Trillions. Literally trillions of taxpayer money is now pouring to financial institutions. Today the Federal Reserve added $800 Billion more. The United States has now pledged $8.5 Trillion dollars to the financial crisis. To put that in perspective, one could have paid off, in their entirety, every house being foreclosed on for $320 billion dollars, the supposed root cause of the financial crisis. The entire home mortgages liabilities in the United States are $10.6 Trillion dollars
So, why is the United States pledging money worth 60% of the entire United States GDP?
More importantly why is this spitting in the wind even going on?
To date, Citigroup has been given more money than it's worth, yet taxpayers don't own the bank, the same executives are there, nothing has changed.
Why are not alternatives being shouted from the rooftops with this level of money being pledged?
Margaret Blair and Ralph Gomory state an obvious point that never makes it to the lips of policy markers, Leadership is More Than Profit.
In the rush to globalization, the United States has tossed aside a crucial principle that guided the economic prosperity of the twentieth century: corporate leaders have a responsibility to their country, their community, and their employees that goes beyond maximizing share value.
Isn't this a most opportune time to realign our corporations to the interests of the United States? Why are we not demanding national loyalty from our corporations in exchange for taxpayer funds?
While Gomory and Blair suggest tax incentives, assuredly some sort of corporate personhood redefinition could be done.
In Corporate Citizen, an Oxymoron Dr. Bruce Scott recommends a redefinition to start a federal charter or licensing to require corporations act in the national interest.
Considering the handing of these corporations gobs of taxpayer money, why not make part of the equation a realignment to the US national economic interest? The public should have voting shares with a controlling interest, even founder stock or stock with restrictions. One could at least make receiving these funds conditional on keeping and creating jobs for Americans in America.
We need our Congress to represent the American people and put oversight, conditions on this money and somehow stop this inane hemorrhage. The same people who caused this problem simply cannot be entrusted to solve it.
Update: The San Francisco Chronicle has a nice table of all of the debt:
Just a rant... maybe..
I have noticed that many economists/financial types have delusions about their understanding the financial world. The reality is that those trained in economics and finance are often the most ignorant of the true nature and scope of their actions.
What is the purpose of money or economic activity? I am suggesting that the true purpose of such concepts and activity is to prevent people from killing each other. The fringe benefits of money and economic activity such as as trade, "progress" and wealth creation are secondary.
However many economists and financial types believe that money is real. Though many of them profess to believing that money is merely a medium of exchange and storage of commercial activity, their actions suggest otherwise. It is curious that kids stop believing in santa claus and the easter bunny as they grow up but start believing in the "realness" of money. Money whether gold based or fiat based is not real. Neither is debt, your favorite economic model or theory. Money is worthless if it cannot create new wealth or keep people from killing each other.
The concept of money, as most people understand it, was created in a feudal and mercantile age when the majority had a subsistence level existence. It is therefore not surprising that it evolved mainly to keep people from killing each other and simultaneously control people (we are just smart apes who seek short term dominance over long term gains).
However the full fruits of industrialization, various historical events and widespread multi-generational acceptance of concepts like fiat currency have made the consumption of the average person the only dominant driver of the economy (consumer economy). While some people express moral misgivings about such a transformation, the reality is that people who advocate a move away from materialism, towards conservatism, fiscal discipline, frugality are the merely the priests of a new religion. They seek to control and dominate the lives of other people just like the 'priests' of every religion from catholicism to environmentalism and "capitalism".
Many educated people harbor subconscious fantasies about a return to a world where their less well educated peers are peons, serfs and slaves. The problem with this approach is quite simple- the level of complexity and hidden supports that keep our society functioning will collapse and we will cease to live in a functional society.
Many educated people also harbor the fantasy that they can return to a medieval age where the level of complexity was "about right" for the "human brain". This belief is mistaken for a few reasons-
a] We have no comprehension about the full capability and potential of the human mind. For most of history we have lived in tribes of less than 200 people, however given the right conditions we have been able to repeatedly form large complex societies. The same minds that are supposed to be capable of only forming medieval societies at best also create complex mathematical models that can ruin the world (as you might have heard recently). While our motivations may be base, our ability to perform complex tricks to obtain those base aims is rather surprising. Complex scams are hardly restricted to the financial sectors- the entire medical industry, construction industry and pretty much any regulated/licensed/ union job is essentially based on a complex scam.
b] Living in medieval society was no picnic. People who visit heritage parks or attend renaissance fairs have a rather incomplete understanding of the hardships in those periods. This situation is not unlike many outdoors enthusiasts who rail against development but who depend on the gear, technology and laws of modern society.
c] Western (white majority) societies are in decline. Throughout history, the intelligentsia of declining societies have always rationalized their downturns as natural, global , inevitable and understandable. The common thread through such declines has always been the belief that "we have reached the peak of human achievement and it is downhill for every human from here on". History suggests otherwise. However this phenomenon has never hit western societies on this scale and scope- until now.
d] Emergent systems guided by chaoas and evolutionary pressures are unlikely to return to their starting point- or even retrace their steps. Much has changed in the 70 odd years since GD1, especially in regards to the permutations and combinations of possiblities.
I believe that the best way forward for us a species is to think about the following concepts.
1] What is money? Why should it retain its value? What is the use of money if it cannot buy you wealth. What use is your 1913 pre-fed dollar if it cannot buy you a circa 2008 - 4 dollar walmart prescription for your kids strepthroat. Do you have any clue about how many kids got rheumatoid arthritis or pneumonia from then untreatable strepthroat. Most people who died in the 1918 flu epidemic died from seconday bacterial pneumonia not the virus.
Gold based or strict credit economies cannot create the infrastructure and technological breakthroughs we are accustomed to. We are quite pathetic at predicting the effects and potential of any any new innovation/ product or service- nothwithstanding the beliefs of of famous and clever white (and asian) men who have proved so wrong about the future of the areas in which they were considered to be experts. Rationing money for innovation would be rather similar to the soviet practise of command economics. In any case it is possible to employ 30-60 people for the total yearly income of an average mid-level investment banker who plays paper games, misjudges opportunities, screws over innovators and also loses your investments.
2] Do banks have any "real" money in a fiat currency based world. Given that the vast majority of banks are either insolvent, propped up zombies or the walking dead- why do we need them (in their current form)?
I believe that banks in a fiat currency world are best operated as utilities, not as the fiefdoms and the extortion rackets they have been to date. The biggest problem with this alternative model is that bankers cannot make obscene amounts of money by shuffling contracts and sucking money from the consumer economy.
I propose that we pay for sending the current crop of bankers on a one way trip to the sun. It would be cheaper to put bankers and their families in launch vehicles directed towards the sun, than bail them out of their fictional mathematical games. The 'Zenit' rocket system can put one kg of stuff in orbit for less than three thousand dollars- You could put a family of bankers in orbit for less than a million. Building the launchers for putting bankers in orbit would create more real jobs than the trillions wasted in the futile efforts to make banks lend to consumers.
3] Large misguided credit expansions, abuses and bankruptcies are inevitable in a species like ours. We like to screw our fellow human for a quick buck. The real question then is how we mitigate the negative effects of such abuses. I believe that any abuses which do not exceed a certain % of GDP should be watched but not intervened in - the dotcom boom created a very good high speed network that we are only now using to it's full potential. The factors that should prompt intervention are high relative size of the bubble to the GDP) and the low potential to create jobs or useful capabilities (housing- we already had a surplus).
I, for once, would welcome a bubble in space exploration, engineering, chemistry, biotechnology or anything else that produces lots of jobs with the small prospect of big unexpected breakthroughs.
4] In a system where the future is unpredictable, can credit be repayed completely or even partially? Given the factors I have listed in 3], periodic widespread debt forgiveness might be necesary to keep the system from collapsing. What do bakers lose anyway? Paper, ink, electrons? They certainly do not lose their previous paychecks, commisions, fees and other assorted loot made from the issuance of bad credit.
Would 1.2 Trillion to repay credit cards + 1 Trillion to repay student loans + 1.5 trillion to pay other personal debt have stimulated economic growth better than pissing the money in a black hole to honor CDS bets (and keep apperances in this nonsensical paper game). Hell, yes!!
5] Maybe we should accept that the two major roles of money are 1] keep people employed / civilized 2] create new wealth through innovation in the non-financial world. It might be time to give up on ideas such as full repayment of debt, money having a constant value and paying sociopaths to manage your wealth. Honestly, how many people who invested in the financial world are gonna make more money (inflation adjusted) than they put in- and guesses on gross percentages.
But first we must put the banksters and their handmaidens into incinerators- heating water in boilers might be the most productive thing they have done in their lives.
Every 4 years
We have a presidential election, a chance to try a new set of policies and politics.
Perhaps we need to start over with a new economy every 4 years as well.
Maximum jobs, not maximum profits.
The big boys have found a new way to make money
Why, Why? Bob would the big boys settle for a solution that rights the mortgage markets and restores a calculable level of risk that allows for the CDS market to work reasonably well when they can make a multiple of the value of underlying assets by gaming the system?
This is part of the diary that I've been wanting to write.
The CDS market is a multiple of the value of the underlying assets insured. Now no one really seems to be true size of these markets, but the Office of the Comptroller of the Currency produces a quarterly derivatives report. (pdf!)
The entire CDS market is valued at about $16.473 trillion dollars. Presumably somewhere between 5-20% of that are subprime mortgages that have been securitized. And some fraction of that let's say 25% have gone into default.
So even in the worst case scenario, we are talking about $824 billion to just scoop up the mortgages.
Further, by working deals out with homeowners, you could discount the value of the mortgage by a rate similar to the house value fall, and keep these people in their houses.
And, by doing that, you are limiting the burden of this project to maybe a quarter of that $824 billion or about $206 billion.
And that is a pretty manageable number.
You restore confidence, and money starts moving again.
I strongly believe that the CDS and all other derivatives markets should be nationalized, so that any future profits go to the government, and they can be regulated in the context of full information.
But this isn't going to happen, because Obama is in hock to these people from the Hamilton Project and Rubin.
I have to admit that Dean Barker has been growing on me the past few weeks.
Like when he called out the outrage at a bailout for autoworkers making $57,000 a year when the same article doesn't even mention how much Rubin's walking away with from this deal.
We are in for a whole hell of a lot of pain unless these jackasses are called out for the charlatans and treasonous bastards that they are.
Last I read the derivatives market was estimated to be $65 trillion, which includes the CDS market.
I asked NDD and midtowng last night to validate my math because I couldn't believe what I was seeing and NDD sent back other bloggers writing the same thing I did in this post.
Barry Ritholts: Barry Ritholts
Tim Iacono: Tim Iacono
So, it appears that financial institutions are getting more money than their entire value or the entire value of the supposed problem.
That excludes though the shadow banking system, derivatives market. I'm not going to say I know what I'm talking about here but more we need more raw data and research, checking the numbers because that is what I'm finding.
I agree with your analysis, they could indeed save every single foreclosure with this kind of money and your estimates for saving most foreclosures is probably on.
What's even more odious is several banks have announced multi-billion dollar home mortgage refinancing, including principle but it doesn't add up to the money pouring from the Treasury and Fed.
Market May Be Much Larger
Reuters put out numbers for the total derivatives market at $560 T. That includes I suspect, much more than just swaps. The other number that I have seen bandied about is the $65 T number to which you refer. One might conclude that this refers to the CDS/CDO etc fraction of the derivatives market. But then again, who knows? Really. The DTCC recently said that the number was $34 T. Do they really know? The derivatives market is unregulated, thinly traded and largely obscure. Where are these numbers coming from? From the stories I've read, there are situations so complex that the total number of counterparties to any one debt obligation is uncertain. Then we get the "settlement" of swaps for Lehman Bros, which is curiously subdued and the numbers relatively trivial. According to DTCC, many of the swaps cancelled out and only $6.2 B was paid out. But, then the news filtered out that most counterparties didn't settle, the consequences of which are discussed here http://www.nakedcapitalism.com/2008/11/credit-swaps-top-33-trillion-depo.... Oops. So does the DTCC number reflect the actual number of CDS obligations or just the number that they are aware of? What a mess.
The first number I saw was Bloomberg's
I think that this market is where most of the deflation is happening. Notice how the numbers get progressively smaller. And even the original article I saw from Bloomberg last August warned that most of the contracts actually cancel each other out; so actual payouts would be MUCH smaller than what the insurance originally cost and was being traded for, more along the lines of the actual $120 T in productive assets, and maybe much smaller than that since not all productive assets were insured.
Given all of that, the $33 T number might be close to correct for the final "real" value after deflation- or maybe not.
Maximum jobs, not maximum profits.
Those estimates are more than 10:1 in derivation. That's the only thing I can think which makes sense to me, they are trying to prop up this unregulated and unknown shadow banking system.
Anybody want to buy a very expensive Dutch tulip?
A rumor I heard last summer
Was that some banks in the UK were overleveraged up to 200:1.
The shrinking numbers we're seeing in the derivatives market would suggest that was actually close to correct.
Maximum jobs, not maximum profits.
What if M1 & M2 is really M3?
I think I've got a theory why hyperinflation hasn't happened.
ALL OF THIS STIMULUS is being done as either investment or loans.
Overleveraging of investment and loans is what got us into this mess in the first place and is the primary cause of the deflation.
Therefore as long as we keep structuring these bailouts as M2 or M3 money instead of directly printing new money without loans, all we're going to do is make the hole deeper and the depression longer.
I've got to put more thought into this. Perhaps a blog posting after Thanksgiving.
Maximum jobs, not maximum profits.