October 19, 2009

Confirmed: The Bailout Failed


After a sojourn among the green shoots, Paul Krugman has returned to his old beat criticizing the bailout. He picked a good time for it.
What have we learned about the bailout, one year on? It was explicitly supposed to get the banks lending again. (And implicitly, our government promised us that if the banks were bailed out they’d never go back to their psychopathic casino ways.)
The basic idea was straightforward enough. Banks were needed to keep lending to small businesses and individuals. This would preserve and create jobs.
It was never explained why this required bailing out the big bank structures rather than shoring up the smaller ones, who have always been the real drivers of that kind of lending, but the government and the MSM claimed that this was the case. Never mind that they had no coherent argument. They just said “trust us”.
Being trusted, what did the government do? It doled out trillions of dollars of taxpayer handouts and exposure to these rackets, demanding nothing in return. The Bush and Obama administrations directly conveyed the money via the TARP, they laundered it through AIG, they let them borrow unlimited funds at practically zero interest through the Fed, they let them borrow on the open market with the FDIC guaranteeing their debt, and in many other ways lent, conveyed, laundered, insured, guaranteed, an unfathomable amount of money.
Meanwhile they asked nothing in return. Nothing. There were no strings attached. No one was investigated, arrested, tried, convicted. No conditions were placed on subsequent activities. Pay, trading, accounting shell games, everything has been not only untouched, but the administration has gone to villainous lengths to facilitate it. 
What was the inevitable result of this?
By dispensing the largesse and the “forbearance” with no strings, rules, or threats attached, the government aggressively helped Goldman Sachs, JPMorgan and others not to “resume lending” but to ratchet up their predatory and parasitic casino actions.
This past week GS and JPM reported billions in “profits”. That these are not real profits, that they are the result of the Too Big To Fail put and accounting games, matters nothing to corporatism. It’s profit for the gangsters, while the people take the loss and the exposure.
And what has been the nature of their “profitable” activities? As the NYT said, “hot areas like trading stocks and bonds rather than in the ho-hum business of lending people money.”
Indeed these are the big winners of the great crime. They were bailed out directly and indirectly. Goldman and Morgan Stanley were allowed to transform themselves into “bank holding companies”, which gave them access to endless cheap Fed borrowing. The MSM lied and said this would mean greater regulation and restricted activities, but in practice Goldman hasn’t been restricted one bit. They’ve gotten the best of both worlds, of law and crime.
GS, MS, and JPM have also issued tens of billions in FDIC-guaranteed bonds. (The FDIC doesn’t have the money to cover its obligations. Indeed it is now borrowing money from the very banks it is supposed to help regulate. So when you picture the FDIC as a grizzled old reliable mainstay which is guaranteeing your modest bank deposits, remember that it is now on the hook for vast amounts of gangland money. When the crash comes it won’t have anywhere near enough to pay off everyone. Who do you think is going to get paid off? This is another massive looting job which simply is in place but hasn’t happened yet.)
GS and the other high-flying casino rackets are simply speculating parasites, using the people’s money to make endless reckless bets against the well-being of the people. Thanks to the TBTF premium, they have a big advantage over any would-be competitors who don’t have such government protection. Because they have no risk, no restrictions, and endless funds with which to gamble, there are literally no limits on their psychopathy in search of odious gain.
(By now they’re so confident in the government as their bagman and hired thug that they no longer even recognize political limits, brazenly looting for themselves tens of billions for what they still call “bonuses”. Goldman alone has put aside $16.7 billion in money that was simply stolen from the taxpayer.)
Does the government at least have to recognize political limits? How does the government defend this? It hardly bothers to try. Obama recently trotted out White House economic cadre Diana Farrell to openly admit that the Too Big To Fail banks are purely an artificial government creation. This was the latest stark declaration of overt corporatism, that the number one priority of the federal government is the continued existence, empowerment, and profitability of a handful of bank rackets.
Farrell also chirped that the administration will “manage and oversee” the New Racketeer Order and made the fatuous claim that big banks are somehow necessary. (How, she didn’t say.) But these were just political lies. The record of the administration is clear. Without exception every major action has been pro-bank, and it has done nothing against the banks or for the people. It is an unbroken record of class war from above.
So much for the “profitable” casino banks. What about the theoretically “real” banks among the Too Big To Failers? Those who are heavily immersed in mortgages and credit cards, like Citi and BofA, who were also supposedly profitable in the first two quarters? Surely more than anything else their continued health would be the best measure of the progress of the bailout and the recovery.
But they just reported multi-billion dollar losses. Even with the TBTF put, even with mark-to-management accounting, even with every other trick and lie the government allows them, they had to report big losses. As Krugman said today, this is the real economy coming back to bite. 
These are the ones who are supposed to take the lead in “getting back to lending”. But they can’t.
Here’s what’s happening, according to Krugman. The economic turndown is on account of the credit crunch driving asset and debt deflation. This causes more credit card and mortgage defaults, more foreclosures. The bailout was premised on renewed lending to individuals and businesses in order to break this cycle. But instead banks like Citi and BofA have hoarded the cash even as these mounting defaults hit their balance sheets harder and harder. This causes them to further retrench, they don’t lend, and the bailout fails to accomplish its purpose even if we pretend that anyone was ever telling the truth about it in the first place.
So let’s sum up. The two premises of the bailout were that banks would then be enabled to play their allegedly necessary role, lending in order to break the debt deflation cycle, and that their casino days were over.
We see how not only is no one lending, but everyone is rushing back to the casino as fast and as flagrantly as possible.
So the bailout was a de jure lie in the case of rackets like Goldman and JPM. Under no conceivable circumstance would they ever have been of service to Main Street. And it was at least a de facto lie in the case of the likes of Citi and BofA. They especially were supposed to be the lending leaders. They can’t and won’t play that role. So they’re useless.
So, as most of us knew at the time in spite of the lies of government, academia, and the MSM, every cent of the bailout money was pointlessly gambled. It was thrown away down history’s worst rathole.
And to think of what could have been done instead, if the biggest lie of all hadn’t been when the people believed they were voting for Change.    
Never in human history was such a robbery committed by a handful of criminals, with an entire society as the victim.


  1. “So, as most of us knew at the time in spite of the lies of government, academia, and the MSM, every cent of the bailout money was pointlessly gambled. It was thrown away down history’s worst rathole.”

    Indeed. I and some untold number of my fellow citizens protested vehemently when the initial “No Big Banker Banker Left Behind” legislation was being passed-after initially failing- last fall.

    I faxed every Senator in the U.S. and my reps, including that super scoundrel Barney Frank, numerous times. I, and I am sure many others spelled out that the bailout was nothing but a case of extortion. Our voices were heard and they were not heeded. The entire apparatus of government must be remade, but increasingly I am not optimistic that “We The People” are up to the task.

    Comment by Edwardo — October 19, 2009 @ 2:51 pm

  2. Glad to hear you did that, and too bad it didn’t work for us.

    As I recall, they heard plenty of real protest and heeded it the first time round. But then the terrorist stock market applied its punishment measure while the enemy organized an astroturf teabagger-type counterattack of people writing and calling demanding that the bailout be passed.

    These, and the “improvements” in the second version (making it longer than three pages, and removing the most egregious Treasury-dictator stuff), were enough to convince enough of them to turn coat.

    For anybody who’s interested, here’s a link that lists how everyone voted.


    I agree that the people haven’t yet achieved consciousness of their position. I guess that won’t happen until the next crash.

    If it doesn’t happen then, I guess it never will.

    Comment by Russ — October 19, 2009 @ 5:48 pm

  3. Yes, the first time around they held the scoundrels and their fetid agenda at bay, but finally, and lamentably, and damnably, they caved.

    Comment by Edwardo — October 19, 2009 @ 10:56 pm

  4. Russ, do you see people’s savings getting wiped out and the FDIC powerless to help them?
    How do you think this scenario will play out?

    Comment by Yakkis — October 20, 2009 @ 12:46 pm

  5. Well, since the FDIC is having to borrow from the very banks it regulates even as it has guaranteed all these billions in big banks bonds (especially since the scam of letting GS and MS become “holding comapnies” went through), not to mention how it’s supposed to backstop Geithner’s toxic asset plan (though I don’t know the current status of that), if there ever was a real bank run or an extreme wave of collapses, it seems unlikely that the FDIC could actually do what it’s supposed to do.

    It seems like the point of the FDIC is that the concept of bank insurance is supposed to enforce the credibility of the system, so that you never actually have to use it. But if that reassurance factor failed, and there was a run on the banks, the FDIC would be swamped.

    (And that was even before it was hijacked by the rackets the way it’s been over the past year.)

    It’s like nuclear weapons and “deterrence” – the idea of it is supposed to prevent certain things from happening, but you’re never supposed to actually have to use it in an extremity, because it can’t really “work” in that extremity.

    Comment by Russ — October 21, 2009 @ 4:50 am

  6. I think the real question is how long the Fed can maintain the Treasury market by allowing the dollar to sink. All the money Helicopter Ben has created is being funneled into speculation. While some speculators are winning others are inevitably losing. The derivative game insures we will be witnessing some big blowups any of which could trigger another deleveraging. The truth is that anything might happen but nothing is likely to be good. One thing is certain: the wealth pyramid is becoming uncomfortably narrow for those at the top. The social distress is only just beginning. Obama has a very narrow window to become FDR. For what it’s worth I think Russ is exactly right.

    Comment by jake chase — October 21, 2009 @ 8:45 am

  7. My belief in their perfidy and stupidity is pretty advanced, and yet sometimes I just have to scratch my head.

    Surely they couldn’t really have wanted all the helicopter money to slosh right back into the casino? And yet when they tossed it out with zero restrictions, how could they have expected anything different to happen?

    (Then again, there are plenty of intelligent people who deplore all this but still believe in regulation, which of course really means voluntary self-regulation. I guess faith in the human goodness even of hardcore gangsters dies hard.)

    It just seems extremely stupid and reckless even by the malign standards I impute to them.

    Maybe they’re just dumber than I thought. Maybe they’re like an alcoholic who knows not to drink but just can’t help himself, and that’s that.

    I know if I were a corporatist trying to orchestrate this I wouldn’t want things to be this demented.

    Comment by Russ — October 21, 2009 @ 9:49 am

  8. Thank you very much for writing me about my post. You might be interested in the NYT article today (10/21/09) on Paul Volcker’s lack of influence in the WH (he recommends separating commercial and investment banking, as per Glass-Steagall). I am not surprised that he is being relegated; I have concluded that the WH has “caved.”
    Thanks again–I enjoyed your use of language. You might consider writing a book.

    Comment by euandus — October 21, 2009 @ 10:45 am

  9. I have cited some of your comments in the post, by the way. Here is the link so you can get to it directly: http://skipworden.wordpress.com/2009/10/20/business-as-blood-sport/

    Comment by euandus — October 21, 2009 @ 11:20 am

  10. Thanks, Euandus.

    Yes, I saw the Volcker piece. So far it looks like he’s aware of his purely cosmetic role and yet is going to mostly comply (though he did talk to the reporter about his dissent, which is more than McNamara ever did).

    Naked Capitalism’s Yves Smith


    and Baseline Scenario’s Simon Johnson


    both wrote pieces on the dissent of Volcker and Mervyn King today.

    Smith was pessimistic, Johnson optimistic. But the fact that ideas like these are getting out there is evidence for Johnson’s claim that we’re turning a corner.

    Comment by Russ — October 21, 2009 @ 4:04 pm

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