Facing Down the Wall Street Oligarchs (part 2)

And so the story of The Wall Street Oligarchs and the Main Street Taxpayers resumes as Simon Johnson, former chief economist of the International Monetary Fund continues his tale of The Quiet Coup –

Every crisis is different, of course. …

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

… the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.

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…Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.”…

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government… Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

But there are no riots — at least not yet.

The Main Street Taxpayers are only now fully awaking to the realization that they are hostages at a never ending party. They don’t want to stay. The party has lost its glamorous allure in the harsh light of day, but they can no longer go home. Seemingly overnight their Main Street jobs, houses and retirement funds have all but disappeared.

Still the band plays on, while the lucky few – the Wall Street Oligarchs and their trusty enablers continue the revelry.

And as a series of multi billion, now turned to trillion, dollar ticker tape parades march down Wall Street, the Main Street Taxpayers are left chained to the curb, a captive audience Watching The Trillions Pile Up says Howie Rich.

With another $2 trillion in federal interventionism announced within the last week alone, the price tag for America’s economic “recovery” continues to soar to stratospheric, scarcely-comprehensible heights.

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All told, the feds have pledged $13 trillion to deal with the current recession – or trillions more than our existing national debt.

Think about that for a moment – $13 trillion.

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Yet in spite of the fact that we were already lurching along on an unsustainable course, it has taken the current crop of Washington politicians less than a year to exceed the entire national debt as they have jumped from one taxpayer-funded “solution” to the next – all in response to a crisis largely of their own making.

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$13 trillion later, I would humbly submit that the only holes in need of filling are the ones in the heads of people who continue to fall for this scam.

The amounts are mind-boggling in their size and mind-blowing in their consequences. It’s like trying to envision an electronic debt tally board with the numbers spinning around so fast that parts start flying out. How can we pass this crushing burden on to future generations? How long can we keep adding on trillions? Where will it all come from? When will it all end? And where is it all going?

Really. Where are the trillions going? The money is certainly flowing out, but where is it really going? It’s not flowing down to main street. Nothing beyond the barest trickle. So, into whose hands do these billions and trillions travel? And in who’s hands do these billions and trillions eventually stop?

No one in the media seems much interested in really tracking this down. And the government is certainly volunteering precious few answers. And even the ones we do get can not legitimately be considered fully truthful. So is it any wonder that a Main Street Taxpayer backlash is building up and seemingly ever ready to explode. According to recent Rasmussen Reports national telephone surveys:

Forty-five percent (45%) of American adults say it’s time to stop all bailout funding for the financial industry. … 34% disagree while 21% are not sure.

Sixty-eight percent (68%) of Americans now believe most of the taxpayer money given out as bailouts is going to the very people who created the country’s current economic crisis.

Seventy percent (70%) of investors hold that view along with 67% of non-investors.

Separate survey data recently found that 64% of Americans believe that big business and big government typically work together against the interests of consumers and voters. Only 15% disagree.

Americans have consistently been wary of the large taxpayer-backed bailouts and 65% now say Wall Street has benefited more from the bailouts than the average U.S. taxpayer. Only 18% believe the taxpayer has benefited more.

The anger and frustration of the Main Street Taxpayers is certainly understandable, but it can’t and won’t solve our problems. They are very real and very big. And they are ones we needed to have addressed yesterday.

So what should our government do? Can our only paths to the future be endless trillions or nothing at all as too many including our President has suggested? Well, Simon Johnson, Desmond Lachman, Paul Krugman and a growing vocal cadre seem to be demanding the government chart a more cleansing course. More from The Quiet Coup.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

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Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

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This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. … “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” [Neel] Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. …

Promoting radically changed behavior and a new banking model seem to be Professor Paul Krugman objective in criticizing the Obama administration in recent days. From the Telegraph:

Professor Krugman has spent large parts of the past seven days trouncing US Treasury Secretary Tim Geithner’s latest plan to lead a public-private partnership to buy up to $1 trillion (£698bn) of toxic assets from bank’s balance sheets.

He now argues that the likes of Mr Geithner and President Obama’s economic adviser Larry Summers need to realise that the securitisation of assets sits at the very heart of the problems Wall Street created, arguing the promise of spreading risk more widely made the economy “more, not less, vulnerable to financial disruption.”

“The administration seems to believe that once investors calm down, securitisation – and the business of finance – can resume where it left off a year or two ago.”

“I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good.”

So what then should our government be doing? What is possible? What is truly necessary? And what will it take from each of us? I give you a final bit from Mr. Johnson and The Quiet Coup.

Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. …

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

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The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

… Anything that is too big to fail is too big to exist.

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… To those who say this would drive financial activities to other countries, we can now safely say: fine.

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The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

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I wish I could say this was the end of our story. Or even the middle. Unfortunately, this is little more than the prologue. The stage is set. The players introduced. A few monologues have been given. But the real action, the major conflicts, and the epic battles have yet to even begin.

The dramatic climax of this historic saga will continue to build with agonizing slowness over the months and years ahead. And yes, I do mean years. Where this will ultimately take us, how and where it will eventually end, is anyone’s guess at this point. I only know that even now the toll for millions is already being felt.

Personally, I am taking heart that finally, there are strong credible voices being heard by the many. And these voices are united in their determination to reclaim our government from the few.

I find hope that we, the Main Street Taxpayers, will provide a steady, determined vocal drumbeat demanding the trust busting era of a Theodore Roosevelt be returned to America.

It is also my fervent hope that as we move forward as a nation, we reclaim for Main Street, its founding birth right as the heart and face of America.

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Major H/T to LisaB and Mountainaires for bringing to my attention many of the articles used both directly and indirectly in part one & part two. All of these articles are well worth a full reading and I respectfully urge readers to find the time if at all possible.