Five Things You Need to Know: America, The Banking Welfare State
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. When the Going Gets Tough, It's Self-Reliance for the Penniless, Government Aid for the Rich
"Self-reliance for the penniless and government aid to those who already had more than they could use was the plan."
- Nelson Algren, "A Walk On the Wild Side"
One full year. One full, impossible to believe stompdown screamer of a year. That's how long it's been since the credit machine on Wall Street suddenly slipped a gear, lost the chain and folded in on itself, howling with the awful grinding sound of metal chewing metal. The real tragedy of it, the outrageousness of it, is that this machine's tear down is still ongoing, happening in horrific slow motion.
And so it is that the central bank announced yesterday it is extending the fat teat of acronyms that allow investment banks to borrow from the Fed through January of 2009. "Healthy economic growth depends on well-functioning financial markets," Federal Reserve Chairman Ben Bernanke told lawmakers in testimony earlier this month. "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve."
Meanwhile, as banks jostle one another for position suckling the government teat, homeowners will have to settle for the dregs of the trough. Brett Arends, in a piece in today's Wall Street Journal, runs the math on the Hope for Homeowners Act and - surprise, surprise - finds that once you tally the "annual insurance premium" added on top of each loan to help pay for the program's losses, your interest rate right now would come to 8.1% a year.
One of the strangest of American myths is the notion of "America: The Welfare State." Say that outloud. Then give it five minutes. Doubtless some self-appointed propaganda minister and "defender of self-reliance" will trot out a stat that purports to show the massive government spending programs "designed to subsidize the poor and lazy."
In the Age of Self-Evidence, anything shouted loud enough, forcefully enough, is almost certain to be etched into stone somewhere, engraved on a government building and hailed as truth. It is, after all, self-evident. Look around, the poor and lazy are everywhere, constantly scheming to worm their hands into your pockets and help themselves to the fruits of your hard labor.
That's the popular lie. But these welfare programs don't so much subsidize anything as institutionalize it, just as the real winner in the War on Drugs has always been the budgets of those units formed to "fight the good fight." Yes, they institutionalize and structure things, like so many moats surrounding the castles of the kingdom of the rich.
There is no Welfare State, not for people, maybe for banks run by the rich, but for people there is only a protectorate of programs designed to shield the Wealthy from a teeming mass of filthy rioters and thieves who, without their economic stimulus checks, just might become desperate enough to scale the castle walls in search of victims to rob.
The weird part about this con is that the rich, the wealthiest 2%, don't even pay for these programs. They show the remaining 98% of us the money in suitcases, whet our appetites, and then close them up and walk away after we eagerly promise to fund the operations ourselves; like a deranged lunatic throwing dice against himself in a dark alley, shifting pennies from one pocket to another.
Maybe the lone nugget of grim consolation is that at least we did it to ourselves.
2. Ranks of Part-Timers Swells
"Still and all times weren't as hard as some people grew fond of pretending. All that had happened really was a withdrawal from abnormal prosperity with business progressing on a downward grade toward new planes of normality and increasing equalization of opportunity. Only this time one exciting opportunity was precisely as good as the next exciting opportunity. Which was to say, simply, that nobody got paid anymore."
- Nelson Algren, "A Walk On the Wild Side"
Speaking of opportunity, the New York Times this morning reports that the number of Americans who have seen their full-time jobs slashed to part-time has swelled to more than 3.7 million, the largest figure since the government began keeping track in 1955.
The total number of people the government classifies as working part time involuntarily rose to 5.3 million in June, an increase of more than 1 million year-over-year.
Now that's just 3.7% of all those employed, which doesn't sound so bad. But once again, reality is poking through the thin protective veneer of surface statistics, like a spring in a rotting couch sticking in your back when you shift on it a certain way. Layoffs have yet to reach the levels seen during prior downturns. The unemployment rate is a relatively modest 5.5%. But, the Times notes, "that figure masks the strains of those who are losing hours or working part time because they cannot find full-time work — a stealth force that is eroding American spending power."
That's why this is a modern stealth depression. Everything about it operates just below the surface, from involuntary part-time employment, to declining real wages, to payday loan stores and pawn shops, all conveniently hidden by a constant barrage of data and images.
For example, exactly one year ago to the day, the United States stuck a hand deep into its national pants and pulled out a $20 bill it didn't even know it had. At least that's how I characterized it at the time. As of May 2007, the national Personal Savings rate had been negative for 26 consecutive months. Then, magically, the Commerced Department "revised" the data and discovered the Personal Savings rate had actually been positive for most of the prior two years, with only the third quarter of 2005 showing a negative rate.
See, that's how you do it. They're just numbers.
3. Why No Currency Crisis?
Kevin,
Regarding The Credit Crunch: What's Next? I'd like to get your thoughts on the following.
At the risk of asserting "it's different this time," I've been thinking about this as well. Not only has our manufacturing base been replaced by the service and finance sectors, but we now have the largest foreign-owned debt in history.
Forgetting for a second that public-works programs don't work (can't create economic recovery), is a second New Deal even an option? Is it not plausible that an attempt to initiate a massive public works program this time around would set off a currency crisis?
What source of funding/debt is available to us to finance trillions of dollars in public works or alternative energy investments? Do we expect foreigners to continue buying trillions more in Treasuries while their economies sink too? Or our own citizens to buy "save the USA" bonds with the money and savings they don't have?
Maybe I'm missing something, but I just don't see it.
Minyan JB
Minyan JB,
The dollar crisis camp misses two key points: 1) massive widespread reduction in debt requires accumulation of dollars to pay it down. 2) the government's balance sheet won't be simply the expansion of liabilities, but assets too. Not everything is going to zero.
I'm not defending the spending of taxpayer money on public works projects, but simply pointing out the reality, which is that whether one agrees with these projects or not, they often build up the asset side of the ledger as well. Infrastructure spending, research and development, military spending. These will all be projects we see going forward.
Also, which has been the main thing I want to point out, this is a multi-year, perhaps decade-long process. The key, for now, to avoiding the dollar calamity you mention, is in extending for as long as possible the unwind.
Everything the government is doing, everything the Federal Reserve is doing, everything the Treasury is doing, is taking place with that aim solely in mind: extending the unwind. By extending it for as long as possible, the potential for a currency crisis - which, by the way, no entity on the planet wants - is reduced in probability. It could still happen, but the probability of it is reduced.
As long as the unwind is extended, the deflationary process will occur as an orderly progression, people will see their wealth evaporate in slow motion, and on the other side of this "crisis" politicians will be free to resume their inflationary policies and the looting of the assets of the middle and lower classes.
4. Desperate Times Require Desperate Measures, But How Desperate?
I'm not saying it's necessarily likely, but given what might be in the file drawer containing the saying, "Desperate times require desperate measures," along with the precedents developing in front of our very eyes… how can we be confident that the next nearly unimaginable thing, (after LTCM, Bear Stearns, Fannie Mae (FNM) & Freddie Mac (FRE), homeowner bailouts, free checks in the mail), is that the government won't simply take bad debt from the banks and voila the banks are whole and ready to resume lending again? Or some even more brilliant scheme that is in essence the government creating new liquidity that they CAN get into the system.” It is a fiat currency, right?
-Minyan JW
The banks are already doing this. But your larger point is a good one. We know - thanks to the historical record of governmental and the central bank's response to the Great Depression - exactly what these programs and "desperate measures" are, what they mean, and how they impact the financial system. But the wild card is what we haven't thought of that these bureaucrats conceive of themselves to slow down the process of deleveraging and unwinding debt. Never underestimate a desperate man.
I think much of this depends on how widespread the consumer asset liquidation becomes, and how quickly it accelerates. That is the area where the central banks have the least amount of control, because they can provide liquidity to banks, take onto the their balance sheets the bad assets, continue rolling over even non-collateralized loans to banks every 60-90 days almost indefinitely. But they can't very well buy the nearly $4 trillion in consumer durable assets on household balance sheets if those households decide to liquidate them.
We have made the point before that the consumer is absolutely critical to this process. One question that keeps coming up is "Will this be like Japan?" But most people when they ask that question are asking if the Federal government's and central bank's responses will be as sluggish, as this is what prolonged Japan's long-term deflationary debt unwind. From that standpoint, it appears the bureaucrats and politicians are intent on not delaying Wall Street and corporate rescues. But they have far, far less control over rescuing Main Street, even if it were their prerogative to do so, which, it has been demonstrated over and over again, it is not.
Another key difference between Japan consumers and U.S. consumers is the extraordinary relative divergence in their personal savings rates and personal balance sheet comfort levels.
Japan consumers entered a corporate balance sheet recession with very high savings rate, savings that never fell much below 3% even at the very heart of the quantitative easing policy that destroyed savings incentives.
The U.S. consumer is entering business conditions that are worse, their magnitude greater, with an almost 0% savings rate and a very thin household cushion.
Moreover, this debt unwind, so far, has largely been isolated to Wall Street and mortgage debt and mortgage-related leveraged instruments, but as we have seen with yesterday's announcements that the states of NY and NJ are selling off assets to cover budget shortfalls, it is a debt unwind that is quickly spreading to other areas of the economy.
Remember, this is just the first stage, the unwinding of the most obvious assets that are deflating, mortgages, houses, real estate. We have not yet even gotten to the commercial real estate shedding, the consumer credit and automotive debt unwind, collectibles. and so on and so on.
5. Socionomics of 'Living Large': Suddenly, it Seems Ridiculous
The rush to disassociate from the trappings of the bull market are in full swing. Today's LA Times observes that in Hollywood, which has never been known for its subtlety, downsizing usually means losing weight. "But with the economy in the doldrums, even this town built on excess is scaling back. Suddenly, living large seems ridiculous. Even gauche. Nevermind if you can still afford a jaunt to Europe or a really great pair of shoes, it's understood that you don't brag about it. Instead, people are proudly sharing their recessionary measures like a new kind of social currency. Whether driven by necessity, anxiety or even empathy, it's high time for a new mind-set on consumption."
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OT, but everybody reads this guy so I jacked a little. And Jeff Cooper doesn't write columns, as far as I know.
Drilling our way out of this is the only option. Wind, solar and corn won't solve the problem. Ethanol pollutes more than oil, and it destroys engines after long-term usage.
This article is sheer genius...you think so well and are so gifted.
Today's point number one summed it all up so eloquently and with such power.
"Five Things You Need to Know" is probably the best written series of articles on the internet....Today's article really shines. Thank you
There but by fortune go you and I brother.
Great work Kevin. I try not to miss any of your work. You really stimulate the gray matter. Inflation vs. deflation. Boy I wish I had an inflation/deflation thesis I could invest on. The only thesis that I truly believe right now is that the US consumer is dying - that is making me some money.
The Wall Street Terrorists, and I do not use that term lightly, and I used to be one, looted hundreds of Billions from the financial system. They bought the regulators and politicians and tilted the playing field. The massed poor did not spoon out the triple A ratings or the hundred million dollar bonuses to those who knowingly made bad loans to bad risks. But, blaming the poor does give one many more targets.
replies are getting attached to the wrong letters and being misattributed. Thanks.
Nice.
Welfare for the poor is direct and obvious: here are your foodstamps. For the rich, it is much harder to see: here's a tax-payer government loan at 3%. Loan it out at 6%. Or look at the value of the USD. If the middle class and lower class were paid in Euros, they would have faced a massive pay cut. Instead, they are feeling this effect through higher commodities (most notably, food and gas). Wealthy people pay a much lower percentage of their income towards essentials, so they feel this effect less. Also, the stock market is artificially inflated by the weak dollar (again, price the US stocks in euros), so stock owners actually have more dollars to make up for the rising prices. Also, capital gains tax cut doesn't help people with no capital gains.
:)
Unfortunately politicians can't let the economy shrink. That's why this year they borrowed close to $500 billion (3.8% of GDP) to create the false illusion that the economy actually grew by $225 billion (1.6% GDP). The middle class will foot the entire bill for this. Next year how much will they have to borrow from China and the Middle East to make it look like something good is happening? And again in 2010? If you think WHO is elected President will change this then you're listening to too much talk radio.
Every dollar they spend trying to forestall the inevitable we will be paying for WITH INTEREST for the next 50 years. "We" being the tax paying middle class. If corporate taxes "paid more they they cost" then we would have a balanced budget. But we have spent TRILLIONS trying to prop up the economy and buy our way out of every problem for the past 25 years.
If you believe in the economy then you have to realize that it can't grow forever. The boomers will be taking their money out of investments to pay for gas, rent, food and medical expenses. The market will shrink. Capital will shrink. The consumer class will shrink. The economy will shrink. The good news is that the youngest generation is larger than the boomers. So, in TEN YEARS will start to experience growth again.
In the meantime class warfare and who is elected President is just fodder for TV Journalists and talk show hosts. Reality can't be averted. The best think we can do is insist on HONEST and REALITY. We're all going to be poorer for the next 10 years.
The chickens (from Fannie Mae to Banking Deregulation to Deficit Spending) will come home to roost. Whether that happens quickly and painfully or slowly and stealthily. It's going to happen. Every dollar we spend trying to avoid it will have to be paid back 5x over with deflated dollars over the next 30-50 years.
By the way this first out dollar crisis is not going to come from the big (chinese/japanese) central banks, but from a panic fro the small to medium size holders of us asset. You do not need dollars for usd debt because it goes to money heaven.
Therefore, more domestic drilling is nearly irrelevant to the price of oil this year and even this decade. If you want to bash the Democrats / environmentalists, go after them regarding nuclear power.
I, personally, could easily accept a 10% to 20% drop in my standard of living with the caveat that the rest of us could accept the same if this would help restore our nation to a nation we could be proud of. The problem is that the Federal Government must have growth to function. In my opinion the government doesn't have the sensibility to deal with our problems, and as a desparate man in stage two they are throwing darts at policies to decide what to do.
But, tell me, is this the way to bring down the Asian Juggernaut, stifle the last Communist Foothold on Planet Earth without firing a single Missile, bullet or firecracker?
Are these Boys ingenious or what?
If people want Change, they merely need to keep it in their pockets. The only vote we have is the money we control. Once it's spent, it's someone else's power.
Borrowed money: doubly so.
And we also send money, indirectly, to places like Sudan, Iran, Algeria, Libya because we buy so much oil from their competitors that they can easily sell everything they produce, and more. Sanctions to oil-producing terrorist states are meaningless. The world demands oil, because we take so much of it.
With regards to more drilling, I do not believe estimates that say it will take decades. The govt is hopeless when it comes to estimating or managing ANYTHING. The govt needs to get the heck out of the way and let private industry do its thing.
History shows us that US private industry ALWAYS exceeds expectations when it is allowed to innovate and work unimpeded.
I am strongly in favor of opening up every possible energy-producing area in the US, including tar sands, shale, offshore, ANWR and other restricted areas.
People who worry about oil spills need to remember what happened when Katrina and Rita blew through hundreds of producing rigs in the Gulf of Mexico. We didn't spill anything. Zero wildlife kills, zero oil slicks, zero beach damage. If the oil industry can go through back-to-back catastrophes like that, they can easily handle routine offshore drilling.
Tens of thousands of Americans are currently losing their jobs, homes and savings because our Congress would rather send hundreds of billions of dollars of American money overseas, instead of investing it right here at home.
The argument that increased domestic production will take too long is totally bogus. If Congress lifted the restriction tomorrow, there would be IMMEDIATE capital investment on the production of hundreds of drilling rigs. It would provide a MASSIVE economic stimulus.
Watch the jobless figures in the morning. We are bleeding massive amounts of manufacturing jobs. We NEED to produce domestic energy.
I was replying to your comment about McCain and Blue Dog Dems supporting more drilling and how that was our only way out. The italicized "this is the post being replied to" feature of The Exchange is completely broken so I do not blame you for any confusion.
Peace,
Dean
The Japanese have been with a decade long or really longer deflation cycle. Not a whole lot has helped with that one and the Japanese, economically speaking, are a pretty virtuous bunch.
The Japanese of course, at least have something to fall back on in the bank. Even with the erosion via easy money policy, money or wealth saved is still that. The US is in for a very rough road head.
Minyanville has sprouted far too many "professors" ...few have your courage and clear vision. Too many of the newer "profs" are still drunk on the kool-aid or are far too enamored of their beliefs in the system that has so rewarded them.
Bravo... this is your best... spot on.
Rosalyn
Excellent piece...
Immoralty of elites is as short sighted as admiration of communism among poor.
" Americans are the first people in history to drive themselves to the poor house"- will rodgers
Wall Street's Masters of the Universe didn't see it coming,
when so many of us simpler folks did. (Thankfully, many
Minyans.)
What I will now admit to not seeing coming is the enthusiasm with which our government would redistribute wealth from us simpler folks to the Masters, to save them from the consequences of their foolishness.
Then again, maybe they did see it coming, and knew how it would play out, which, I suppose, would qualify them as Masters.
Mike
Currently I will be working 15 days and 12 hours a day.
New business cycle it happens in history. Two more where terminated "them" since the Company is going in another direction. I am not against making "honest" money. Corporate Master's whipped to foment by The Wall Street Global Gods? Avarice is a desease. Humilty a truth. Waste defined by law. It goes on and on. You are not prepared to the level of intellectual depravity of the new breed. Words will never suffice to reality of the new world order that we warned about. Oh that called free market conditions. As compared to what. Black death in the middle ages. Mullah"s who stone desperate women. We have no one to blame but the face you see in the mirror. Have faith things will settle down, and hope you serve on jury duty to inflict the maximum sentence if there guilty. I have worked Union way over 30 years and your not alone sister. Remeber kick them where it hurts. In the pocket book in the check out line where ever that is. Pay Ceaser his dues, wait he's dead. Perfect law of liberty is truth. His 66 books
It's the illusions which are the problem when we become technologically and System-dependent. Blind faith in the systems leads to exploitation. Blind faith is what leads to open-loop behaviors, such as financial pyramids. Humans are no different than the animals they claim to "domesticate". We have leash laws for our dogs, but then we have income taxes for our society. Income tax is like collecting a bunch of cattle without a fence and then scaring them away from the barn. No limit to what people will do to get away from their responsibilities, and no limit to what kind of schemes they will come up with for the sake of money instead of their own best interests as part of a community. We even allow the creation of false responsibility systems ("non"-profit) to pretend that all the money exploited from the public is "doing good things", when the best thing it would have done was for the people who worked to create it to stay home and take care of the people who needed taking care of in the first place. The idea that money is necessary to live is part of the fear system of Capitalism (worship of money). The full integration of working for someone else (corporatism) in order to live in this country is the goal of state/corporate fascism. It's too late for any simple solution. Once the powerful have control over the perception of what freedom means, then freedom no longer exists. We can only ride the pony until it dies.
you have it exactly the wrong way around. it was the massive fiscal and monetary intervention that prolonged and deepened Japan's crisis - not the 'sluggishness of the interventionist response'.
it is a common mistake to believe that government intervention makes economic crises somehow better. this would only be true if one were to believe that government is actually better at allocating scarce resources than the private sector is - plainly, this can not be true. so what is the effect of government intervention? it makes the crisis worse, by delaying the necessary liquidation and redirection of capital that was malinvested during the boom, while at the same time encouraging new malinvestment. the demonstrated willingness of the political class to intervene in the current crisis will ensure that it is going to be far worse and last much longer than it would have otherwise.
…that the whole system was directed towards encouraging or driving the worker to spend his wages; to have nothing left on the next pay day; to enjoy everything and consume everything and efface everything; in short, to shudder at the thought of only one crime; the creative crime of thrift. It was a tame extravagance; a sort of disciplined dissipation; a meek and submissive prodigality. For the moment the slave left off drinking all his wages, the moment he began to hoard or hide any property, he would be saving up something which might ultimately purchase his liberty. He might begin to count for something in the State; that is, he might become less of a slave and more of a citizen.
Wendell Berry also puts in a good word on this in "The Gift of Good Land", where he talks about how the farm credit and agribusiness system gets farmers to risk just a little more than they can afford, the equipment always just a little larger and more powerful than they need to get the job done, never quite being satisfied with what they have.
The marketers and educators never stop to question where this trend will lead.
Now we know.
Again, that doesn't excuse or deny what the jerks like Mozillo have done and are continuing to do.
