (formerly with Goldman Sachs) showed us exactly where their allegiances were, in their handling of the 2008 financial crisis.  

And, contrary to popular fiction, they sure weren’t looking out for the American public. 

Their actions in the Fall of 2008 are being felt to this very day, w/ both foreseen and unforeseen consequences… most of them bad.  Excepting, of course, the financial elite and Wall St. banks have made out like bandits.

Thankfully, these three wise men have shown us exactly how future financial crises should not be handled.

Copyright JM Hamilton Publishing 2018 

Does the Center Deserve to Hold?

Does the Center Deserve to Hold? 

Turning and turning in a widening gyre 

The falcon cannot hear the falconer; 

Things fall apart; the centre cannot hold; 

Mere anarchy is loosed upon the world, 

The blood-dimmed tide is loosed, and everywhere 

The ceremony of innocence is drowned; 

The best lack all conviction, while the worst 

Are full of passionate intensity. 

• From the poem, The Second Coming, by William Butler Yeats  

By J.M. Hamilton (7-8-2018) 

Was watching the Ken Burn’s documentary, The Vietnam War, over the Independence Holiday.  The Vietnam War was, of course, another endless war, spanning multiple generations - and administrations of both stripes - in which the US elite killed and maimed millions, many of them innocent.  Painting with far too broad a brush, the nation’s best and brightest tarred a nationalist independence movement (originally, fighting their French colonial masters, and then the US) – very much like America’s fight for independence - with broad Cold War strokes. 

Warning: This documentary is not for the faint of heart.  Amidst the graphic bloodshed, firsthand accounts of wartime atrocities, and much hand wringing and some remorse… comes a tremendous sense of deja vu. 

History does repeat, or certainly rhymes, and for a generation – if we are lucky two generations – we learn a lesson or two.  That is, until another gang of ultra-elite-Ivy-thugs come along and turn a War – this time upon terror – into endless malaise, a tremendous waste of blood & treasure, and another humiliating experience for the world’s greatest Superpower.   

Only the dead have seen the end of war…  and as long as extraordinary profits are to be made from man’s martial endeavors, Plato offers up one of the truest statements ever written. 

Some of the parallels, between 1968 and 2018 that immediately come to mind, are as follows (I’m sure there are many more): 

As in ’68, US citizens are marching in the streets again – granted today, less so about war – but certainly about civil rights, mistreatment of minorities - including LGBTQ, poverty, and women’s rights. 

As in ’68, the US finds itself with an expansive and costly empire – that crowds out social & infrastructure spending.  The US also, not to belabor the point, finds itself in endless warfare. 

In ’68, a Republican president divided and manipulated the public to great effect, so that internal divisions tore the nation in two.  “Law and order” were the watchwords of the day.   Richard Nixon’s silent majority was pitted against the nation’s youth, minorities, and protestors (even though this nation was founded upon dissent). 

The Pentagon Papers – very much like Mr. Snowden’s revelations – made the public realize they were being lied to and manipulated, by the leaders of the nation.  

The political tactic of the day - in 1968 to keep the nation on a wartime footing -was: FEAR.  The red scare was overplayed, very much like terror has been overplayed, repeatedly, since 2001. 

As in both wars, MIC contractors made obscene profits, all on the taxpayer's dime, and social programs – like LBJ’s/Kennedy’s Great Society – were put on the chopping block and suffered setbacks. 

Interestingly, very much like today, there was some division among the US and its NATO allies, many of whom did not support the war in Vietnam. 

As with our current White House occupant, both LBJ and Nixon took issue with the mainstream news media, and resented the east coast elite. 

Then as now, there were great pockets of poverty in the world’s wealthiest nation, w/ children, per the usual, bearing the brunt. 

But history only rhymes … among some of the dissimilarities, between ’68 and ’18: 

The top income tax rate in ’68 was 75%.  And no, the world did not come to an end.   

In fact, despite GOP propaganda about the necessity of tax cuts to drive the US economy, GDP growth in ’68 came in at 4.8%.  (The top corporate tax rate was 52%) 

Nineteen sixty-eight GDP growth, at 4.8%, was likely driven by a war time economy, but also the fact that the nation was not faced w/ astounding debt.   

In ’68, the national debt to GDP ratio was roughly 40%; today, our national debt to GDP ratio hangs over the economy like a menacing force in excess of 100%.   

Unlike today, teens in ’68 faced a draft, and so their interest in foreign affairs was far greater than today’s citizens and youth.  One immediately wonders, if there was a draft today, would the US still find itself bogged down in Afghanistan and the Middle East in perennial warfare? 

Unlike ’68, Americans today have endless sources of amusement, entertainment, and news and information sources (perhaps the worst of these is Facebook).  In ’68, for the most part, three major news networks enjoyed near hegemony over televised war reporting, and reporters were given unprecedented access to the war.  Hence, the Vietnam War was dubbed the “living room war.”   

Like I said, these lists are by no means exhaustive, but interesting nonetheless. 

A little over fifty years ago, Senator Robert Kennedy wrote an op-ed in the NY Times w/ a title based upon the aforementioned Yeat’s poem, entitled:  ‘Things Fall Apart; the Center Cannot Hold…’ 

Among other things, Mr. Kennedy in his essay observed: the upheaval w/in the country; lamented the nation’s direction; noted our significant wealth & glaring poverty; and commented upon some of the external & internal divisions – and our use of tremendous power - rending the nation, indeed the world.   

He went on to state: 

We have discovered that private accomplishment or affluence affords no escape from the perils and plagues that afflict the nation – and that these questions are far too important to be entrusted to remote leaders. 

We search for answers to specific problems; but more than this, we seek to recapture our country.  We have not yet discovered how to do it.  That perhaps, is what troubles these long nights of our national spirit.  And that is what the 1968 elections must really be about. 

I’d say Mr. Kennedy was expressing some doubt and reservations about US leadership, and the men who ran this nation fifty years ago. 

My how little has changed. 

Today, the US enjoys extraordinary wealth, and turns a blind eye to its exceptional poverty.  The very foundation of our democracy is threatened by a billionaire class, who has captured government – for their exclusive benefit – from every angle.  Money flows through Washington like a river, and our Congress – abdicates all responsibility – and campaigns 24/7/365.  

Behemoth multinationals are no longer interested in earning money the old fashioned way, via hard work, and affording exceptional products & services; but rather, monopolistic profits are earned through unexceptional rent seeking behaviors: like M&A, industry consolidation, cartels & monopoly.   Gangsters roam the corner of Wall and Broad, thriving upon unpayable global debt (and speculative insurance products affording coverage for that debt - derivatives & swaps).

What remains of the American middle class is stomped daily. 

In many respects, a Nixonian clone inhabits the White House, parroting some of the very same divisive rhetoric (and enacting abhorrent policies). 

America fights unwinnable wars with no end in site, while successive administrations are too afraid to announce the end of failed nation building exercises.  As a matter of political expediency then, our nation's youth are sacrificed upon the altar of war for political careers. 

The blood of innocents - and our fighting women's and men's lives - stains the nation’s hands, while the MIC reports out record profits for inferior products. 

And worst of all, our US leadership appears entirely incapable of learning from history’s mistakes.  Which seemingly, are repeated time and time again.  Instead, we - as a people - appear thrilled by technology’s totalitarian promises, big data’s magic, and are distracted by the shiniest object of gratification at any given moment.   

And the elite like it that way. 

All of which begs the question, should the center - center right (the GOP) and center left (Democrats) political parties – maintain their duopoly over US power?  

Given the complete breakdown in leadership, and the folly & hubris – often - surrounding our experts, why should they remain in power? 

Copyright JM Hamilton Publishing 2018