Mendo Island Journal — Timely. Useful. Sometimes Cranky.

Don Sanderson: Depression? What Depression?

In Around the web on December 3, 2011 at 7:02 am


After growing at an annual rate of 1 percent two quarters ago, the U.S. Gross Domestic Product (GDP) reportedly grew at a 2 percent rate last quarter. This is projected to continue and increase throughout the next two years. All our problems will be solved by a growing economy. Well, maybe not.

This week, beginning November 27, 2011, has seen a number of bombshell explosions. To begin the week, Bloomberg (the business news organization) announced, as a result of a two year investigation and the winning of a hard-fought court case, that the Federal Reserves System (the Fed), beginning in 2008 and continuing through March 2009, parceled out $7.77 trillion to many dozens of American banks to save them from failure. “Fed officials say that almost all of the loans were repaid and there have been no losses,” so we shouldn’t be troubled. Apparently the Fed was concerned as to how this would be viewed, since “The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret.” Subsequently, the banks turned these loans into profits. “It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP.” But, all is OK; “The Fed has said that all loans were backed by appropriate collateral. That the central bank didn’t lose money should lead to praise of the Fed, that they took this extraordinary step and they got it right,’ says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson …”

Bloomberg researched the Fed loans and bank reporting during this period of time and estimated how much banks profited from the Fed loans. They estimated that 23 percent of the net income of the six biggest banks came as a gift from the Fed, courtesy of the US taxpayers. $4.8 billion free dollars. When considering all of the banks for which there was data, the number is even bigger: $13 billion dollars.

“The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks.” “Lawmakers knew none of this .” Why then the secrecy? “Had lawmakers known, it ‘could have changed the whole approach to reform legislation,’ says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size. Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard – the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers. If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks.”

In fact, it is curious that the above is news. Thanks to amendments to the Dodd-Frank Wall Street Reform act sponsored by Ron Paul and Alan Grayson in the House and Bernie Sanders in the Senate, the first ever GAO (Government Accountability Office) audit of the Federal Reserve was carried out and the results reported near the end of July, 2011. Fed chairman Ben Bernanke, Alan Greenspan, and various other bankers vehemently opposed the audit. The results were amazing. Between December 2007 and June 2010, 16 months longer than that covered by the Bloomberg report, the Federal Reserve had secretly loaned U.S. banks and corporations and foreign banks a total of $16 trillion, of which more than $1 trillion was outstanding at one time.

The partial list of institutions that received the most money from the Federal Reserve can be found on page 131 of the GAO Audit and are as follows:
Citigroup: $2.5 trillion ($2,500,000,000,000)
Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
Bank of America: $1.344 trillion ($1,344,000,000,000)
Barclays PLC (United Kingdom): $868 billion ($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank (Germany): $354 billion ($354,000,000,000)
UBS (Switzerland): $287 billion ($287,000,000,000)
Credit Suisse (Switzerland): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)

What makes this list especially interesting is that the Fed has just announced that it, in cooperation with other national banks, is undertaking Europe’s economic salvation, likely again with the passing out of trillions of dollars. Rumors are that a very large European bank was failing and quick action was necessary. Meanwhile, several large American banks are undergoing stress and rating agencies aren’t happy, so they will be needing more money as well. Of course, the Fed is not trying to save the American or European economies as felt by the 99 percent – Bernanke has expressed no interest in employment concerns; it is intent on saving the banks, on saving wealth. As one has written, “To place $16 trillion into perspective, remember that GDP of the United States is only $14.12 trillion. The entire national debt of the United States government spanning its 200+ year history is ‘only’ $14.5 trillion. The budget that is being debated so heavily in Congress and the Senate is ‘only’ $3.5 trillion. Take all of the outrage and debate over the $1.5 trillion deficit into consideration, and swallow this Red pill: There was no debate about whether $16,000,000,000,000 would be given to failing banks and failing corporations around the world.” Still, these trillions are only part of the story.

Banks loan money they don’t have. Just as the Fed creates money out of thin air, so do commercial banks. Economist J.K. Galbraith once wrote that “the process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent”. Magic? Imagine there were only one bank. Whenever it loaned money, that money would reappear in other accounts, almost none would remain in cash. So, the money really never went anywhere. The bank would wisely keep a small amount of its money in reserve just to cover that which might be wondering around in cash. Now imagine that all banks form a giant composite bank, the banking system. Any money loaned by one bank will show up in its own accounts or those of another bank, so it is hoped and expected that money in and money out balance and assets and deficits match. Of course, these accounts only balance on the average, so central banks, such as the Fed, make short term loans available to even things out. Banks are also required to keep reserves on reserve at the Fed, perhaps 1.5 percent of outstanding loans. Thus, private banks can really create money by simply making an entry in a ledger. The more money banks loan, the more profitable interest they draw, Thus, it aids their bottom lines to loan ever more.

This situation was complicated when a few years ago Congress deregulated banks by allowing them to invest money however they pleased, not necessarily just in loans. Thus, they could invest in stocks, bonds, and securities of various types. Since on the balance sheet they behave just like loans, banks proceeded to create money for these purposes as well, again with the Fed evening everything out with its loans. The GDP, according to one method of calculation, is in essence the sum of all purchases of goods and services, which includes investment vehicles. Thus, the more money banks and the Fed dump into the economy, the more financial transactions occur, and the larger the GDP grows even if no more goods are produced or employees hired. This seems to be what is happening at the moment as indicted by the U.S. stock market. In other words, the present GDP growth is almost all fluff, a storm of private bank-created dollars. The government has in practice no direct involvement in nor control of the money creation and allocation process.

It is an economic truism that as the pile of money grows, inflation follows simply because of the competition for goods and services. Why isn’t that happening now? Perhaps because that flood of money is mostly tied up by the 1 percent and they can purchase only so much. It has been reported that almost half of consumer spending is due to the top 20 percent. The Fed is also keeping interest rates down as far as it can, which also constrains price rises. However the price of energy, notably gasoline, remains high – as do oil corporations’ immense profits – and food prices are predicted by the USDA to rapidly increase as a result of shortages due to a variety of factors but actually to global warming and misuse of pure water and arable land.

But, loans and other investments sometimes fail; the money goes out one door, but doesn’t come in the other; the banking system books don’t balance. Short term Fed loans won’t cover up the holes. While commercial loans are usually secured, investments aren’t. Even secured assets can fall in value. Thus, in a recession when asset values are falling and loans are defaulting, holes form throughout the system, institutions become afraid of loaning or making investments, and the amount of money floating around begins to fall; it simply disappears when a loan or investment fails. Hey, it is all imaginary anyhow.

Bank investments in mortgage-based securities are huge problems with foreclosures continuing to increase and housing prices projected to fall at least another 10 percent; some say much more. Thus, money may disappear as easily as it appeared and deflation may occur as it did during the great depression. Curiously, as long as foreclosed houses aren’t sold, banks are holding onto associated mortgage-based securities as assets priced at the original inflated home prices – Bank of America has over a trillion dollars worth. This means that their balance sheets are nonsense and the Fed regulators are mostly looking the other way – the Fed is buying a few at the phony prices, which is on top the Fanny Mae and Freddy Mac’s government supported bailouts. Obama is insistent that mortgage originators, i.e. the big banks, don’t pay for their shoddy and often illegal practices, which would bring the house down.

Transfers between banks continually occur. Problems arise when a bank has inadequate funds to meet the required transfers to other banks, in other words when it is broke and it doesn’t even have assets that can be sold. Such a hole can create imbalances throughout the banking system, particularly if the broke bank is very large. The Fed roars to the rescue sirens blaring, at least for those who are too big to fail. If or rather as dollars become ever rarer and prices increase, those who depend on dollars are in for some difficult times. The Fed is banking on trickle down economics, though we haven’t seen any evidence that it works in the past thirty years.

U.S. public debt exceeded $14.6 trillion in July 2011 and it is increasing by approximately $4.2 billion a day. And since the budget deficit for 2011 is projected to be $1.5 trillion, the public debt is expected to reach $15.4 trillion by the end of 2011, or some 105 per cent of U.S. GDP. Should we worry? This dept is in short, medium, and long term bonds, relatively few of which mature at any particular time. Should we fear an American default, given that the Fed is willing to create vast sums at any signs of banking need and is already purchasing U.S. bonds ostensibly to keep bond prices low? Truly, a default here, in Europe, or anywhere would impact bank balance sheets throughout the world. Hence, the banking system’s great concern with deficit spending, at least when it doesn’t directly impact their investments by cutting military spending or government-funded corporate subsidies or require higher taxes. The Republican Party, with the exception of small-change players such as Ron Paul, and most of the Democratic Party are wholly owned by Wall Street. It has been noted that Paul’s original libertarian, i.e. quasi-anarchist, version of the Tea Party, which he is attempting to recreate, and OWS have much in common.

Many are asking if there is some way to turn the Fed’s interest to aiding the 99 percent, to regain democratic control of the process. The problem is that the Fed is owned by a conglomerate of private banks, American and foreign, and it was charged in 1913 with oversee banking without government oversight. In the days before he was assassinated, John Kennedy was preparing an executive order taking money creation out of the Fed’s hands and returning it to government oversight. Upon taking office, Johnson quickly destroyed it. Bobby Kennedy, however, would likely have recreated it as well as, following his brother’s intended lead, of bringing the military/industrial complex to heal. Several in Congress are now pushing both of these, including those terrible radicals Bernie Sanders, Ron Paul, Dennis Kucinich, and Alan Grayson. It is thought that the Bloomberg and GAO investigations will turn enough other heads to make things happen – if it weren’t for the vast sums Wall Street spends on campaign contributions and promises of fat employment opportunities for retiring politicians.

Saudi Arabia is a major, major investor in western banks. It is also the principal financial source of al Qaeda’s wide-ranging and expensive network. The insurance giant Lloyds of London recently brought suit against Saudi Arabia and a long list of Saudi organizations in an English court to recover losses resulting from 9/11 fall of the trade towers. Their complaint, which is now publicly available, is long and detailed. The heart of their case was detailed in the following:

24. The success of al Qaeda’s agenda, including the September 11th Attacks themselves, has been made possible by the lavish sponsorship al Qaeda has received from its material sponsors and supporters over more than a decade leading up to September 11, 2001.
25. Each of the defendants named herein was a knowing and material participant in al Qaeda’s conspiracy to wage jihad against the United States, its nationals and allies.
26. The conspiracy among the defendants to wage jihad against the United States, its nationals and allies, included the provision of material support and resources to defendant al Qaeda and affiliated terrorist organizations, persons, and entities, as discussed herein.
27. Absent the sponsorship of al Qaeda’s material sponsors and supporters, including the defendants named herein, al Qaeda would not have possessed the capacity to conceive, plan and execute the September 11th Attacks.

Sometime in the last couple of weeks, Lloyds dropped the suit. Some feel it is likely because the Saudis settled out of court. Would that we could see the case Lloyds intended to present. American authorities apparently carefully skirted around any 9/11 investigation involving the Saudis. Saudi Arabia and Israel – note the number of prominent Zionists at high levels within the banking industry – pretty much control Congress to this point, embarrassingly so, to the detriment of the country – a war with Iran, who will be supported by China and Russia, is being pressed by each of these parties and Obama and Congress are huffing and puffing. There are exceptions such as Bernie Sanders. Dennis Kucinich, and Ron Paul, but they are few.

Now Congress is determined to move the military “terrorist” war here, where a terrorist will be defined however the military and Homeland Security choose, forget the Constitution. The proposed National Defense Authorization Act bill would allow the military to imprison anyone suspected of an offense deemed “terrorism-related” indefinitely and without trial. After observing the punishment dealt out of OWS demonstrators, it seems clear to me that this may well include anyone who disputes Wall Street’s control. Why don’t we admit it; the U.S. is a plutocracy. Indian demonstrators lead by Gandhi sort of won in South Africa after 8 years and after many had sacrificed the homes and business and spent extended periods in jail. On his return to India, he faced the British Empire plutocracy. After more than thirty years, Britain finally backed away leaving the country being partitioned and engaged in internal warfare. In response, Gandhi declared that thirty two years if work promoting non-violence “have come to an inglorious end”. I conclude that the British Empire was a pussycat compared with Wall Street and the military and police forces it controls and we have no Gandhi.

It has long been recognized by those who dare to look that the GDP is a nonsensical measure of wellbeing. Every dollar spent to equip the U.S. military contributes to the GDP; every dollar spent for health care contributes; the more involved the technology, the larger the contribution; the fossil fuel-supported energy industry contributes mightily, which is one reason why any consideration of global warming must be put down; all the wastes we generate contribute; every purchase of elaborately packaged groceries and prepared foods contributes. The resulting money flows through the banking system are a joy to behold – by the 1 percent. What at least cn minimize contribution? Anything we do for ourselves, such as cooking from scratch foods we have produced ourselves or for which we’ve traded is perhaps the simplest example. The simpler our lifestyles, the less we contribute particularly if we can stay on a cash basis – Latino workers typically cash their paychecks, which is their only direct involvement with banks. Let us bring down the GDP and banks by every means possible beginning with greatly simplifying our lifestyles. Wall Street clearly will object as it is by inducing the government to regulate CSAs (raw milk dairies and others) and small-holder commercial vegetable production. Government per se isn’t the problem; Wall Street-dominated government is.

In fact, this cause is critical for the future of the verdant Earth and the human species. In May 2011, the International Energy Agency estimated the amount of CO2 released into the atmosphere in 2010. According to their report, “Global leaders agreed a target of limiting temperature increase to 2°C at the UN climate change talks in Cancun in 2010. For this goal to be achieved, the long-term concentration of greenhouse gases in the atmosphere must be limited to around 450 parts per million of CO2-equivalent, only a 5 percent increase compared to an estimated 430 parts per million in 2000. The IEA’s 2010 “World Energy Outlook” set out the 450 Scenario, an energy pathway consistent with achieving this goal, based on the emissions targets countries have agreed to reach by 2020. For this pathway to be achieved, over the next ten years emissions must rise less in total than they did (just) in 2010. That is, the amount of CO2 released just in 2010 was more than half the maximum amount which would drive the total above 450 in the coming ten years – and release amounts are growing. 2°C is a dire increase, as we can guess from high temperatures resulting in horrendous storms and droughts now being unleashed on the world. James Lovelock, the originator of the Gaia hypothesis, recently argued we have between, at worst, twenty years and, at best, forty five years before we are forced to move into far northern sunken villages. This was before the IEA announcement.

There is more recent worse news: the Massachusetts Institute of Technology Joint Program on the Science and Policy of Climate Change issued a remarkable report in January. Written by over a dozen leading experts, they doubled their 2095 warming projection to 5.2°C or 10°F, 20°F in the Artic. But this has just been topped by NOAA and the National Snow and Ice Data Center: the artic permafrost are melting, which will release the same order of magnitude of carbon as deforestation if current rates of deforestation continue; but because these emissions include significant quantities of methane, the overall effect on climate could be 2.5 times larger. The National Science Foundation has also just published a paper reporting that the Artic Ocean shelf is also melting and methane is bubbling to the surface. Methane release has not been previously included in climate change models such as the MIT one.

Of course, to bring fossil fuel usage to heel we must kill the economy and very soon. Wall Street, corporations, and governments are stoutly resisting being drawn into the climate change battle because, as they surely correctly suspect, all of their powers and possessions will come to nothing if they do what is necessary. Thus, the U.S. government has just trashed the Durban climate change negotiations. I hope this is getting your attention. Our cause in not only about saving the 99 percent from poverty. All news stories, all political and economic commentaries, are a waste of time to read if they don’t focus on our central problem and the Fed and yours and my personal complicity.

We humans love our competitive games and cheer the winners, no matter what happens to the losers. From an evolutionary viewpoint, such games appear to make sense. But, they are clearly no longer working for the future wellbeing of the human race. We must, I emphasize must, learn new radically simple, cooperative, acutely aware ways, the ways Gandhi followed, or else. To convert the world, beginning with ourselves, is a cause like no other we’ve ever undertaken. I don’t believe we can bring Wall Street down in time by our efforts, but hope and expect it will die on its own. But, will this occur soon enough? That all depends upon whether the Fed can continue to keep the economy patched together, which may ultimately depend upon the willingness of the 99 percent to participate, to be able to participate given we are being drained dry. May it fail very soon.


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