Obama's Speech, His Banks, Our Jobs

Before tomorrow's 2012 pre-election speech in which President Obama's vocal elocution will be earnest, and results - to put it mildly - tepid, about about how he could create jobs dammit, if only the Republicans would behave, it's interesting to note who's supporting Obama keep his job.

A cursory look at the early stages of his campaign fundraising reveals that the same group of people that benefitted from policies (bi-partisan) that lavished them with cheap money, secret loans, debt guarantees and other forms of perks not available to the average citizen, are backing him for President. Big Time. 

And whereas it's true, Obama's most recent poll numbers look as abysmal as any President (save FDR who he will never, ever be) facing a depressed economy and a near double-digit 'official' unemployment rate (worse if you get beneath its massaged surface), this isn't effecting his most important support, the financial kind. To date, Obama's Presidential bid dosh comes largely from - wait for it - the financial sector.

Yes, the same sector that screwed the country over, and that, despite some unpleasant lawsuits they will likely settle,  remains as powerful, unrepentant, unaccountable, selfish and Main-Street-destabilizing as before Obama took office. No wonder he's been able to keep Treasury Secretary, Tim Geithner by his side - someone has to allay Wall Street concerns that true retribution or meaningful regulatory repercussion will befall them.

So far, Obama has raised $49 million dollars. (More than all the GOP wannabes combined, but that's largely because he's got the head-start and incumbent factor going for him. Plus, he's a hit at fundraising events. Here in Los Angeles, he's tied up traffic several times with those already.) Nearly $35 million has come from 'bundlers', those wealthy, connected, folks that circumvent the caps on their individual donations by pooling their dough together. And just over a third of that, or $11.8 million, comes from the Finance Sector (and yes, one of the sector's 44 bundlers is from Goldman Sachs, his number two contributer in the 2008 election). 

Now, it's not shocking that the banks are banking on Obama. Until they see a surer bet on the Republican side emerge, they're not going to be diffusive with their capital that way. And, beyond some scolding words a couple years ago around election time, followed by a Wall Street speech to which none of the CEOs showed, Obama has done zero to expose, denounce, or change the specific fraudulent actions of his supporters - that would be - political suicide for him. Plus, in the game of politics today, the issue for both parties is slamming each other, Wall Street ire has been replaced with entitlement spending cut banter, whether this results in meaningful policy is not even an afterthought.

Meanwhile, Obama will release details of a new $300 billion jobs stimulus program and urge the GOP to allow him to do his job by creating the nation's jobs. He might even throw in a sentence or two about helping downtrodden borrowers refinance, which will require bank approval and facilitation, which therefore will be as successful as HAMP. And the GOP will balk and say we must cut spending not increase it, refusing to acknowledge the extent of debt we created to float a criminal banking system.

Stalemate to the nth degree. Big yawns all around. 

What Obama will not discuss, is the private lending problem that caps the ability of individuals to stay afloat and small and mid-size businesses to hire. Though they have been treated with kids gloves and deep pockets by Washington, the big banks have not shared the joy they received. Small business loans remain anemically at late 2008 levels inhibiting hiring or expansion - and these are the companies that don't offshore in a heartbeat. Refinancing and mortgage restructuring, despite record low interest rates making the transaction sensible and reducing risk all around, are negligible, thus home movement is impossible and consumer confidence and construction jobs are hit in the process as well. Personal and business bankruptcies continue to mount absent opportunity. This isn't a healthy scenario for job growth.

You can blame it on 'the economy', 'tough times' 'all of us struggling together' or any other generic poli-sound bites. Or you can blame it on the biggest banks sitting on extra capital, which either a) is stored at the Fed in the form of $1.6 trillion worth of Treasury bonds that receive interest in excess of the cost of borrowing the money to purchase them, b)  is used to trade and speculate, or otherwise derive ways to make a 'quick' buck, or c) is set aside to deal with lawsuits they brought upon themselves. Again, none of this is nationally productive or job inducing.

The private banking system is holding people's homes, potential jobs, and general confidence and economic well-being hostage. Thus, however Obama phrases whatever he says tomorrow, and even if his plan for a job stimulus package is verbalized in a more coherent strategy than last time - without a loosening of credit - new or re-negotiated or otherwise more befitting the low rate environment that the Fed offers banks, it's just one tiny piece of a giant puzzle that won't be able to do squat to turn the tide. 

Fed to keep rates low and brainwaves lower

Not surprising after yesterday's Dow beating, and S&P spanking, that the Fed rose to the occasion to save the US. Concluding there is further risk of economic deterioration (welcome to the planet), the Fed decided to really shake things up and try something different this time.

a) It will force member banks to divert the excess $1.6 trillion of debt they have stored on the Fed's book to pay for the creation of 3.2 million jobs.

b) It will revert the mortgage backed securities it's holding back to the banks it bought them from, even if those banks have to take a loss, to clear the slate. It will also remove all risk guarantees.

c) It will force banks to stop mortgage loan losses on their books through making them work immediately with individual borrowers to reduce loan principal and payments to a level more comparable to the current market, not the one the banks inflated with toxic assets scooping up fraudulent loans on over-valued properties.

d) It will cease current and future QE programs in order to stop cheapening the value of the dollar, and stop giving the Treasury a place to park the debt it creates, while Washington argues about how to cut the debt.

Just kidding. The Fed's going to keep rates around zero forever (or for the foreseeable future) and reinvest any proceeds of the assets it's holding into buying more of them, and keep the Treasuries it has, yet beckon Washington to find ways to cut the debt. And, since so far nothing it's done has helped the Main Street economy, it will keep right on doing it.

Defiance, Denial and Downgrades Won’t Help our Economy

Yes, the US has a debt problem. But, more than that, it has a priorities and accountability problem. Yet, rather than giving Washington a pause for reflection, the S&P downgrade of US debt from ‘AAA’ to ‘AA+” merely gave Capitol politicians renewed opportunity for elaborately orchestrated hissy fits that won't lead to introspection or policy change.

First, let’s again acknowledge the irony that this rating agency rubberstamped $14 trillion of toxic assets in the five years leading up to the crisis of 2008, thereby enabling the Wall Street manufacturing and global dispersion machine to thrive. Then, let’s sign that Washington still doesn't get it.

We racked up debt predominantly, but not exclusively (less revenue due to fewer jobs and an antiquated system where not everyone pays a comparative share contributed, as did the cost of three wars) because of the choice to subsidize Wall Street.

Nearly 80% of the new debt created by the Treasury since the financial crisis was either sold through the banks, is sitting on the Fed's books doing nothing productive, or was used to bolster various elements of the banking system through cheap loans, guarantees for faulty assets, and other methods.

Chances are near one hundred percent, that this next round of debt will exhibit the same pattern. The Treasury will issue bonds and a big portion will wind up on the Fed’s books, doing zero for the greater population. More bi-partisan squabbling over why the economy isn’t growing quickly enough will eschew.

A few months ago, Treasury Secretary, Tim Geithner made the talk show rounds to declare empathically that there was ‘no chance’ of a downgrade of US debt. After the downgrade, with the stock market plummeting, President Obama took to the airwaves to explain that the US was ‘AAA’ no matter what ‘some rating agency says’.

As Obama opined that ‘there will always be economic factors we can’t control,’ the stock market kept dropping.  Some of that fall was for ‘technical reasons.’ People and firms borrow money to bet on the market, and put down collateral (or margin) in order to do so. When the value of their purchases (stocks) falls beneath a certain amount, they are required to put up more margin to continue to participate in the market. If they don’t have the cash, they have to sell stocks to come up with it, thereby pushing the market down further. These ‘margin calls’ were the technical cause of the Great Crash of 1929.

The other reason for the drop was uncertainty, precipitating cashing out stocks to buy bonds, and reaction to the fact that no matter what anyone says, we’re not in an economic recovery, and things are getting worse. In all, the Dow Jones Index dropped 633 points during the first post-downgrade trading day, regaining a third of it the next day.

The bond market shrugged off the downgrade, meaning global investors were buying, not selling, Treasury bonds. This puts the debt cap drama and catastrophic consequence threats into scary perspective. Recall, the sky was going to fall if we didn’t bail out and subsidize the banks, too. The political fear-mongering would be laughable if it didn’t have dire consequences for the rest of us – an anemic economy unable to add jobs effectively and a banking sector floated on debt.

So, does the downgrade matter? In terms of infusing the market with more uncertainty as to whether it might lead to another one – sort of. But, in terms of Washington, it means nothing. The GOP will blame Obama for causing it by not cutting spending further. President Obama and the Democrats will act defensive and dismissive about it.

Beneath the banter, remains the stark fact that the extra debt wasn’t created to help the economy, it was created to help Wall Street. Any future political fights (and there will be many) about debt, missing that point, will therefore be unable to tackle the most important economic problem we face – lack of job and real (not paper) growth in the US and throughout the globe. Political denial and finger-pointing is not productive growth policy, no matter which party is doing what.

S&P’s downgrade got a bit of this right when it labeled Washington dysfunctional, yet, by denying there’s more to the downgrade, S&P continues to shield its own actions in the crisis build-up and Washington’s reaction to it - massive bank subsidies and a tepid bank regulation bill that didn't even break up the too big to fail banks as Glass-Steagall did in the wake of the pain banks caused leading up to the Great Depression.

A one notch ratings drop from  AAA to AA+ makes no difference to the US production capacity. Indeed, with all the scaremongering about how much more expensive it would be to borrow at a higher rate (reflecting the lower credit rating), the bond market rose in a sigh of relief that the downgrade was ‘over’ rendering the cost of the downgrade minor. As for other countries dumping our bonds, though they should because our policy remains financial market subsidization through debt creation, as long as the dollar remains the dominant global currency, other countries will lend to us though buying our Treasury bonds. They don’t want their own portfolio of US Treasuries to decline in value.

Obama stated that, “we need jobs and growth.” Absolutely. But austerity compromises won’t get us there. A reality check might. He said that Americans have come through (more denial, as we haven’t come through anything, we’re still in it) the biggest financial crisis since the 1930s with grace. He made no mention of the dual DC-banks role at all.

In the 1930s, the government made a bi-partisan decision to smack the banking system into place and separate bank trading and commercial functions so banks couldn’t take risks with other people’s money; it didn’t lavish Wall Street with cheap loans and debt at the public’s expense.

All Americans should be deeply concerned that our government supported, and continues to support, banks over people. The Treasury Department and Fed continue to mislead us over this. And we all pay the price.