Wall Street: Get Their Claws Out of the Real Economy

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.

Comments

[CroatianCritter]

You have a very good post and I understand the fear of DEFLATION that our political leaders have but I would like to ask you a question. WHAT CAN REALISTICALLY BE DONE TO FIX IT? Wages have stabilized and decreased in many instances, cost of living is through the roof and even simple medical benefits have inflated in price by double digits over the past few years. DEFLATION is a market mechanism that ADJUSTS the economy when the cost of living is out of control. This is a natural event that needs to be undertaken. Homes can not maintain in California at 600K when only 11% of the people in southern California can afford a home at that price. The wonderfully corrupt loans made people feel invincible when it came to these overvalued prices. But, deflation has set in. So homes are going down to the REAL VALUE that they should sell at. We love INFLATION as a country but it is very destructive when wages don't match the inflationary percentages. Obama should only try to keep people fed and alive through this crisis by slashing defense spending and taxing the rich to pay for the poor and allow this multiyear event to occur. Once we hit bottom, the United States can once again move forward.

[robin50]

It is refreshing that someone does realize that Wall Street is a no value added street. They add no value nor produce or manufacture anything. Wall street may be neccessary, much like the janitor who cleans the tiolets, but they do not actually add value to the product a customer wants. And sorry to all janitors around the world, hope the slam comparing you to wall street wasn't taken personality. For a person to be value added, they actually have to touch a product. They have to physically alter that product one way or another increasing its value. Wall street doesn't do that, and wall street needs to be taken off the back of people and streets that do actually produce something.

[Henryk A. Kowalczyk - Huffpost Blogger]

I like clarity of your argument, so rare on this subject.

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?

[peterg76]

"Seems wrong to me."

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.

[jackwaddington]

How about closing all stock exchanges (rich men's (called investors), gambling casino) Even now all they do is SPECULATE on being saved by taxpayers. It's the speculative aspect of stocks, bonds and all the other commodities by raving traders all screaming and shouting (like 2 year olds) in a chaotic auction forum--madness. Send then all home (traders and trading companies). We've bought into this insane 'buy and sell' free-for-all.

[Charlie M]

What I would like to see is ; Make the banks that gave mortgages to people they had to know could not continue to pay on them at the rates put on them by those very same banks , eat those mortgages . allow the mortgagees to continue in their homes with no further payments; The homes would be theirs debt free. A lesson for the greedy banks and relief for the poor.

[babymonster]

There has as yet been nothing done to regulate the stock market, to regulate corporations, to regulate real estate, to improve the credit ratings system, or to regulate banks. I believe that this kind of action would immediately instill confidence around the world and turn around markets.

[darker]

US Banks want to protect their rich CEOs assets and asses
and hand USTaxpayers the HUGE bill to pay to protect their CEO wealth.

Things will never change.

[Rule Of Law]

"The Fed and Treasury need to make a fresh start -- by bailing out debtors: homeowners, companies, local governments and individual­s."

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.

[ellaichell]

Pettifor is so right on about so many things. However, in all of her posts that I have read, she seems to proceed from the assumption that the Federal Reserve exists to help the people of our country and that it is a part of the government. As the first poster pointed out, the Federal Reserve is the problem and in no way part of the solution.

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?

[robin50]

Why not just give it to us? Our recent past credit history tells us why. We, current company excluded, spend 110% of out income. We can't be trusted. I have absolutely no debt, other than property taxes. I live within my means. I have no mortgage, no car payment, and no credit card debt. I know, how unamerician can that be? But that isn't the norm of the typical americian. Up to there hairlines in debt and no plan to ever pay it off.

[leoevon]

Well put, ellaichell. Although I dont agree with Pettifor, you are indeed right on the money (no pun intended) when pointing out the Federal Reserve's the problem. Fortunately, theres a significant amount of people that are starting to wake up to this. There are also some congress members that are aware of 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!!

[dsigeorge]

It's time for an end (by civil disobedience if necessary) of the federal reserve bank. The root of all our financial sickness.

[JohnLloydScharf]

Just send me the money. Just send me the $2600 it costing each man, woman, and child to finance this. Naw, make it an even $3000. That is the cost of the interest at least.

[idest]

I'd love to, but we need this money to be spent. And chances are you'd put some if not all of that money in the bank and leave it there, doing absolutely no good for anyone.

[Troubledwawa]

Ann, you make a lot of sense, and thank you for the article. You're one of the few people to come out and assert that someone is going to have to forgive debt - and I totally agree with you.

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.

[ScreenName05]

Wall Street is still nothing but a casino instead of a place for investment. We must stop this nonsense. The only way to convert Wall street back into an investment market is to stop day to day speculation. The stock market went down 200 points today on news about the stimulus, then came back to near zero with news about mortgage plans. Neither of these events will have any short term effect on investments. Let me repeat, no business is going to be effected by these events for at least 6 months. Therefore the gambling based on those events is nothing but placing bets on a crap table. To stop short term speculation we must stop all profits from short term speculation.

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.

[bighat]

Nancy and Harry are letting us down and embarassing the President. Just readin the Washington Post that the caps for Wall Street and Bank CEOs will be lifted. They will no longer have to get by on 500k a year.

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