Springtime – crime blooms.
This past January we discussed Bill Moyers’ interview with Kevin Phillips (Celestial Dirge, with interview videos HERE) . The purpose of the interview was to discuss the latest Phillips book Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.
Kevin Phillips was an author we have previously discussed and featured in our articles. The Bill Moyers interview was particularly relevant as it took place in September 2008 when the financial crisis, which Phillips had forseen, was in its most public stage yet. Phillips said:
But Americans, ordinary Americans don’t have much of a role in this partly I think because they don’t really know the dimensions of what’s involved here. This is the denouement of the 25-year debt buildup which was undertaken mostly by the financial sector putting themselves on steroids to get bigger and bigger and bigger. And we’ve finally gotten to the point where the bubble isn’t sustainable anymore but a lot of Wall Street is dedicated to minimizing the spattering of the bubble, so to speak.
Phillips described “seven sharks”. The first was “financialization”. Bill Moyers observed, “Obama’s trademark rhetoric of inspiration seems to desert him when he talks about economic affairs.” Phillips answered:
He doesn’t seem to have anything very specific to say. That’s part of the problem. [snip]
I mean, one of the Chicago people was a major financer of his. He gets a guy to pick his vice-president. Turns out to be somebody who was part of the Fannie and Freddie mess.
Asked if he was at the point of “despairing”, Phillips replied “my sense of histories previous goes to the one or two percent leading world economic power is you don’t get back on the right track.”
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Today we sort of have a follow-up to Celestial Dirge.
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
Simon Johnson, the author of The Quiet Coup was the chief economist of the International Monetary Fund in 2007 and 2008. As Johnson boasts, “the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there…” Johnson worked in Eastern Europe after the collapse of the Soviet Union, Asia and Latin America, the hyperinflationary Ukraine , short-term-rollover crisis in Russia, Thailand, currency near collapse in Indonesia, credit crisis South Korea, and Johnson conclues “all of these crises looked depressingly similar.”
Johnson continues, “Almost always, countries in crisis need to learn to live within their means after a period of excess….” The steps to be taken (budgets, money supply) might be complicated but “the economic solution is seldom very hard to work out.” The hidden problem, the “biggest obstacle to recovery” turns out to be “almost invariably the politics of countries in crisis.”
We have written repeatedly that Obama’s economic “plans” and his fake “stimulus” scam were not genuine economic programs – they were political plans with political objectives – primarily directed at the 2010 elections. We also warned repeatedly that Obama cannot be trusted and his loyalties are only to himself and his advancement and well being. Obama has laughed in the faces of those who supported him most worshipfully and most reverendly during last year’s political campaigns and made his alliance with the powerful oligarchs clear. The Obama alliance with the ugliest and dirtiest forces in America are long-term and based on a simple quid-pro-quo: they help Obama and Obama will do their bidding. Whether it is Big Media or the wealthy and powerful, the Kennedys or the Kerrys, the compact remains the same: if you are rich and help Obama then Obama helps you.
Democrats, before they became Dimocrats and targeted Hillary Clinton for abuse, – for years, agreed with us that George W. Bush advanced himself with the aid of “other peoples money”; lacked any experience to captain the ship of state, and effectively let others run things for him – Obama is the Third Bush Term.
Simon Johnson describes why countries fall into disrepute when these powerful and wealthy ogliarchs seize power:
Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.
Johnson describes the oligarchs in Russia and their gambles and how they grew in importance to “political elites”.
But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.
Then the steep downward spiral begins.
Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse.
In the end, the government finds a need to “squeeze at least some of its oligarchs.”
But “the squeeze” is not the choice at the beginning.
Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government…. [snip]
Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. [snip]
… the government cannot afford to take over private-sector debt completely.
Eventually the government in trouble wakes up to economic reality and the need to “wrest control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.’”
The oligarchs fight back. “They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies.”
From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.
Johnson, after describing what typically happens, then gets down to the American Obama scams and the proximity to Banana Republic status:
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.
But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
The core problems should not be confused with the symptoms.
But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.
Johnson adds dollar signs to the Kevin Phillips “financialization”.
From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.
The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.
Hopium addled addicts rejoice that their Lord Obama has at his side the world’s “most advanced oligarchy”.
In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.
We laughed when we read that analysis of modern American style corruption. It reminded us of when we wrote REZKO For Dummies, back in January 11, 2008. We wrote:
In olden days, corrupt Chicago politicians would simply take a bag full of money. Usually the bag of money was passed under the table while corrupt politician and corrupt fixer lunched or dined. Those were simpler times. [snip]
Now imagine this: A Chicago politician, in modern day Chicago, who wants things he can’t afford. Wifey likes expensive things and wants a big mansion to live in. What new clever system would said modern day Chicago politician devise? Said Chicago politician first acquaints himself with ethics laws and how to skirt them.
Chicago politician and Chicago fixer come up with this scheme: Funnel tens of millions of dollars in government money to the Chicago Fixer and get him to somehow buy you a house, among other amenities. Yes, you have to turn your back on freezing Chicago constituents, African-Americans mostly, but hey, it’s the Chicago way.
Simon Johnson follows up on our 2008 ruminations:
Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round… Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks.
Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions… This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.
Regular Americans should not be intimidated by the high-blown flim-flam of Obama and his cohorts looting the American economy. Obama and his cohorts want to pretend they are playing “three-dimensional chess” but they are simply playing the same three card monte cheap hustlers use to loot on a small profit basis.
By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.
While others praised Obama’s “honest” budget and Obama’s amazing ability to explain and communicate we yelled it was not so. We opposed the bailouts and the scam “stimulus” and the pork 2009 budget and the lie which is the 2010 budget. We saw Obama for the flim-flam man he is and said so. Now our view is increasingly echoed:
Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.
The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine.
It’s all one huge scam fronted by the biggest scam artist con man flim-flam artist in American history, Barack Obama:
Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. [snip]
As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand.
Johnson agrees with us on the myriad scams and their ineffectiveness. Johnson also agrees with us on the need for a comprehensive economic plan which Obama refuses to produce let alone explain. Johnson states that big banks “have only gained political strength since the crisis began.”
At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.
Johnson makes a strong case for nationalization of the banks. But with a corrupt BOob in charge is that a wise prescription?
Johnson persists. Yes, nationalization, he says, is absolutely necessary.
Johnson does not address directly our “BOob” question. But Johnson does obliquely discuss what he calls the “second problem the U.S. faces – the power of the oligarchy. Johnson wisely calls for the break up of big banks, and the “reemergence of dangerous behemoths” using Teddy Roosevelt style “trust-busting”.
Johnson, like us (in The Emerging Coaltion Against Barack Obama’s Flim-Flam Stimulus Bill in which we discussed the “creative destruction” value of economic downturns ) refers to Joseph Schumpeter and the need to change elites from time to time.
Johnson is troubled that the United States might just “stumble along for years” because it is so powerful.
Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.
There is a second scenario:
It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.
Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.
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The day following our Kevin Phillips article, January 22, 2009, we wrote Blind Hope Hits a Wall – The Mulligan Man On Day 1. We wrote on that first day what is glaringly truer today:
Big Media will not investigate their tool – Barack Obama. The economy will be looted. Obama will be the Mulligan Man forever.
The voters will eventually fight back.
But for the next few months, the rats will loot and feed.
The Obama Crimelords are in charge.