"It May Be Distasteful"

Banking remains at the epicenter of the economic news, unfortunately. The Establishment has been executing its plan over the last year to massively transfer national wealth to the financial giants. This transfer of wealth in this sort of quantity has never been overtly done to any other industry in my memory. (The closest one can come is to blame wars such as Iraq, Viet Nam and World War I on a desire to enrich the captains of industry, if one has that sort of belief. And even if such were the case, at least the companies actually provided goods and services in support of the war(s).) Here, the companies being aided are keeping the funds rather than producing anything with them (because they are more or less insolvent).

To keep things positive, before reading me beat up on a Bloomberg.com article, please consider reading two articles by the noted economist Willem Buiter (both published by the Financial Times.com:

No change, no hope: Obama’s Transition Economic Advisory Board
November 10, 2008 (this is actually an entertaining, witty writeup)

and

Time to take the banks into full public ownership
January 16, 2009 (more important and sober).

Dr. Buiter has impeccable academic, governmental and regulatory credentials (listed by his writeups) and is famous for having "spoken truth to power" last summer, as reported by Naked Capitalism: "Buiter Provokes Wrath at Jackson Hole, Says Fed Too Close to Wall Street".

In any case, the Establishment continues to keep up a pathetic but in the aggregate effective drumbeat of concealed advertising in favor of the bailouts. To wit, from today's Bloomberg.com:

"Obama Bank Rescue May Make New Effort to Resolve Toxic Assets"

"President-elect Barack Obama is likely to back a financial-rescue effort that channels capital to banks and deals with troubled assets clogging balance sheets, according to people familiar with the matter."

“We have a deteriorating real economy and deteriorating financial sector feeding on each other,” said Raghuram Rajan, a former chief economist for the International Monetary Fund who’s now a professor of finance at the University of Chicago. “It may be distasteful but we need to put more money in the banks.”

DoctoRx here: No we don't. We should follow the lead of Sweden about 15 years ago and let the failed ones fail, no matter how big, but in an organized way. This will save the "system", and let taxpayers reap the profits from "Newco" banks that we will finance, grow, and privatize later on.

Another snippet from the article:

"Obama is set to take office on Jan. 20 and his advisers have been working to craft a comprehensive blueprint for overhauling the bailout."

The bailout bill was written entirely by Congress, under control by the Democrats, the party that has been led by Barack Obama since summer 2008. Mr. Obama voted for the bill; I recall that he expressed no reservations with the Reid-Pelosi-Frank etc. legislation at the time. Now Bloomberg is reporting without saying so that the bill, passed merely 3 months ago, has failed and needs an "overhaul". What Bloomberg should have been reporting is what I just wrote, not what it wrote. I have been writing consistently in my posts that Congress held no hearings of any substance in putting together this bail-out turkey. Oh, it was an "emergency" (such an emergency that the smart money starting exiting the financial stocks at least as far back as 2006 and the housing stocks in Q2 2005). Bush and Paulson are going, going, gone. They were good pinatas for putting the left-wing side of the Establishment in total control of the Federal Government. I have also been writing that the Obama Administration was going to continue the Bush-Paulson-Bernanke-Reid-Pelosi consensus policies on finance. These policies are to use all necessary efforts to continue the failing and flailing policies that support the Merchants of Debt.

I said yesterday in On "Financial Reform" that I would have more to report on the RiskMetrics/Volcker etc. G30 report and recommendations on Financial Reform. I have reformed my thinking. Please read that post and Dr. Buiter's posts referenced above. 'Nuff said.

What is going on now is momentous. Because the stakes are so high, the Establishment media such as the New York Times and Bloomberg.com are virtually ignoring the core issues. The same NYT that put Abu Graibh abuses on its front page for daily for well over one month should be doing the same with this issue.

Will society get back to where we once belonged, where people actually owned things free and clear and adjured debt? The profitability of selling debt can be seen in the unbelievable number of credit card solicitations sent out yearly even now and in the hysterical Establishment reaction to "save" the banks, "distasteful" though it is.

It is looking more and more as if the Obama Administration is going to simply re-market the same debt-based system that brought us to the most severe economic downturn since the Great Depression, but with more regulators sucking more money from you and me to support them. Mr. Obama now has the bully pulpit. If he were to issue a clarion call for greater personal responsibility, restraint in purchasing material goods until personal savings were available to properly pay for them or conservatively finance them, and took on the Merchants of Debt as Teddy Roosevelt took on the "malefactors of great wealth", his popularity would soar and he could become as transformative a President as was TR. He needs to decisively set the tone and put forth policies that guide the country from a finance-based economy to a 21st Century one. The outlines of a 21st Century economy are clear: medical technologies, information technologies, cost-effective energy-generating and energy-transmitting technologies: knowledge-based stuff. Stuff with real products such as life-saving drugs. No more creating "wealth" that is simply a financial construct.

To do this, he needs to clean house. Force the "too-big-to-fail" failing "banks" - which are really giant holding companies with no real interest in the boring job of taking insured consumer deposits and doing prudent (i.e. low-profit) things with them, to disclose all details of their "Tier 3" and even "Tier 2" assets. Don't have the Federal Government buy them. They should sell them for what they are worth. Then all institutions that have Government guarantees should be banned from holding illiquid assets such as those.

Who will buy these "assets"? I don't care and neither should you. A modest proposal: over the last decade, individuals working for financial firms have snarfed up hundreds of billions of dollars of personal income, perhaps trillions, from bonuses and capital gains made by building up this system that has now suffered a heart attack/stroke/short-circuit/disaster. Let these gentlemen, huge numbers of whom are rich beyond Croesus' imagination, buy them at the same price at which the former IMF official expects the Federal Government to buy them at. Let Bill Gates and Warren Buffett, who are so generous to so many non-Americans (and on occasion to Americans as well, to be fair), help us out and spend a portion their tens of billions of net worth on paying generous sums to these financial institutions for their troublesome assets. That would be an act of real charity to a suffering populace and to their country. Unlike Haim Salomon, who helped save the Revolution, and who died a pauper, they need not go quite so far!

It would be nice to believe that after a disaster of the current magnitude, there would be real hearings in Congress as well as an independent commission (not the G30), a la the "Pecora Commission" (see my Jan. 7 post, Where Is Jurassic Park When You Need It?) about the root causes of how matters came to the current sorry state.

Don't hold your breath. But please contact your Congressional representatives to let them know that you need your money, the Federal Government needs its money, and you find it "distasteful" and more than that for our money to keep being thrown down a rathole.

After taking the oath of office, President Obama will give a great speech Tuesday. Will that be associated with an Obama stock market rally? I don't know and I don't care. Because he has already signaled that in the fields of economics and finance, the candidate of change is not going to make any fundamental changes.

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