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.

Captain Obvious (S&P) vs. Captain Oblivious (Tim Geithner)

Last week, President Obama driveled on about nothing of consequence in his budget speech. Yeah, he said he’d push to roll back tax cuts for the wealthy and close some off-shore corporate tax loopholes, but he’s said both (many times) before and neither happened, so in terms of revenue enhancement, it’s a non-starter.

Today, S&P – that beacon of toxic asset rating foresight (which has yet to be slapped with any monetary accountability for its collusive role in bringing down our economy) came to the astonishing conclusion that the United States has a debt problem, and tagged the country with a 'negative watch' label. The S&P report proceeded to highlight fiscal spending issues, related political debating, and our ridiculously high debt vs. GDP percentage, which is only a few points below 100, as points of main contention. It paid minor lip service to the ‘financial crisis’ as being a factor. It shied away from blaming ongoing and potentially further devastating fallout from the overleveraged mortgage-related assets still clogging the books of the Fed, housing agencies and financial firms. It ignored the fact that the banking system maintains the appearance of solvency only through federally supported accounting gimmickry and an exceedingly generous and ‘easy’ Federal Reserve keeping assets bid and rates low in the face of inflation it chooses to ignore.

Meanwhile, the media and Washington have been laser focused on $38 billion worth of budget cuts, a whopping 1 percent of the entire budget, which as slight as it is in the scheme of things, disproportionately chops public good buckets. Rather than the excruciating time sink and mind-numbing arguments, it might have been best to just lop 1% off the top of everything proportionately, but that would have been too easy, and not political enough. Maybe then we could have shifted focus to the real cause of our budget woes – which is that our economy continues to deteriorate and the people with the power to do something about it are lying about its very cause and thus its remedies.

The flashing fuchsia elephant at the core of our economic, and thus budget problems – remains the response to the financial homicide imparted by the big-banks and abetted by the Federal Reserve and the Treasury Department. There was a choice to be made in Washington in the fall of 2008 - smack Wall Street into place, do a good-ole free-market – you fail if you deserve to fail, we’ll protect consumer assets and that’s it maneuver - and deal with possibly intense, but definable fall-out for a short period.  Or - lavish bailout upon guarantee upon subsidy upon asset purchase upon the lowest rates in our nation’s history on Wall Street, and wring the very possibility of a recovery out of the general economy from the get-go. Of course, the brilliant minds of our exceedingly-privileged, out-of-touch, economic leadership decided on the latter, and are acting their asses off to pretend that that decision, in itself, wasn’t the cause of the economic problems that followed, from Main Street anemia, to commodity inflation to international disdain and a weak currency that has no right to even have the purchasing capacity it still does.

And, yet Tim Geithner had the audacity of job-security to take his debt ceiling ‘plea’, on the Sunday Morning talk show circuit – really, we will be in crisis and other countries will think poorly of our ability to pay our debts if we don’t raise the ceiling and increase our debt. In truth, it is Tim Geithner’s ego on the line, while his boss, through staggering absence of mention, is fine with assuaging it. Federal Reserve Chairman, Ben Bernanke remained silent about the topic, not least because between the Fed and the Treasury department, more debt has been racked up and issued in the past two years than ever before.  Of course, the debt cap will get raised, just as it got raised under Treasury Secretaries Paul O’Neil, John Snow and Hank Paulson.

When Geithner got elevated from the NY Federal Reserve head position of aiding Wall Street in its time of need to the Treasury Department, from where he could rubber stamp the entire bailout notion as being essential to our survival as a nation, the amount of Treasury Security debt outstanding was $5.7 trillion (in tradable securities, and $591 billion in nonmarketable ones.)  In August 2008, just before the most powerful banks sucked the soul out of the country in every manner possible, Treasury debt outstanding was  $4.9 trillion.

Today, outstanding Treasury debt stands at $9.1 trillion, an increase of $4.2 trillion since the big bailout began, most of which occurred under Geithner, though it started under Hank Paulson, who in 2007 and recently on Tim's behalf, has used all of Geithner's current arsenal of reasons to request a sizeable debt cap increase. All of it, allegedly to avoid a Depression and propel us to what has been deemed a slow recovery by none other than the Treasury Department, the White House and the Federal Reserve.

Geithner can (and will) keep pretending that this seismic debt increase was a requirement to fix our main economy, even though the actual fiscal stimulus package of the Obama administration accounts for only 18% of this increase, so the numbers just don’t fly.  Indeed, they only make sense if you take into consideration other diversions, like the $1.37 trillion of Treasuries, about a trillion of which is in excess bank reserves, and the nearly $1 trillion of mortgage-related securities parked at the Fed, the $142 billion of mortgage-related assets at the Treasury deparment, and various remaining FDIC guaranteed bank debt hangover from the bailout period, and sundries like JPM Chase’s ongoing Fed backing for its Bear Stearns’s acquisition.

Meanwhile, our debt interest will be more than $430 billion this year, or more than ten times the amount being quibbled about by the elected partisan politicians that are debating it, as the value of our debt and debt-worthiness diminishes.

Anyone can make promises that at some time in the future, some of any budget will be more in check, or even that unicorns will overtake the oval office and do a better job running the economy, but the fact remains – misguided, larcenous policies created a boatload of debt to float a financial system that continues to suck us dry (near zero borrowing costs from non-zero lending through mortgage, personal loans, credit cars, or whatever), and until this fact is given even an iota of a percentage of the time that the smaller bantering is given, we will continue to sink further into a financial abyss of the Fed’s, Treasury department’s, bi-partisan Congress’ and executive leadership’s making, no matter who’s in charge. For now, there are those excess reserves at the Fed - just saying.