Last week $2.15 trillion dollars in plans were announced from the Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC) and the US Treasury. These plans have received little attention. Instead, attention was focused on the raging battle over $170 million in AIG bonuses. This is truly sad. There are 300 million Americans. The AIG bonuses amount to 56 cents per American. The FED, FDIC and Treasury Plans announced in late March could potentially cost north of $2 trillion. That works out to $6,667 for every living American. Passions run much higher over 56 cents than they do over $6,667.
This is what happens when real pain drives real anger and blinds us from watching the real money. There are so many new plans, each with its own similar and confusing acronym. The numbers are huge and hard to follow. There are few descriptions of the plans and they are often full of boring and alien jargon. To get the pearls of wisdom you have to shuck the tough, slimy oyster.
Households are drowning in pain and loss. Americans took one month's wages and salary cuts worth $26 billion in January 2009, and $28 billion in December 2008. In the past year we have added 5.5 million people to the ranks of the unemployed. Our problematic unemployment rate has surged upward from 3.3% to 8.1%. Almost 3 million Americans have been out of work for half a year or longer. For 38 months the monthly foreclosure rates have increased year-over-year. RealtyTrac reported 291,000 foreclosure filings in February 2009. In 2008 one in 54 US households received a foreclosure notice or filing of some kind. On March 25, 2009, Jesse McKinley's shantytown article in the New York Times highlighted the growing number of homeless Americans. Our house prices have slid an average of 15% in the last year and our 401ks are off by an average of over 45%. Storefronts are closing, college educations are moving out of range, credit cards and credit lines are being canceled. All the pain and loss is driving growing rage. It will be a long, hot summer.
Corporations are reeling from losses. There was a 16.5% decline in corporate profits in the fourth quarter of 2008 as the overall economy shrank by 6.3%. This makes the fourth quarter of 2008 the worst quarter for corporate profit growth/shrinkage in 55 years and the worst quarter for GDP growth/shrinkage in 26 years. American firms saw a $250 billion decrease in profits and a $97 billion decline in internal funds. We see this in slashed payrolls, canceled retirement matching funds, reduced R&D spending and $130 billion in corporate tax payment. There is no Main Street - Wall Street divide. The complex and interdependent organism that is the economy is sick -- very sick. Various fantasies about dividing lines between beneficent real economy and wicked financial economy are neither insightful nor productive. No matter how angry we are (for good reason), heaping derision on financial firms, scoundrels and past abuses will not heal the body economic. Righteous anger is overflowing. Congress and the White House are fearful of public anger and the economic downturn. This is being managed by stoking rage while staying the policy course. Our attention focuses on Madoff and AIG bonuses. We ignore the Fed, FDIC, and Treasury plans that bypass Congress and spend trillions.
I fully understand that the public is paying attention and is really, really angry. Past abuses and present plans often anger me. However, it is high time we focused on what is happening and how to save millions of jobs, college educations, retirements, homes, hopes, enterprises and industries. This discussion needs to start by looking at the two massive programs that have received almost no attention and are the order of the day. These two plans are the Fed TALF and the Treasury PPIP. These two programs mark another round of massive spending targeted at removing troubled legacy assets from balance sheets. Troubled legacy assets are the bundles of mortgage, credit card, auto and commercial loans that are now seen as dangerous and hard to value. Our commitment to cleaning bank balance sheets is a strategy to restart lending and return our financial system to health. It is an attempt to get banks lending and solvent again. This is done as public anger spikes at the imbalance between the spending commitment to financial health and the relatively smaller spending on public programs. This is a real issue and will not be debated until we understand what is being done. The longer systemic debate takes, the more angry the public will be, the more in debt the nation will be, and the further into crisis we will be.
The TALF -- Term Asset Backed Securities Lending Facility -- was expanded on March 18, 2009. The Fed announced its plans to increases its balance sheet by around $1.15 trillion. The latest changes announce the intention of the Fed to purchase an additional $750 billion of agency mortgage backed securities. Agency backed securities are backed by government agencies. Agency securities here refer to bonds issued directly by government agencies including Fannie Mae, Freddie Mac and Sallie Mae. The $750 billion Fed purchase increases total buying to $1.25 trillion from the previously planned $500 billion purchase. The same announcement includes the Fed plan to double purchases of agency debt to $200 billion from $100 billion. Last and certainly not least, the Fed announced plans to begin buying $300 billion worth of US longer-term Treasury Securities to reduce interest rates. As households struggle, firms cut wages and payrolls and delinquencies and defaults rise, the Fed is stepping up its activity. These are attempts to get banks lending again and credit to consumers and business at lower cost. This is done, in part, by the Fed and FDIC to elide long debates that enrage the public and encourage Congressional grandstanding. In short, you are used to paying close attention to one set of decisions and ignoring another.
To learn more, visit: http://federalreserve.gov/newsevents/press/monetary/20090318a.htm
The Fed is not alone. On Monday, March 23, 2009, The Treasury announced a new program. The Public Private Investment Program (PIPP) will use between $50 and $100 billion in TARP money and FDIC assistance to fund the public and private purchase of $1 trillion in loans and asset backed securities. Large, well capitalized firms will bid for loans and securities in auctions run by the FDIC. The winners in these auctions will then have their private capital matched by government money. The government will match dollar for dollar. If the investment is in loans, investors will be allowed to borrow cheaply with the FDIC assuring their borrowing. The plan allows private firms buying loans to borrow up to 6 times the total capital -- half theirs and half the government's. Private managers could then buy 12 times as much asset value as their initial capital and manage it. The FDIC will regulate this process and provide guarantees to lower borrowing costs. Gains will be shared equally between the government and private investors/managers who will manage the monies themselves. When buying asset backed securities investor borrowing will not exceed 100% of the value of the capital- also half private and half public. In an unlikely, worst-case scenario, losses could fall 11 parts of 12 to the government. Losses could fall 3 parts of 4 in asset backed securities buying. Private compensation is not capped and the FDIC loans are non-recourse loans.
To learn more: http://www.ustreas.gov/press/releases/tg65.htm
I know there are many details, terms and statistics in the above paragraphs. I know many of you are not used to seeing these details, terms, and massive numbers. I know you are angry about how much has gone wrong and who is and is not being directly assisted. You need to know that the details are very important. You need to know what is being done with your future tax dollars borrowed today from world markets. You need to know what risks and opportunities that creates. You need to know that banks will want to sell assets in these auctions at higher prices than investors will want to pay. This could be a serious problem. If banks slash prices and sell they may need more money. If they don't, the plan may be less potent than hoped. You need to know that this is being done to reopen consumer and commercial credit markets by restarting the market for bundles of consumer and commercial loans. That market has collapsed and damaged the economy. At its height, 40% of consumer loans were made possible by this system. You need to know the Fed is an increasingly massive and central part of our economy. You need to need that we will have to sell trillions, at least $2.25 in calendar 2009, in government IOUs. Voices of critique about US spending are rising in volume and number. Russia and China have been particularly critical of the US Dollar. EU Nations are voicing concern about our spending levels. The G20 meetings across the first few days of April will be important to watch.
An angry public is getting distracted hunting evil doers that really don't matter much in the grander national scheme. These are dangerous days. We have real problems and opportunities to go along with our real pain and real anger. In times like these, witch hunts waste time and energy. Our focus has to stay on the real money and the full range of real options and limitations in how and on what we use that money. Our resources are not limitless. Each program we undertake ties up and risks monies that can't be used for any other worthy plan.
Huh? Hear me out.
Laws were systematically repealed, and new laws introduced, with the combined effect that trillions of dollars' worth of ... let us call them what they plainly are ... FRAUDULENT transactions were undertaken for dozens of years. Likewise, FRAUDULENT credit-ratings were attached to them with the express intent to DECEIVE investors and to EVADE the remaining bank-regulation laws that required "safe" investment. Regulatory agencies from the SEC on down ... ahem ... "looked the other way." For about fifteen years.
Today, these WORTHLESS pieces of paper are being called, "hard to value." (What's hard about "zero?") They're simultaneously being called "toxic" and called "assets." (How can this be?)
In either one of these "plans," which as you say are receiving NO press attention, the Treasury of the United States is being harnessed to make-good on every single one of these fraudulent, worthless securities. Even if it does so for a penny on the dollar, even one penny is too much to pay for a zero.
I do not agree that this thing is "so mysterious" that it cannot be viewed with plain common-sense: "Yes... it means you're stealing."
I submit that this is, in fact, a very ordinary financial crime ... it is just stupendously big, outlandishly brazen, and outrageously ... STUPID.
There... another capitalized word. :-D
Watch the magician's OTHER hand... not the one with which he is dealing out colorful puffs of smoke.