by Teh Nutroots | Where is the tough love? Or is that only for the poor, the halt, the disabled, and the feckless? Come ON, people. I shit you not, this is getting ridiculous. Even, as my coblogger says, "the ignorant layperson" can see that this is f*cked up. I am sorry for all the asterisks, but if we were a different sort of nation, we'd be out in the streets, burning Henry Paulson in effigy----along with assorted anonymous dummies representing any number of incompetent, corrupt, or incompetent and corrupt CEO's and managers.
Because it isn't going to work. It already isn't working. You know it, I know it, Bush knows it, Paulson knows it. It's not working because it can't work; it's an insult to reality and a violation of natural law. It's like we've had our legs cut
off, and we're lying on the railroad tracks hemorrhaging, and while one
of the paramedics tries to stop the bleeding with gauze and string,
another is siphoning off blood to give to the engineer who got drunk
and made the engine jump the tracks and got a nasty scratch on his arm. Then he'll be fine and can get us out of here, except we'll be dead.
Amazing how much damage the lame ducks can still do.
So why, when you, I, Deb, Damozel's mom, and my cat all know that this isn't working and can't work is it going on anyway?
At Naked Capitalism, Yves Smith thinks he knows why. Sound like it to me.
But these still are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease....
There is a remarkable failure to acknowledge a key element of the task before us, that is, that the financial system HAS to shrink. Its current size is based on an unsustainable level of debt, a big chunk of which will go bust or be renegotiated. Yet rather than trying to figure out what a new, slimmed down version of banking ought to look like, to ascertain which pieces should be preserved and which jettisoned, the authorities are instead reacting in a completely ad hoc fashion, rushing to put out the latest fire. And in the process, they keep trying to validate overly inflated asset values (a measure straight out of the failed Japan playbook) rather than try to ascertain what their real value might be so as to determine how much recapitalization might ultimately be needed (if you doubt me, Exhibit One is the pending Citi bailout, in which lousy assets will be guaranteed at phony values). Is this denial? Do the authorities fear that if they work up this analysis, it will leak out and the markets will panic? This seems to be the first, most important order of business, yet here we are more than a year into the crisis, still tip-toeing around one of the very biggest issues.
And why is that? Back to the cult issue. Willem Buiter has chastised the Fed for what he calls "cognitive regulatory capture," that is, that they identify far too strongly with the values and world view of their charges. But it isn't just the Fed. The media. and to a lesser degree, society at large has bought into the construct of the importance, value, and virtue of the financial sector, even as it is coming violently apart before our eyes. Why, for instance, the vituperative reaction against a GM bailout, while we assume Citi has to be rescued? A GM bankruptcy would be at least as catastrophic as a Citi failure. but GM elicits attacks for the incompetence of its management and the supposedly unreasonable posture of the UAW (the same free market advocates recoil at a deal struck by consenting adults)....
And yet the specter of incompetent, and worse, DISHONEST management elicits far less anger. GM may not make the best cars, but Citi and other banks sold products that were terrible, destructive, that resulted in huge losses and are wrecking economies, damage crappy cars could never inflict (environmentalists might quibble, but never has so much seeming wealth evaporated in so little time, and with the main culprits readily identified). They paid huge bonuses, yet their 2004-mid 2007 earnings have been wiped out by subsequent losses. But while UAW workers will have to give up on deals cut earlier, in terms of health care and pension promises (entered into, by the way, to bridge difference over wage levels), I guarantee no Wall Street denizen of the peak years will have to cough up one penny of his bonus from those days.
I don't know how to convey a sense of how deeply indoctrinated we all have been. (Naked Capitalism)
Free Exchange, tersely:
The need of the system to shrink---the moral imperative to create shrinkage---is something that certain econo-boffins who don't agree about anything else seem to agree on.
I mean, check out Arnold Kling, who is worried that Obama's jobs creation program will mean more work for illegal immigrants. He says, and I quote:
The one sector that definitely needs to contract is the financial sector. Maintaining Citi as a zombie bank is not really constructive. I would feel better if it were carved up, with the viable pieces sold to other firms and the remainder wound down by government. In my view, getting the financial sector down to the right size ought to be done sooner, rather than later.
From my perspective, the whole TARP/bailout concept is misconceived. The priority should not be saving firms. The priority should be pruning the industry. Get rid of the weak firms, and make good on deposit insurance. Then let the remaining firms provide the lending that the economy needs.
From The Wonk Room:
Former Secretary of Labor Robert Reich concurs, writing that, “This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi“:
In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened.
As James Kwak as The Baseline Scenario notes, Paulson’s message amounts to “We will protect some (unnamed) large banks from failing, but we won’t tell you how and we’ll decide at the last minute. As long as that’s the message, investors will continue to worry about all U.S. banks.”
Indeed, Paulson is not inspiring any level of confidence, moving haphazardly from one proposal to the next, and focusing solely on salvaging the financial sector while doing nothing for the people whose money is financing the salvage effort.
Why the hell is he still dicking around with the economy then? And why in God's name don't people take it away from him now that's he's making it worse?
I don't know, but here's an anecdote James Thurber tells about a great aunt of his---a dairy farmer--- who tried to fix a cream separator that had broken.
Shouldering her way past a number of diary workers, farm hands and members of hre family, she grasped the cream separator and began monkeying with it. In a short time she had reduced it to even more pieces than it had been in when she took hold of it. She couldn't fix it. She was just making things worse. At length, she turned the onlookers and bawled, "Why doesn't somebody take this goddamn thing away from me?" [Thurber, Let Your Mind Alone!, How to Adjust Yourself to Your Work]
So why doesn't somebody? Because at this point, it's pretty clear that Paulson can't fix the economy. And yet they go on letting him try.
Here's another bit of prognostication.
While Citigroup’s second multibillion-dollar rescue from Washington hit Wall Street like a shot of adrenaline on Monday, many analysts worried that the jolt would soon wear off. Citigroup has been stabilized, but the outlook for the financial industry as a whole is bleak.
But longer term, the new bailout could haunt regulators and taxpayers. The move ultimately may encourage banks to take more risks in the belief that the government will step in if they run into trouble. (NYT)
Or, as Gavin M. at Sadly, No! puts it:
O hai! Here’s your US Goverment, Mr. Obama. Sorry we spended it all, hehe.
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