Absorbing more economic punches...

Econocratic brains everywhere recoil in fear as the zombie smorgasbord continues in Washington.  The administration persists in deflecting and downplaying criticism that it is coddling the investment banking industry and rewarding its reckless practices.  Instead, the president and his advisers seek to focus media attention on upcoming regulatory reforms.

But many of us still feel that the White House is essentially saying to Wall Street:  Don’t worry, we’ll cover your assets.  In unsettling ways, the federal government is taking over where AIG left off, assuming much of the risk burden produced by pooled toxic assets, while inviting sanguine investors to play the game with too little to lose.

What should we nickname this pool of little orphaned assets now being pushed by the U.S. Treasury?  The Federal Fools’ Fund (FFF)?  Shall we call these new arrangments Debt Unlimited Miscellaneous Public-Private Partnerships (DUMPPPs)?

Meanwhile, the U.S. GDP contracted by 6.3% in the 4th quarter of 2008, while the national unemployment rate will likely hit ~8.3% by the end of the current quarter.

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Here’s a flashback from last fall, when the economy seemed a lot more intact, even if the credit system was on the rocks:

“Credit markets do not function.  Why not?  Because the word ‘credit comes from ‘credibility.’

The left side of the balance sheet has nothing right and the right side of the balance sheet has nothing left.  But they are equal to each other.  So accounting-wise we are fine.

Transparency is ‘what you see is what you get.’  And what you don’t see gets you.”

Now who was the witty wiseacre behind this wry wordplay?  Why that would be the AIG vice chairman entertaining his financier friends at a luncheon on October 11, 2008.

The hoi polloi have mostly stopped calling for the heads of these AIG goons.  For now, their righteous rage is subsiding as popular sentiment retreats to more familiar territory — seething impotent outrage, frustrated disgust, and reluctant resignation.

But quiet terror simmers, particularly among those who distrust the exuberant overtures of obscurantist optimists.

By the way, if you still want your zombie fix, check out cartoonist Mark Fiore’s “Zombie Bank” animation.

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De bankier en zijn vrouw (The Banker and His Wife)  [cropped]
(after Quentin Matsys)
oil on wood, date unknown
Marinus Claesz van Reymerswaele, ca. 1490 – 1567
Netherlands
collection of the Musée des Beaux-Arts, Valenciennes, France

Instead of continuing the zombie theme, I’ve included an early Northern Renaissance painting.  Bankers, money-changers, and other monetary specialists were often regarded with suspicion and wariness back then, too.

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Today I recommend a very thorough and eloquent piece written by a thoughtful liberal-leaning progressive:

“This Crisis Is Way Bigger Than Dead Banks and Wall Street Bailouts”
(AlterNet.org / Washington Monthly,  3/23/2009)

James K. Galbraith :

Lloyd M. Bentsen Jr. Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin

senior scholar, Levy Economics Institute

author, The Predator State:  How Conservatives Abandoned the Free Market and Why Liberals Should Too  (Free Press, 2008)

For focus on the banking industry debacle, skip down to the 11th paragraph in the article and/or search for the lead sentence:

The chance of a return to normal depends, in turn, on the banking strategy.

Here Galbraith joins the chorus of people who insist that the current financial crisis resembles the banking system failures of the 1930s more closely than the credit stumbles of the previous three decades.

He reminds us of the current plight of middle class Americans who have to rely on our government entitlements safety net now more than ever.

Galbraith also adds to the colorful metaphors enlivening the debate by characterizing the recent wanton behavior of Wall Street speculators as a “poisonous game of abusive mortgage originations followed by rounds of pass-the-bad-penny-to-the-greater-fool.”

He points out that the FDIC could justifiably take over distressed Wall Street institutions by placing them in full receivership.

He also implies that a “state of denial” that began in the waning days of the Bush administration persists within the current Treasury leadership.

Galbraith also reminds us of why former SecTreas Henry Paulson eventually began to back off the throw-the-money-in-the-hole approach.  First there was the sheer scale of the potential losses involved (as suggested by the ravenous appetites of certain cash-flow-starved financial institutions feeding at the TARP trough).  In addition, the task of discovering the true value of these mysterious assets was highly arbitrary and rife with risk and wishful thinking.

He is blunt about so-called “troubled assets”:

“The reasonable inference would be that many more of the loans will default.  Geithner’s plan to guarantee these so-called assets, therefore, is almost sure to overstate their value; it is only a way of delaying the ultimate public recognition of loss, while keeping the perpetrators afloat.”

He also implies that delaying the inevitable may lead us into further financial and economic hazards while sidelining “normal prudent banking.”

For example, instead of soundly restructuring, reforming and restoring our lending systems to health, delay and enabling may provoke investors to wreak havoc in other risky markets or indulge in additional rounds of klepto-capitalism.

Galbraith also cautions us that the shortsightedness of the plan signals that the White House’s economic brain trust fails to recognize that we are faced with “a true crisis -- an integrated, long-term economic threat.”

(Many of us felt similarly when we heard Fed chairman Ben Bernanke utter the following prediction/prescription on CBS’s “60 Minutes” ten days ago:  “We’ll see the recession coming to an end, probably this year.  We’ll see recovery beginning next year.”)

As a liberal, demand-side economic thinker, Galbraith challenges the primacy of what I’d call “mechanical” or “system flow” economics.  He stresses the importance of “creditworthiness” anchored in consumer economic fundamentals such as asset prices.  He also states that Americans who find themselves suddenly asset- and cash-poor don’t tend to rush headlong into more credit, even if the lending spigot is set at full blast again.  He argues that this reluctance to spend and borrow will dampen any multiplier effects triggered by cash and credit injections into consumer markets.

And then Galbraith ventures into that misunderstood decade of our economic history, the 1930s.

He quotes a December 2008 paper (“Time for a New ‘New Deal’” [PDF, 59k]) by economist Marshall Auerback.  (Interestingly, Mr. Auerback appears to be a global portfolio manager fluent in areas like equities trading.)

Again, I encourage you to read Galbraith’s piece.  He argues for public investment and relief initiatives that borrow the most productive and redemptive aspects of FDR’s New Deal.  However, like many others, he credits the war mobilization, not the New Deal, for helping to stoke enough consumption, investment, and trade to propel the United States out of the rut of the Depression.

The current thinking among many social liberals is that a millenial “Newer Deal” could revive our economy.

However, many of us believe that this assumption is fatally flawed.  We fear that such an audacious undertaking could yield few immediate results, while plunging our country further into debt.

Such programs should be supported as standalone public relief and investment measures, without being hitched to false hope and inflated promises.

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To be continued ...