Tuesday, February 24, 2009

Upholding the Illusion

Upholding the illusion that America’s financial system is simply going through a crisis which can be resolved is becoming increasingly more difficult for the U.S. government. After an enormous bailout package, a stimulus package worth about 6% of GDP and guarantees of bad assets worth much more than that, the government has nothing to show in terms of recovery.

It is also an illusion that many U.S. financial institutions are not already nationalized. AIG has received $150 Billion from taxpayers. The company has far more in losses, and it will report what is expected to be the biggest losses in U.S. financial history on Wednesday.

AIG has now asked for more taxpayer money, although the government already owns 80% of the company.

Citigroup has received $45 Billion from taxpayers, and is now asking for much more. Citigroup is only worth about a fourth of that, around $10 Billion, so why the hell are there any shareholders left other than the U.S. government?

The U.S. government’s ideological opposition to nationalization has wound up costing American taxpayers 4 or 5 times more than what a nationalization would have cost.

Citigroup’s shares are as I just mentioned worth $10 Billion, yet taxpayers have paid the company $45 Billion just so that the shareholders won’t lose their investments (of which there is only 10% left since Citigroup’s stock lost 90% of its value), and so that the executives won’t have to be fired.

It would have been a lot cheaper to simply buy all the stock. Cheaper yet would have been the only morally sound thing to do: wipe out shareholders and nationalize the bank.

Furthermore, banks are failing across the United States every week now, and the FDIC (which nationalizes such banks every week so that they can be liquidated and/or sold off) has had to hire more staff, and is currently bringing people back from retirement.

The U.S. government also has a secret list of which banks are in serious trouble, and are in imminent danger of failing. Many have called for this list to be made public, but the government refuses.

In addition to all this, the U.S. government is engaging in the sort of “creative accounting’ that played a large role in creating this crisis. It is trying to sweep all the losses of big institutions under the rug by “not estimating assets too conservatively” as Geithner has stated.

What that means is that when the government has given taxpayer money to big banks and other institutions, it has valued their assets much higher than the market (which values them at zero), creating the illusion that these institutions are much better off than they really are.

Also, the government has helped institutions like AIG to set up “special purpose entities” where the company can hide bad assets away from the balance sheet, again creating the illusion that things are much better than they really are. This is what Enron did, and a lot of people went to jail after that…

All these efforts are obviously counterproductive and ultimately detrimental. The government is lying about many things relating to the financial crisis, but most people don’t realize it. Why is the government doing this? Well, I think it feels that it MUST uphold the illusion that the system can indeed go on as it has before. If it cannot, what is the alternative?

They know what the alternative is: a European-style regulated society where citizens are guaranteed a standard of living rather than being left to hope for that standard amidst cycles of boom and bust. In a country where all politicians are either right or right-wing, this is a terrifying prospect.

I recently realized that the upholding of illusions is exactly what Keynes based his theories of spending and crisis management on, and that’s why it makes perfect sense for Keynes’ theories to be back in the spotlight.

It is widely believed that Keynes developed his theories in response to the Versailles Treaty after World War I, and the treatment of Germany in economic terms.

The Versailles Treaty made it so that Germans’ standard of living went lower and lower each year after it was enacted. This, according to Keynes, destroyed confidence among Germans, and the economic crisis started feeding off itself (which is something that was echoed by Ben Bernanke in a speech before Congress today).

So, after the war, Germans were obviously bankrupt. Even so, thought Keynes, they should keep spending, and if they could not, the government should enable them to do so. Even if you don’t have money to spend, you must uphold the illusion that you do, by borrowing money to spend, otherwise the economic crisis will get worse. That is in essence what Keynes thought.

Expressed in that way, Keynesian economics sounds like a really bad case of “keeping up appearances”, don’t you think? Upholding the illusion is what it is all about.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

1 comment:

Anonymous said...

So, where is this thing headed?

How bad is it going to get for people like me who are looking for jobs?

At the end of the day, I just need a job, not to pay back my debts, which I can no longer afford to do, but rather, to just keep me afloat.

There was an interesting discussion on NPR this morning about the coming student loan defaults. I'm looking for a post from about that soon. Should be interesting.