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September 28, 2009


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Yes, we should have called their bluff. It wouldn't be any worse than it is for the middle and lower classes.

And speaking of Doomsday, Maricopa Co. wants to double the amount of freeways at a cost of $60B to accommodate their projection of 10 million people living in the Valley. The Dead Hand still is around our throats.

It's true we have a hollowed-out economy but that, paradoxically, makes the hollowers even more powerful. I'm not even sure there's a conspiracy in any of this beyond the ordinary persuasion factor of concentrated wealth. It's as if we're locked into a play whose ending is bad and whose script doesn't permit overwrites. This empire is imploding.

Judging to what extent the bailout was necessary, or at least prudent, and what was hyperbole in service of a hidden agenda or ulterior motive, requires more information than has been made available to the general public, so far as I know.

The Bush and Obama administration's advisers who counceled these actions have never reproduced their reasoning and the details behind it for the public, or even for specialists in the fields of economics and finance -- again, so far as I know.

The justification given by them paints, in very broad strokes, a story of interlinked financial institutions, and a domino theory involving companies like AIG, but what little detail has been revealed to date is far from strongly compelling.

There are several possibilities:

(1) The standard explanation is accurate.

(2) Essentially accurate, but the bailout was larded with special deals for favored parties that probably weren't necessary to maintain the integrity of the system as a whole.

(3) Essentially inaccurate, but nobody had a real understanding of what was going on, and the advice and decisions of all influential parties were well-intentioned.

(4) Essentially inaccurate, but a comparative handful of highly influential individuals were offering deliberately dishonest explanations and advice to the administrations and the public, for their own benefit.

(5) Essentially inaccurate, and this was widely known at the upper levels of the political and/or economic establishment.

Take your pick.

The media (television and radio especially, but also general readership newspapers) does a very poor job of explaining the workings of the system even when this involves aspects that have existed for many years and are well documented.

Part of this is the lack of specialist reporters, part is laziness, and part is the result of low standards in the media industry.

Too often, reporters do not bother to read through primary documents -- especially when these are large (such as the Budget of the United States Government) but instead rely on executive summaries and/or press releases. Balance in reporting is considered to be fulfilled if the leadership of both major parties is consulted; but when both parties have a reason for lying, the public is ill-served.

For example, today I saw an Associated Press article in the Arizona Republic titled "Job losses causing huge deficits for Social Security".


"Big job losses and a spike in early-retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years - the first time that has happened since the 1980s.

"The deficits - $10 billion in 2010 and $9 billion in 2011 - will not affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion."

Well, no. This program is run on a cash basis and the so-called trust funds are a preposterous scam. The government actually admits this explicitly in its budget documents.

Social Security's monies come from the General Fund account of all monies collected by the Government: the government collects taxes and fees, and uses these (plus borrowing) to pay the obligations of all federal programs, including Social Security.

If there is a "deficit" it is with the general budget and not a specific program; and payments to beneficiaries are determined by the formulas contained in Social Security legislation, which can be changed (and has been numerous times).

"Without a new fix, the $2.5 trillion in Social Security's trust funds will be exhausted in 2037."

No. The "trust funds" are financially and legally irrelevant: they are not a source of funds, and never will be, and their contents do not determine who receives benefits or at what levels. They cannot be "exhausted" because there is nothing to exhaust.

"The Congressional Budget Office is projecting that Social Security will pay out more in benefits than collect in taxes next year and in 2011 - a first since the early 1980s, when Congress last overhauled Social Security."

True, except that Congress didn't "overhaul" the program: they deliberately raised payroll taxes above what was necessary to fund ongoing program expenditures, falsely representing this as saving toward the future for an aging population, then spent the excess funds on other things; and this was perfectly legal.

Amazingly, despite all of this, at the end of the article the author seems to acknowledge it:

"Those funds have actually been spent over the years on other government programs. They are now represented by government bonds, or IOUs, that will have to be repaid as Social Security draws down its trust fund."

The first sentence is true. The second is not, since the trust fund does not contain assets, and the IOUs were issued by the government not to the public, but to itself. There is nothing to draw down, nobody to repay except itself, and no way to raise program funds except the usual method of taxation, fees, and borrowing that fund federal programs in general.

It is way past time for heads on sticks.

I wrote:

[Social Security and Medicare are] "run on a cash basis and the so-called trust funds are a preposterous scam. The government actually admits this explicitly in its budget documents."

Fortunately, you don't have to take my word for this. It's interesting to observe how the government has become more sophisticated in obscuring the facts in its own budget documents. Back in FY 1996, despite putting the information in an obscure section of the budget and surrounding it with language designed to camouflage the facts, the language used was nonetheless relatively clear:

"The Federal budget meaning of the term 'trust' differs significantly from its private sector usage. In the private sector, the beneficiary of a trust owns the income generated by the trust and usually its assets. A trustee, acting as a fiduciary, manages the trust’s assets on behalf of the beneficiary. The trustee is required to follow the stipulations of the trust, which he cannot change unilaterally. In contrast, the Federal Government owns the assets and earnings of Federal trust funds, and it can raise or lower future trust fund collections and payments, or change the purpose for which the collections are used, by changing existing law." (p. 251)

"These balances are available to finance future benefit payments and other trust fund expenditures -- but only in a bookkeeping sense. Unlike the assets of private pension plans, they do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, reducing benefits or other expenditures, or borrowing from the public." (p.258)

"However, issuing debt to Government accounts does not have any of the economic effects of borrowing from the public. It is an internal transaction between two accounts, both within the Government itself. It does not represent either current transactions of the Government with the public or an estimated amount of future transactions with the public. For example, if the account records the transactions of a retirement program, the debt that it holds does not represent the actuarial present value of future benefits." (p.188)


In the current budget document, much of this language has been removed or altered, and the meaning is less clear, though substantial portions remain. See for example the same section in the FY 2010 budget:


Mr. Talton asked whether or not the bailout disarmed or enabled the "dead hand" of Big Finance. Clearly, without fundamental regulatory reforms, the bailout will only serve to increase "moral hazard" and encourage future profligacy and irresponsible risk-taking for private gain.

Robert Cyran of breakingnews.com had a great column buried in the Business section of today's New York Times which was headlined "Canadian Banks Missed A Chance".

The main point of the article, however, wasn't the Canadian banks' timidity, but the way that Canadian banking regulations, industry attitudes, and culture allowed the biggest Canadian banks to escape largely unscathed by the meltdown:

"None of the major banks in Canada failed in this financial crisis. In fact, they found themselves in stronger shape. The total market capitalization of the big five Canadian banks — Royal Bank of Canada, Toronto Dominion, Bank of Nova Scotia, Bank of Montreal and CIBC — has risen 8 percent since the start of 2007. By comparison, the five biggest American commercial banks lost almost 40 percent, vaporizing more than $350 billion of market value.

"There are many reasons that American banks got into trouble while the Canadians didn’t. Among them: 50 percent greater leverage among American banks, which amplified losses; less prudent underwriting and credit standards; a regulatory patchwork that allowed [American] banks to play one set of watchdogs off against another; American government officials’ belief that the private sector needed less oversight; and a larger reliance on short-term borrowing.

"These factors all played a role and fed upon each other. For example, Canadian regulations encourage banks to keep more loans on their books. While half of all United States mortgage loans were sold at the peak of the securitization bubble, the figure for Canada was about 25 percent. Since the banks had to eat more of their own cooking, so to speak, there was more incentive to make sure borrowers could repay.

"The Canadians also had a bit of luck. They weren’t forced to step in and provide liquidity to their off-balance-sheet vehicles at the height of the crisis because, unlike in the United States, the standard legal arrangements didn’t require that. More important, the American cultural mood latched onto the idea of buying houses and flipping them for hefty profits to a much greater extent. Canadians were more circumspect, limiting the housing bubble north of the border."


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