It's hard to believe this. Harder even to write it. But yesterday's announcements prove that the US Treasury is still afraid of the big bad wolf, Wall Street.
While Wall Street laps up taxpayer funds it continues to dig its claws into the body of the real economy. The Treasury seems in danger of pandering to the beast, rather than protecting the vulnerable -- those companies where real wealth is created.
There is some, but not enough, focus in the Treasury statement on foreclosures, debtors and debts. There is very little focus -- either from the Fed or the Treasury -- on the cost of debt for those productive companies and households buckling -- and going bust -- beneath the heavy load of their debt.
How can this be?
I can only think it is because America's leaders are still too fearful of Wall Street This makes them blind to the role that the private banking sector is playing in hurting the real economy.
Remember, Wall Street has the power to set interest rates -- market rates. And neither the Fed nor the Treasury seem willing to mess with that power.
By focusing on bailing out the banks, and by not helping the rest of the heavily indebted -- but productive -- economy, the Treasury team and the Fed are likely to make things worse. Not just for the economy -- but for Wall Street too.
Making banks more transparent -- belatedly -- won't solve the problem. Pumping in more capital won't help. The debts are too many, and unknowable. Geithner has to face this.
The focus must now be on protecting and reviving the body of the productive economy. That is the economy in which real -- not phony -- wealth is made.
Right now it is hurting. The finance sector has overwhelmed companies and households with debt -- which grows more expensive by the day -- and that's destructive.
The Cost of Debt
How can debt become more expensive, you ask? Interest rates seem low.
Here's how: because of a phenomenon very few of us have ever lived through, and even fewer (including orthodox economists) seem to understand: deflation.
Prices are falling. That is the prices of houses, stocks, goods and labor.
When prices, wages and salaries fall -- the cost and the value of debt rises. This is both because of deflation, and also because creditors -- i.e. the banks -- raise the price of debt (interest rates) to defray their own losses.
Think of it this way. The price of tomatoes in the market place can fall beneath the cost of growing those tomatoes. If tomato warehouses are filling up with tomatoes -- sellers run down stocks.
They sell below cost.
But the price of debt -- interest rates -- can never fall below zero. So if prices are minus 3% (i.e. deflation) and the Fed Funds Rate is zero, then the real rate of interest, i.e. the real cost of debt is 3%, not zero.
It is worse than that -- because very few pay the Fed Funds Rate on their overdraft; on their company loan; or on their mortgage.
Most pay interest rates set by Wall St .bankers -- or creditors.
So if the interest rate paid by a company is 15% -- then as deflation takes hold and prices fall to minus 3% the cost of their borrowing rises to 18%.
The US, like Japan in the 90s, is now experiencing deflation. Interest rates are actually rising, because creditors -- like those on Wall Street -- have literally run out of credit -- 'the credit crunch' -- and are trying to defray their losses.
Neither Fed Governor Ben Bernanke, Treasury Secretary Tim Geithner or the president seem to be paying attention to this phenomenon -- the rising cost and value of debt at a time that costly debt is bankrupting America's productive economy.
As our tomato-grower's loans and overdraft become unpayable -- he goes bust. Lays off his managers and workers. They have less money to buy tomatoes. Or pay their mortgages. Tomato prices fall further. They sell the house, another nail in the coffin of the housing market. And the spiral continues downwards.
Debtonation!
The Fed and Treasury need to make a fresh start -- by bailing out debtors: homeowners, companies, local governments and individuals.
How to do this? In some cases debts will have to be written off. The fact that debts cannot be repaid will have to be faced. That is why we have bankruptcy laws.
But in many cases debtors -- good, productive companies and government departments that employ people, pay wages, grow the food we need, the goods we want, and provide vital services -- can be helped by dramatically lowering the cost of their debt.
This can be achieved by lowering interest rates -- across the board. Rates for short-term loans, long-term loans, safe loans and risky loans.
But most rates are fixed by Wall Street and other creditors -- not by the Fed.
If the Fed were to take control and bring these interest rates down -- and it has various 'technical' instruments for doing this including Quantitative Easing (buying up long-term Treasury bonds) -- then the productive economy could still be bailed out before deflation makes things much worse. But time is running out.
Right now the Fed is treating Wall Street with kid gloves. Allowing creditors to exercise their ferocious power. The power to fix -- and raise interest rates across the board -- when the United States is facing its biggest-ever debt crisis -and companies and individuals are bankrupted.
Wall Street in the meantime is bailed out.
Seems wrong to me.
In my view, http://www.huffingtonpost.com/henryk-a-kowalczyk/its-time-for-financial-di_b_128466.html , we got in hot water as in our system bankers were able to collect hefty commissions on moving around inflated (toxic) assets.
The most what the government can do is buying some time, so bankers can figure it out between themselves what they are worth. The simplest way of buying time is by issuing at hoc emergency loans to individuals who cannot afford paying their mortgage. If by issuing these loans, the government would guarantee that no one house would be foreclosed within the next six months, but six months only, then within this time banks would figure it out the real value of their assets. Just to be clear, if an individual receiving a loan to cover mortgage for the next six months would fail in paying mortgage afterward, bank would repay government first before getting any money from the foreclosure.
It means no dime for Wall Street bailouts.
Please notice, that proposed here solution, would work against deflation. Do we have a better way of stopping it?
It seems wrong because money is being stolen from the productive members of society and laundered through insolvent banks.
It's not an accident, it's a scam.
and hand USTaxpayers the HUGE bill to pay to protect their CEO wealth.
Things will never change.
This will NEVER happen, and here's why. Banks live on debt. It is the blood upon which they feed. A bank can be created out of nothing and show 10 times the value of each loan it makes--each debt it helps some homebuyer, for instance, take on, and that imaginary money is as good as gold.
Why would that want anyone to kill the interest paying cash cow that is Debt? They don't. They don't want Obama to bail US out, and they are working it so that our debts remain untouched and payable to them for the life of each and every debt, AND at the same time they are being paid out of the Public Treasury because of the "Economic Crisis." It's Win Win for the bankers and a big lose-lose for the rest of us.
Also, contrary to what Pettifor keeps saying, the problem is the debt, not the cost of debt, which in my view is really a distinction without a difference. And the reason debt is the problem is because we're being asked to give the banks money so they can loan it back to us at interest. That's why the cost of the debt isn't the issue--the real issue is we're being ripped off. The banks are being allowed to steal from us. Literally.
And we're expected to just go along with it like it's perfectly normal, you know, for the "stability and vitality of the economy." They want to "get credit flowing again." Credit is the problem, not the solution! If we can give banks money to sell back to us, why not literally give the people the money? It's the people that need bailing out, not the banks.
Seriously, though--give us the money. Put it directly in our hands--it's our money, anyway. Why can't we have it?
There is a bill right now that is for Ending the Federal Reserve. Our founding fathers were very clear on the dangers of central banks for the reason that they destabilize economies and it concentrates far too much power in the hands of a few outside of congress. Even if Obama wanted to do something different, the Fed's are far too powerful to allow Obama to choose contrary.
Lastly, I really agree with you that if they ARE going to give out money, WHY NOT US??? Why the Bankers?? Its outrageous and absured!!
Real estate is the base of wealth and it is still falling. And it will continue to fall until the average person in a given area, that makes the average income, can afford a 30yr fixed mortgage based on 28% of their monthly income - for an average house.
The only variable that I can see in that equation that can be controlled is the interest rate of the 30yr fixed mortgage.
We need a 90%+ tax on short term capital gains. We need it now. We need to stop the gambling with our investments. We need to close the casino.
Kill this bill
Let Obama write one without the pork and put restictions on it so congress cannot change it for their petty needs. I do not understand why our representatives have to add port to a stimulus bill.
Go Obam. Be the President we all know you can be. A President to all the people and tell Harry and Nancy to get on board