Wednesday, October 29, 2008

Can We Trust Our Bankers?

October 29, 2008, 9:00, 10:15 a.m.

Looking for "The Economics of Conservation," October 28, 2008? Click here.

"If You Can't Trust Your Banker . . ."



[Credit: "Shady Deal at Sunny Acres," Maverick, 2nd Season, 1958. The popular early television series, Maverick, "starring James Garner and Jack Kelly, remains the most famous and widely discussed episode of the Western comedy television series Maverick. Written by Roy Huggins and Douglas Heyes and directed by Leslie H. Martinson, this 1958 second season episode depicts gambler Bret Maverick (James Garner) being swindled by a crooked banker (John Dehner) after depositing the proceeds from a late-night poker game, then recruiting his brother Bart Maverick (Jack Kelly) to mount an elaborate sting operation to recover the money." It's also the source of two oft-quoted lines: "If you can't trust your banker, whom can you trust?" and "I'm working on it." See, "Shady Deal at Sunny Acres," wikipedia.org.]

At the outset, let me make clear that I don't mean to be questioning the trustworthiness of our local bankers (notwithstanding the physical similarity between one of them and John Dehner). The "bankers" I'm talking about are those in Washington, represented by the President, his Secretary of the Treasury, those "to get along go along" campaign-contribution-receiving members of the House and Senate, and their Wall Street collaborators.

Given that they have fallen for the same "Chicken Little, 'the sky is falling, the sky is falling'" rhetoric from Bush on the economy that he used for the Iraq War,


[Credit: Jon Stewart, "The Daily Show," September 25, 2008.]

apparently what this country needs is a Washington invasion of chiropractors to strengthen their spines.

Europe is still providing examples of how to go about this bailout responsibly.

For example, in a story of some local interest we learn that the Dutch government is bailing out the corporate parent of Cedar Rapids' AEGON USA. Associated Press, "Netherlands Gives Aegon a $3.7 Billion Bailout," New York Times, October 28, 2008 (in this morning's Gazette as, "AEGON Gets $3.7 Billion Government Investment," The Gazette, October 29, 2008, p. B7 -- apparently Europe's "bailout" is America's "investment").

Note that the European AEGON parent has canceled dividends and executive bonuses for the rest of the year.

Note also that the government has given "Dutch Uncle treatment" a whole new meaning by simply nationalizing the biggest Dutch financial institutions, ABN Amro and Fortis.

Nor has it simply given AEGON $3.7 billion. It has acquired 750 million shares of a new class of non-voting AEGON stock which, if converted to common stock would be nearly a 50% stake in the company. It will name two members of the board. The stock will pay a minimum of 8.5% annually. And if the company ever chooses to buy them back it will cost them $5.6 billion, not $3.7 billion.

Meanwhile, here in the good old U.S. of A. it looks like Secretary Paulson is weakening on his commitment to obtain taxpayer equity in exchange for the $700 billion bailout. Meanwhile, apparently the banks are taking the money -- designed to ease the credit crisis -- and instead of using it to make loans have decided they might better enrich themselves by using it to buy up other banks at a bargain, thereby creating even larger financial institutions that "we just can't afford to let fail."

And the auto companies, having already been given $25 billion (I believe), are now back in line for whatever they can get from wherever they can get it -- a part of the $700 billion "financial institutions" bailout, the additional $25 billion auto "just for the hell of it" fund, and some $5 billion from the Department of Energy for retooling to (hopefully) begin building cars that Americans would actually like to buy.

The roughly $10 billion in government funds to support a merger would be in addition to whatever funds would be allocated under an already-approved $25 billion program to provide low-interest loans to the auto industry for retooling to make more fuel-efficient cars. . . .

Moody's Investors Service cut its GM rating on Monday deeper into junk territory on the view that GM's liquidity would continue to erode into 2009. The ratings agency also cut Chrysler for similar reasons . . ..

GM has a market capitalization of just over $3 billion based on Monday's close and roughly $10 billion of outstanding debt. Chrysler's privately held auto operations were valued at zero last week by Daimler AG (DAIGn.DE) . . ..

GM's shares have slumped nearly 80 percent this year and its market value has dropped below what it was in 1929.

Jui Chakravorty Das and Kevin Krolicki, "GM seeks $10 billion in aid for merger: sources," Reuters, October 28, 2008, 12:06 p.m. ET.
Far be it from me to yield to the persuasive forces of cynicism and conspiracy, but doesn't it kind of remind you of two things:

(1) Civil disorder and riots, whether in Baghdad after our invasion or American cities 40 years ago, with store windows broken and looters running down the streets with anything that was not locked down that they can carry. Even the foxes have stopped guarding the chicken coops and opened the door to any and all to come take as many as they can carry. This Administration and their friends in Congress realize that change is most likely coming. If they intend to keep on getting they best get while the getting is good. Since when they opened the vaults at Fort Knox they discovered they were bare, and they don't want the wealthy to have to pay taxes, they've simply run up debt for our great grandchildren to pay, and then started paying this borrowed money to themselves as fast as they can between now and January 20 (Inauguration Day). Maybe not, but that's sure as hell what it looks like to me.

(2) An almost equally valuable byproduct -- certainly politically -- of this unrestrained theft from taxpayers involves one of the most effective strategies of those who would like to do away with government entirely -- except for making war (while enriching the weapons merchants). By running up astronomical levels of debt they can totally eliminate any and all "discretionary spending" by the president and Congress. Remember Bush's adviser, Grover Norquist? "To Norquist, who loves being called a revolutionary, hardly an agency of government is not worth abolishing, from the Internal Revenue Service and the Food and Drug Administration to the Education Department and the National Endowment for the Arts. 'My goal is to cut government in half in twenty-five years,' he says, 'to get it down to the size where we can drown it in the bathtub.'" Robert Dreyfuss, "Grover Norquist: 'Field Marshall' of the Bush Plan," The Nation, May 14, 2001 (online April 26, 2001).

It's a two-fer for them: riches beyond their wildest dreams of avarice, and a political body blow to any Obama Administration. After all, what will Obama's options be? ("You can't always get what you want; but you can get what you need"? Not if "Change We Need" is "Change We Can't Afford.")

1. He can capitulate to the neocons' strategy; fail to put any of his proposals in place, and cut back even more on the few social programs that still exist, further extending the gap between rich and poor and driving America ever closer to third-world demographics.

2. He can, irresponsibly, increase the national debt beyond the $10 trillion or more that Bush is leaving for him -- and the $55 trillion of unfunded future obligations -- and just hope that the Chinese, and other peoples with greater inclination to save than Americans, will continue to loan us money.

3. He can (a) pray for an economic recovery sufficient to radically increase federal tax revenues (without increasing tax rates), using the money to both pay down debt and provide at least pilot project-level funding for new programs, or (b) increase tax rates notwithstanding the lack of economic recovery.

There may be other options, but those are the only ones that immediately occur to me.

Of course, I may be too cynical. After all, "If you can't trust your banker, whom can you trust?"

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1 comment:

angelin said...

I believe that demand for economics classes will rise, as it often does in economically troubled times. Seeing the economy this year, some of this will be "shaman demand" rather than "knowledge demand." The consulting incomes of finance economists will fall and fewer talented people will go into finance.
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Angelinjones
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