BORROWING $1 TRILLION IN ONE DAY ... WHY IT MATTERS (and where the hell is the Tea Party on this?)

Exactly three years ago today, at the height of the market crash, I pointed out on my blog (and my radio program) that the biggest banks in America were granted well over $1 trillion in ultra-low interest rate loans by the Federal Reserve. These loans were granted so the biggest banks would have money to stuff the financial holes that their trillion dollar (derivative) bets had created. They also helped purify toxic crap and kept the banks out of court.

Best of all, the loans were backed by the government American taxpayer.

Thinking how bad things were - and so people could see for themselves - I explained (very slowly) how to find the more than $1 trillion in loans in the Federal Reserve's December 11, 2008 "Flow of Funds Accounts" release.

Things were so bad at the end of 2008 that the banks borrowed $1.2 trillion on December 5, 2008. Let's repeat that ... the banks had to borrow $1.2 trillion on one day.

Worse, much of the collateral the banks put up to secure the loans was either inflated, or simply toxic crap. These toxic instruments are the stuff you and I will get stuck paying for over the next few decades.

Putting it All in Perspective
To put $1.2 trillion in perspective, think about this little nugget: $1.2. trillion is much more than what President Bush spent on the TARP bailout ($750 billion), and far more than what President Obama asked for in the Stimulus Program ($825 billion, of which $275 billion were tax cuts). And it's also far more than the $907 billion we owed as a nation in 1980.

As you can imagine, the Federal Reserve and the big banks fought to keep $1.2 trillion in bailout loans a secret. To do otherwise would have alerted America to how much trouble the banks were really in back in 2008 (they're still in trouble). It was the largest loan-bailout in U.S. history, after all.

Fortunately for America's biggest financial institutions most Americans didn't catch on to what was happening. This includes the vast majority of our incredibly hypocritical "We Just Found Financial Jesus" Tea Party movement. Most them still don't have a clue. Nor do they seem to understand how the banks used more than $1 trillion in low interest loans to profit off of the U.S. taxpayer.

How the Banks Profited ...
Thanks to Bloomberg News we can see exactly who profited from the barely above zero interest loans made to Wall Street's biggest banks. One thing's for sure. It wasn't the American taxpayer. Here's the details.

Simply put, the banks made about $13 billion in taxpayer funded profits (play with the interactive here). How did they do it, you ask? Simple. They borrowed the money at rock bottom interest rates from the Federal Reserve, then "walked down the street" (as it were) to purchase Treasury Bonds from the federal government that paid almost 3% interest. A classic case of robbing Peter (the American taxpayer) to pay Paul (themselves).

But wait, it gets better (or is that 'worser'?).

Flush with cheap taxpayer-backed loans America's bankers began lobbying Washington to stop the movement for more regulations. Their argument? Since they were so healthy - and weren't bankrupt - they didn't need pesky regulations. Regulations and oversight distracted them from making money.

That's right. While America's biggest bankers were on government life support - and had one hand in the taxpayer's pockets - they were also pretending they had done nothing wrong. Ergo, they didn't need to be regulated.

While TARP and taxpayer backed loans enabled banks and Wall Street to dodge bankruptcy, America's biggest banks began turning away and punishing customers who lost their jobs and homes as a result of the 2008 market collapse. Bankrupt citizens facing tough times as a result of the market collapse had to be punished.

Long story short? In spite of collapsing the economy, and asking the American taxpayer to underwrite their market stupidity, the banks demanded market-like discipline be imposed on the American public. It didn't matter that the American taxpayer had helped turn their toxic investments and stupid bets into market gold.

Aren't double standards beautiful?

The Chutzpah Behind the "Self-Esteem" Loans ...
Let's make this real simple. If the banks had not received government loans, or had been forced into bankruptcy or receivership, the lobbying efforts of the banks would have been comical (they still are in my book, but that's another story).

But stuffed with TARP bailout money, and with emergency loans from the Federal Reserve (who created brand new loan "facilities" for troubled banks), America's biggest failed banks were able to escape market justice and pretend things were just fine. Congress played along ... as they continue to do today. But here's the kicker.

In a classic WTF moment, the banks argued that they were simply borrowing from the Fed (again, at least $1.2 trillion in one day) so other banks wouldn't feel "stigmatized" by having to take loans from the Federal Reserve. Huh? Are you kidding me? How clueless are these people? They didn't want other banks to feel shame for making stupid decisions, so banks had to borrow money from the Federal Reserve? Unbelievable.

At the end of the day, the thinking behind our banker bailout programs is akin to the logic behind toddler leagues. You know, the leagues where parents don't keep score so they don't hurt little "Johnny's" feelings. Incredible. Apparently bankers and Wall Street need self-esteem programs too.

Keep this in mind the next time your friend wants to discuss corporations and rugged individualism in America.

The End ...
This, my friends, is just one reason why it's difficult to take the status quo "happy talk" about profits, falling unemployment, and Wall Street success stories seriously. It's all backstopped with trillion dollar federal loans and taxpayer furnished bailout money.

The happy talk about Wall Street means little for jobless and foreclosed upon Main Street. Monopoly Man's successes mean nothing to Joe Six-Pack. This is especially the case since it's all backstopped with taxpayer money, still overly complex loan structures, lax regulatory oversight, and record debt loads.

So - again - my question is Where's the Tea Party outrage on all of this?

- Mark

FROM INVISIBLE HANDS TO GOVERNING DYNAMICS

We were discussing this in class, so I'm posting on it ...

In The Wealth of Nations (1776) Adam Smith told us that competition can lead to the best possible outcome for everyone. He believed that by rationally pursuing their own selfish ends producers and merchants, in the pursuit of profit, could enhance both production and quality in the market place. This much is true.

Unfortunately, many of the people who like to focus on this aspect of Adam Smith completely ignore - or never learn - what he had to say about maintaining the laws of justice (equality of opportunity is key here), the impact of unrestrained market greed (not good), and why we really needed to keep government away from the market (it's not what free market conservatives claim). Rather than developing these arguments here, I'll selfishly (and rationally) say read my book for more on this.

Still, the governing dynamics of John Nash help us understand why the assumptions modern conservatives make about competition and rationality in the modern era are incomplete, and need revision ...



- Mark

THE GOOD, THE BAD, AND THE UGLY

On a regular basis I get comments about what I have written or said in public forums or in the media. Some of it is good. Some times it's bad for what it reveals about America's future. Other times it just makes you laugh because of what it tells us about the crazies that are out there. I especially enjoyed this diatribe directed at me after I wrote to a Tea Party crazy conservative that the "Fairytopia market world" they believe in doesn't exist.

 Mark your vast knowledge of fairies would lead one to believe that you belong to that low life, scum sucking, bottom dwelling, dingy smelling group of nefarious would be communist Marxist who are by some twisted fate, members of that disgraceful group known as the Barney Frank, act alike, Democrats. If I were you, I would hide myself in shame and ... See Morerealize you really are not American at heart or of mind. But most definitely are an accumulation from some oderferious, decayed part of the world, like the bottom of a human waste pit. Consider yourself properly vetted and cast out of membership with any real American patriot. "WE THE PEOPLE" shall overcome the likes of detrimental ilk, such as you. I will pray for you, but not very much!

I know, pretty ugly. But you have to admit, it's kind of funny. Entertaining too.

Most of the time, though, I get genuinely good comments. Yesterday, for example, I gave a talk at the university for the 60+ Club. The group is made up mostly of retirees who support the mission of the university, and attend presentations given by faculty members because they're interested in the world around them.

One of the comments yesterday dealt with the specific definition of "mark-to-market" accounting. In a few words mark-to-market accounting in our post-meltdown world allows market players to reprice collapsed financial products upward. Apparently I didn't make it clear enough that mark-to-market accounting has been turned on it's head since the bailout, and is really just another way for market players to avoid taking responsibility for the stupid decisions they made. This is one of the reasons many accountants refer to the concept as "mark-to-make-believe" (which I should have noted yesterday).

In all cases, these comments demonstrate you've got an audience that's done their homework, and makes presentations fun. This is good.

Then I get comments from people who aren't looking for clarification. Nor are they foaming at the mouth Tea Party diatribes (like from the guy mentioned above). Instead, they're ideological rants that the writer believes are bold statements of fact, when they are really little more than emotionally-charged opinions. For example, a couple of days ago I received these comments on the blog site I have for my book, The Myth of the Free Market: The Role of the State in a Capitalist Economy.

The free market did not write a 60,000+ page tax code that punishes work, rewards sloth and buys the votes of special interest groups, the government did.

The free market did not destroy our public school system and graduate (or fail to graduate) generations of civically and financially illiterate citizens, the government did.

The free market did not drive our jobs overseas and kill our entrepreneurial spirit with over-taxation, over-regulation and frivolous lawsuits, the government did.

The free market did not ban drilling for oil, vilify coal and block the building of nuclear power plants in the United States, thereby transferring hundred of billions of dollars of American wealth and many thousands of energy-industry jobs to foreign countries, the government did.

This crisis is the result of a giant social engineering experiment and vote-buying scheme gone tragically wrong.

The free market does not try to engineer society or buy votes, the government does.

The government caused this crisis, the free market did not.

The government cannot fix the crisis, the free market can.

What's clear is that - like my Tea Partying friend noted above - this individual has a utopian view of how markets work. In a few words, the state creates the conditions under which wealth is created. I can't emphasize enough how silly it is to believe that market players in a market setting without rules suddenly become virtuous and ethical. The pursuit of profit does ugly things to people who might otherwise be decent people (then again, many of them are unhinged sociopaths).

What's interesting, though, is that I shouldn't have to write any of this.

James Madison and the Founding Fathers made it clear that what was behind the activities tearing the country apart, especially after winning our independence from Britain, were the conflicts and "factions" driven by people in the pursuit of wealth. Without going into a long history lesson here (read my book), it needs to be said that our Constitution includes Art. I, Section 8 (and other sections) precisely because the Framers understood that market players don't always do the right thing, and needed guidance. Indeed, the patron saint of captalism, Adam Smith, wrote that government action to protect consumers and citizens from market players was necessary. There's a reason why he wrote this (it's tied to collusion and favorable legislation), but this post is already long enough. Click on the labels below for more.

The point is, believing in market fairytopias is intellectually lazy and, quite frankly, reveals a penchant for embracing myths that's dangerous because they work against our understanding of reality. This is bad for the country because it prevents us from developing policies that deal with real world problems.

At the end of the day, market players in the pursuit of profit don't alway do the right thing. People in the state of nature aren't angels either. Believing otherwise is sweet. But it's also delusional.

- Mark

ARE BANKERS LOOKING FOR HANDOUTS? (Blast from the Past Edition)

I first posted this in December of 2007, about nine months before the market collapsed in 2008. I still like it. I'm posting it again because I was just learning how to blog back then and put it in the wrong section (which some of the more savvy readers told me about months ago). Also, I'm in the process of rearranging my blog and I want this article to be more accessible (and with links), so you're seeing it again. Finally, this post makes it clear that - as I point out in my book - the market collapse should not have come as a surprise to anyone in Washington.

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Continued from the "So Much for the Invisible Hand" post ...

Let’s start with this. If I make poor financial decisions, either in a small business or by lending to free-loading in-laws, I have to suffer the consequences, right? However, if I live in the world of big finance and fat broker fees I can be stupid and greedy, and can expect a free ride. Here’s how it works (or how it's working out now).

Right now banks are in a financial storm of doubt and edginess because of the mess caused by fraud, stupidity, and the outright greed of big lending institutions. Bankers, of course, might disagree with my assessment because they see a genius every time they look in the mirror (money does that to people). Still, one institution after another reports they have to write-off billions of dollars in losses because of the sub-prime lending packages they sit on. Today they find themselves short on cash as they draw from reserves, or seek out other institutions to lend them operating funds. But investors and banks are reluctant to lend to anyone. The Wall Street Journal reports why:

Financial institutions remain suspicious of each other after multiple rounds of announcements of mortgage-linked losses, and are anticipating more. They also are eager to hold onto cash to shore up their troubled balance sheets.

The reluctance to lend money has the world’s central bankers worried that a recession, or worse, may be around the corner. This explains why the Federal Reserve has cut interest rates by one point since August (to prime the economic pump), and why the Bush administration is working with lenders (on a lousy plan) to get them to cut sub-prime borrowers some slack on their terms. And now we get this.

The Federal Reserve is offering an additional $40 billion dollars in new loans to lending institutions, and making the money available to banks that offer collateral terms that aren’t much different from the past.

Seriously. Is this how you “discipline” the market? By offering additional money with no real penalties for poor decision-making? For those of you keeping score at home this is what we have.

1. Lenders, focusing on fat fees and big bonuses (from anticipated high interest rate income) decide to lend to people who really can’t afford to borrow. 

2. The income from high interest rate loans don’t pan out because sub-prime markets were always tied to unrealistic contracts based on wishful thinking. 

3. After the defaults begin lending institutions amazingly act surprised, wondering “What happened?” 

4. Big institutions start looking for cash. They need the money to either: (1) shore up their financial situation and/or (2) lend, which will enable them to make money charging fees and interest. 

5. No one wants to lend because they’re scared and, well, the banks/borrowers made stupid decisions in the past. 

6. The central banks of the world decide to create a pool of money to help build confidence in financial markets; i.e. we're seeing yet another market bail out for big institutions.

Isn’t this grand? You screw up and you get the opportunity to secure more loans. Imagine that. I wish my bank would find new ways to make money available to me every time I made poor financial decisions.

At the end of the day this is not only a market subsidy but a reward for bad behavior. Is this the way capitalist markets are supposed to work? I think not.

Oh, and did I mention that the dollar continues to sink around the world? And don’t anyone take a peek at consumer (and national) debt in America because it’s not pretty. And consumer confidence? It's at a two year low. No wonder the bankers are jittery. They see a financial mess around the corner and no one seems to know what's going on, or how to fix it.

- Mark
[December, 2007]

HEALTH CARE HUMOR

Click on the cartoon if you can't read the letters.

- Mark

GETTING ADAM SMITH WRONG ...

In the field of economics one of the arguments that gets thrown around rather loosely is the idea that Adam Smith, the patron saint of modern capitalism, was a big proponent of allowing individual market players do as they please. Proponents of this perspective tell us that allowing market players to operate freely in markets is what Adam Smith believed would create harmoney and the greater good. It's the keystone behind Smith's book The Wealth of Nations, so we are told.

Indeed, as Gavin Kennedy - author of Adam Smith: A Moral Philosopher and His Political Economy (Great Thinkers in Economics) - reminds us in his blog, we're usually treated to the following interpretation of Adam Smith:

Adam Smith first coined the term “The Invisible Hand” in his important book “The Wealth of Nations.” With this term he was trying to capture the idea that the marketplace would be self-regulating. The basic principle of the invisible hand is that though we may be unaware of it, an unseen hand is constantly prodding us along to act in line with what’s best for the whole economy. This means that when this invisible hand exists, when we all pursue our own interest, we end up promoting the public good ...

This interpretation of Adam Smith misses why he used the "invisible hand" to convey a message about markets, and what capitalism's intellectual godfather actually said about the negative affects of markets.

As Gavin Kennedy points out here, Adam Smith made reference to the "invisible hand" because he was trying to help those who did not understand science and philosophy interpret how markets might work if market players played by the rules (which I discuss with reference to the "laws of nature" in my book).

More to the point, in "Adam Smith and the Invisible Hand: from metaphor to myth" Kennedy makes it clear that because Smith wanted to reach the "[s]avages and heathens who did not understand the science of nature" he "relied on notions of ‘invisible beings’ with ‘invisible hands’ to explain unusual phenomena." Smith did this because we were a superstitious and religious lot back in the late 18th century, and could only understand difficult concepts with the help of spiritual or supernatural references.

Put more simply - and I find this rather interesting - by using the "invisible hand" as a metaphor Adam Smith was trying to explain a difficult concept to the unlearned. In this way, according to Kennedy, the "invisible hand" was used as an "innocuous metaphor" en passant (a chess move), and not as a broad theoretical claim about markets and market players if the state would only leave them alone.

There's a difference between metaphor and theory, and is one of the reasons I wrote my book. Check out Kennedy's piece.

- Mark