Super Heroes of Macroeconomics

Somebody must have a lot of time on their hands to write a song called “Hey, Paul Krugman” but still, if the angsty, artsy fartsy creative class that foisted this POTUS on us is finally waking up, then Twitter me when the Revolution comes.  I’ve even read the orange cheeto place  and seems even a few of them are beginning to see the writing on their blackberries.

So, Paul is still appalled and speaking out against the Zombie Plan.   I’d say this is another sfz! warning to the White House.  What I can’t repeat enough is that it’s not just Paul.  It’s not just me.  It’s everyone with any knowledge of macroeconomics and the financial system.

Why am I so vehement about this? Because I’m afraid that this will be the administration’s only shot — that if the first bank plan is an abject failure, it won’t have the political capital for a second. So it’s just horrifying that Obama — and yes, the buck stops there — has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006.

I don’t know if you’ve ever sat in an economics class, but most of you who have will attest that few economics professors are what you would call the dramatic, excitable types.  However, I’ve seen more animation out of them recently than I’ve seen in all recent Marvel Comic Books.

From “Reasons Why The Obama Administration will not solve this crisis by the end of 2009” at The Underground Investor:

Consider that President-elect Obama voted FOR the horrible $700 billion bailout plan that accomplished less than zero in fixing the global economy while only transferring wealth from people that were struggling the most to the unethical financial executives that created this problem. These were my exact words in October, 2008, verbatim, about the eventual effect of the bailout plan: “Don’t believe the media spin. This will fix nothing. Even if and when the government overpays Wall Street and US banks by 300%, 500% and 1000% for their toxic assets, this temporarily recapitalizes these financial institutions but only creates A MUCH BIGGER PROBLEM for the future.” If I understood why the bailout plan would most definitely fail, as I blogged here, and the next President of the United States could not, that is a scary thought. On the other hand, if President Obama understood that the bailout plan would likely accomplish nothing but the transference of wealth from hard-working citizens to corrupt financial executives and still voted for the bill, then this action needs no further discourse.

From FT’s Willem Buiter:

Why are the unsecured creditors of banks and quasi-banks like AIG deemed too precious to take a hit or a haircut since Lehman Brothers went down?  From the point of view of fairness they ought to have their heads on the block.  It was they who funded the excessive leverage and risk-taking of banks and shadow banks.  From the point of view of minimizing moral hazard – incentives for future excessive risk taking – it is essential that they pay the price for their past bad lending and investment decisions.  We are playing a repeated game.  Reputation matters.

Three arguments for saving the unworthy hides of the unsecured creditors are commonly presented:

• Unless the unsecured creditors are made whole, there will be a systemic financial collapse, with dramatic adverse consequences for the real economy.

• If the unsecured creditors are forced to take a hit, no-one will ever lend to banks again or buy their debt.

• The ultimate ‘beneficial owners’ of these securities – notably pensioners drawing their pensions from pension funds heavily invested in unsecured bank debt and owners of insurance policies with insurance companies holding unsecured bank debt – would suffer a large decline in financial wealth and disposable income that would cause them to cut back sharply on consumption.  The resulting decline in aggregate demand would deepen and prolong the recession.

I believe all three arguments to be hogwash.

Yves Smith (Naked Capitalism):

Dear God, let’s just kiss the US economy goodbye. It may take a few years before the loyalists and permabulls throw in the towel, but the handwriting is on the wall.

The Obama Administration, if the Washington Post’s latest report is accurate, is about to embark on a hugely expensive “save the banking industry at all costs” experiment that:

1. Has nothing substantive in common with any of the “deemed as successful” financial crisis programs

2. Has key elements that studies of financial crises have recommended against

3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.
The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).

What are they doing?

In a nutshell, the Obama Economics team has decided to protect the Creditors of AIG, Citibank, and other failing institutions rather than let them take any loss.  Who are these ‘creditors’?  Basically, they are mega-investors; specifically firms like  Goldman Sachs that are the financial institutions that manage hedge funds and similar entities.  We are not rescuing the little banks that dot Main Street or even Wall Street.  We are transferring major amounts of money from main street banks, main street businesses, and main street houses to the really big Wall Street Gamblers.  This is a Ponzi Scheme that makes Madoff look like some teenager that robbed the neighborhood 7-11.  We’re talking massive amounts of wealth transfer here.  Several TRILLIONS of Dollars of YOUR wealth, your kids wealth, your neighbor’s wealth, your country’s wealth is the likely estimate from folks like Nourielle Roubini.  This is taking your taxes to make sure that no one at Goldman Sach’s loses their home in the Hamptons.  I’m not sure how much clearer I can be than that.  This will cause a prolonged recession.

Lawyer Darren Hutchings at Dissenting Justice gets it!!!  Goldman Sachs is why the Obama Team is worried about AIG.  These are the folks that paid for the inauguration!  They were his big campaign contributors!  He’s protecting his real base!!  From a legal standpoint, Darren explains that a bankruptcy judge would make the megainvestors take a hair cut.  They’d lose on their investment.  If the government continues to keep he AIG zombie on the taxpayer dollar IV infusion they don’t lose major money.  WE LOSE it!

… a bankruptcy judge could invalidate (as a “voidable preference”) the transfer of collateral or money from AIG to Goldman if the transfer took place within 90 days of the filing of the bankruptcy petition. Bankruptcy law disfavors payments to creditors on the eve of bankruptcy because they tend to benefit more powerful creditors and frustrate the underlying policies of bankruptcy law, which include the distribution of the debtor’s assets to all creditors in proportion to the debt owed them. Early payments to an individual creditor could drain the debtor’s resources and make them unavailable for a proportional distribution. It is unclear whether Goldman could have recovered from third-parties the same amount of money it obtained from AIG, but it is definitely debatable whether it could have extracted the same amount from AIG had the company entered into bankruptcy.

The Obama administration is NOT protecting the taxpayer.  They are using taxpayer funds to protect a few HUGE creditors.  Creditors that donated to the Obama Campaign.  Creditors that sit on the Board of Advisers to the Obama Administration. Creditors that paid for that big inauguration celebration! Creditors that put these folks in power!

In other words, they payed and we’re getting PLAYED!  Please, take a moment to read ANY Economics blog from ANY political persuasion.  We’ve all read the data and the studies on the Zombie banks of Japan.  Many of these folks DID the research on the Zombie banks of Japan.  I cut my financial analyst teeth in a savings and loan with a bad balance sheet back in the 1980s.  I detailed my experiences here.  You cannot correct a problem with a mismatched balance sheet with more money.  You have to rip the balance sheet apart.  You have to renegotiate the contracts with the creditors and every one or the entity will just continue to drain money from wherever it can get it.  Read Krugman’s blog today.  That is exactly what he is saying.  Read Anna Schwartz at the WSJ.  She said that same thing!  While Paul is a Nobel Prize winning Liberal Economist, Anna Schwartz helped Milton Friedman win his Noble Prize studying monetary economics and the Great Depression.  My small mind and their great minds are saying the same thing.

The Bonus thing is a distraction.  We have to stop this plan to bail out  the creditors that does nothing but infuse cash into Zombie financial institutions from the taxpayer to the rich idiots who brought us this mess.  We need real regulation and reform and we’ve needed it for some time.  It must happen now or our economy will not effectively recover.