President Obama's State of the Union: Ten Skirted Issues

I confess; I expected to be bored out of my mind listening to President Obama’s campaign - I mean, State of the Union - I mean campaign, speech. I kept hoping some truly earth shattering story would sneak in there beforehand, like say some discovery that Mitt Romney had been having an affair with Newt Gingrich’s ex-wife while he was creating jobs at Bain capital, and we could all focus on that instead.

It turned out that my pre-determination proved accurate. I wonder if the members of Congress felt the same sense of same déjà vu that I did, as they were bopping up and down and applauding. 

Obama's speech was a compilation of highlights from his past ones. One part optimism, two parts repetition equals one total uninspiring. Maybe it’s so boring, because it matters so little at this point. Taking away popularity polls, our national threshold for belief in hope or change has been trampled, not just because of Obama or Romney, but of the whole political apparatus that thrives on deflection of reality and posturing. We don’t have the same energy to expend listening to politicians, the endless spin that renders fact obsolete, responsibility absent, and true accomplishment, unnecessary.

We saw Optimistic Obama in his first address to Congress in 2009: “While our economy may be weakened and our confidence shaken; though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before.”

We got Presumptuous Obama in 2010: “As we stabilized the financial system, we also took steps to get our economy growing again, save as many jobs as possible, and help Americans who had become unemployed.”

We watched Philosophical Obama in 2011: “We are the first nation to be founded for the sake of an idea -– the idea that each of us deserves the chance to shape our own destiny.  That’s why centuries of pioneers and immigrants have risked everything to come here… The future is ours to win.”

Now, we had Campaigning on Fairness Obama. He returned to the roots of his pre-Presidential words, having accomplished little to attain the goal that his words implied. Here are ten things that President Obama skirted: 

1) The cost of healthcare insurance. Obama tried to play both sides, slapping a populist spin on an insurance industry gift. “That’s why our health care law relies on a reformed private market, not a Government program.” He claimed he won’t “go back” on things like health insurance companies being able to cancel policies. He didn’t say that insurance premiums have already risen 22% in the past two years. Republicans hate Obama’s ‘signature’ healthcare reform bill because it unconstitutionally forces people to purchase insurance. Democrats support the bill because Obama passed it. The reality is – by the time it takes effect in 2014, premium costs may have doubled. Frame it however you want, that means health insurance could cost twice as much when this bill takes effect as it did before it was passed. Meanwhile, there are more people without insurance (because they can’t afford it) even though insurance companies can’t cancel policies or deny insurance for pre-existing conditions. This bill merely offers insurance companies a wider pool of customers, with a few restrictions on how much they can pillage them.

2) Student Loan Defaults. Obama claimed he wants to cap interest rates on student loans - which would be great, but can only work in this particularly low rate environment. He urged  colleges to keep costs down – again, something that’s worked out really well when he’s mentioned it before. This year, student loan debt surpassed credit card debt, breaching the $1 trillion mark, at an average of more than $25,000 per student (and up 47% over a decade ago, not all under Obama, but still a problem). Not surprisingly, student loan defaults rates have risen alongside this debt increase. Nearly 9% of loans defaulted in 2010, of those that began repayment in 2009, vs. 7% that began in 2008.) Obama didn’t mention this growing concern. 

3) Youth unemployment. Obama took credit for the creation of 3 million jobs (I’m not going to debate that here). Regardless, youth unemployment is at its highest rate since 1948. The unemployment rate for those under age 25 is 18.1%, (31% for blacks) having risen sharply since 2008. Do the math. High student loan debt + diminishing  job prospects =  bad ending. Work-study programs have to be intense to really alter that.

4) Big banks. The largest firms continue to grow their asset bases and fee extrapolation strategies from their captive customer base (If you’re say, a JPM Chase customer, it costs you $5 to extract your own money from a Bank of America ATM – both banks get a cut). It was Obama that re-confirmed Fed Chairman Ben Bernanke for another fourteen years (and yes, a bi-partisan Congress agreed), and who still keeps Treasury Secretary, Tim Geithner around. Both men were gung-ho about the merger mania that dotted Wall Street in the fall of 2008 and making the ‘too-big-to-fail” banks bigger, as they now are.

5) Small banks. President Obama didn’t address the smaller bank closings occurring because the big banks got disproportionate subsides;, 389 smaller banks (with $297 billion in assets) failed from 2009 to 2011. Like during the early years of the Great Depression, this means less choice for individuals, less loans for local businesses, and consolidation of influence and market share for the big banks – which comprise Obama’s largest bundling base.

6) Borrowers. Despite a few tepid programs to help homeowners, the sheer number of foreclosures is higher today than it was in 2008. There were a record number of foreclosure filings:  2.9 million in 2010 and 2.7 million in 2011.  These are predicted to rise in 2012 amidst default surges and more lender notices than in 2011. 

Why? Because Obama’s program (that was supposed to help 5 million borrowers, and helped half a million) had to be approved by the banks. Banks don’t like citizen aid programs, even if they screwed citizens to begin with by fueling a $14 trillion toxic asset pyramid repackaging risky (for people), high interest-bearing (for them). Obama said, “The banks will repay a deficit of trust”? What?! When?! Where?!

7) Recent regulator incompetence. Regulators looked the other way, Obama said, pre-crisis. But he mentioned nothing about regulators' more recent passes; the SEC bestows banks settlements for fraudulent mortgage asset products, without extracting any admission of wrongdoing. He missed saying anything about the lack of related DOJ criminal indictments. The top five banks agreed to pay $1.149 billion to the SEC to settle subprime-mortgage related fraud charges, with no admission of guilt or criminal indictments. (The SEC settlement of $285 million with Citigroup was rejected by Judge Rakoff in November, 2011 and is being re-negotiated.) And Obama wants to create a Financial Crimes Unit? What’s the SEC supposed to be doing? or the DOJ? or the FBI?

8) MF Global and customer money. On the same topic – the deficit of trust thing: Obama avoided any talk about his buddy, Jon Corzine or MF Global, the nation’s eight largest bankruptcy. He didn’t point out how diabolical it was to use and ‘lose’ customer funds that were supposed to have been kept separate from bad bets. He didn’t suggest having a solid separation between customer money and financial firm money - as in - don't have it at the same firm. He claimed, "we will not bail you out again” and yet, we still are.

9) Banks hoarding. Obama neglected to mention the $1.6 trillion that banks are stashing at the Fed in the form of excess (and interest-bearing) reserves, which do nothing for the Main Street economy. Meanwhile, small business loans are at a 12-year low, having shrunk continuously since 2008.

10) Obama conveyed that we dodged a bullet by getting the banking system under control. He didn’t note the rising risk in the banking system: the largest four US banks (JPM Chase, Citibank, Bank of America and Goldman Sachs) control nearly 95% of the US derivatives market, which has grown by 20% since just last year, to  $235 trillion. JPM Chase holds 11% of the world’s derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. Goldman has 537 times as many (from 440 times last year) derivatives as assets and it’s still considered a bank holding company (as per Bernanke) that gets federal backing.

In all, the President's speech was reminiscent of George Clooney’s in Ides of March. We’ve heard it all before, maybe with slightly different words: America lost 4 million jobs before I got here, and another 4 million before our policies went into effect, but in the last 12 months, we added 3 million job. We must reduce tax loopholes, and provide tax incentives to businesses that hire in America. We must reform taxes for the wealthy (though he signed an extension of Bush’s tax cuts.) We must train people for an apparent abundance of expert jobs. We need more clean energy initiatives.  We created regulations (big sigh of relief he didn’t use the word ‘sweeping’) to stop fraudulent financial practices. We will help homeowners. Wall Street must make up a "trust deficit.”  Like Jamie Dimon cares. 

In other words, Obama gave Wall Street a pass, while waxing populist. Don’t get me wrong. I expected nothing different. I will continue to expect nothing different, when he gets a second term, given the lame duo the GOP favors his key contenders to be.

Bailouts + Downgrades = Austerity and Pain

The markets (read: traders with big books at mega financial firms and hedge funds) weren’t particularly shocked by last week’s wave of heavily pre-broadcast S&P sovereign debt downgrades. For months, the question wasn’t ‘if’, but ‘when.’ True to form, just as with the US downgrade, S&P’s reasons skated the surface of prevailing wisdom – governments have too much debt, and not enough income. That’s only a fraction of the story.

Nowadays, when any sovereign (including the US) gets downgraded by a rating agency, it's not just because its debt repayment ability is questionable (the publicized logic of rating agencies), but because it incurred more expensive debt to float its banking system. It chose to subsidize banks over people.

The S&P likes moving on Friday nights. It was on a Friday night that it downgraded US debt to AA+ from AAA. On Friday night, January 13, 2012,  it downgraded France and Austria from AAA to AA+, and 7 other European countries, too; Cyprus, Italy, Portugal, and Spain by two notches; Malta, Slovakia, and Slovenia, by one notch. Portugal, Cyprus, Ireland and Greece are at junk status. Germany’s AAA rating is intact.

Nowhere in S&P’s statement about “global economic and financial crisis”, did it clarify that sovereigns were hit due to backing their largest national banks (and international, US ones) which engaged in half a decade of leveraged speculation. But here’s how it worked:

1) Big banks funneled speculative capital, and their own, into local areas, using real estate and other collateral as fodder for securitized deals with derivative touches. 2) They lost money on these bets, and on the borrowing incurred to leverage them. 3) The losses ate their capital. 4) The capital markets soured against them in mutual bank distrust so they couldn’t raise more money to cover their bets as before. 5) So, their borrowing costs rose which made it more difficult for them to back their bets or purchase their own government’s debt. 6) This decreased demand for government debt, which drove up the cost of that debt, which transformed into additional country expenses. 7) Countries had to turn to bailouts to keep banks happy and plush with enough capital. 8) In return for bailouts and cheap lending, governments sacrificed citizens. 9) As citizens lost jobs and countries lost assets to subsidize the international speculation wave, their economies weakened further. 10) S&P (and every political leader) downplayed this chain of events.

The United States

On Aug. 5, 2011, S&P downgraded US government debt to 'AA+'. This was four days after Congress voted to raise the US debt cap - to prevent a downgrade - proceeded by political squabbling and the US Treasury and Fed begging Congress to raise the debt cap. S&P, beacon of stamp-any-toxic-asset-AAA, accountability, claimed, “American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.” In other words, too much debt, too little income.

According to the US Treasury, the main reason for the debt increase was a stalling economy –  lack of enough incoming tax receipts to pay US expenses, (which include interest payments on growing debt.) That’s not true. Tax receipts dropped $400 billion to $2.1 trillion in 2009 vs. 2008. Expenditures jumped to $3.5 trillion in 2009 from $3 trillion in 2008. Treasury debt ballooned by nearly $4 trillion from 2008 through 2010.

Where’s the money? About $1.6 trillion lies on the Fed’s books as excess reserves which banks  - dealers for sovereign debt - put there. Nearly a trillion dollars went to backing Fannie Mae, Freddie Mac - which enabled banks to artificially overvalue related securities, and extra interest payments. There was $700 billion in TARP, which though mostly repaid, never manifested into debt reduction, and hundreds of billions of dollars of asset guarantees underlying big bank mergers. So, 75% of the extra debt went to saving banks. S&P didn’t mention this. The policy repeated across the Atlantic.

Ireland

The Irish government’s pain started when it guaranteed the bonds of Anglo-Irish bank in September 2008. By May, 2010, Central Bank head, Patrick Honohan, assured the world that he’d have ‘two big banks, fixed by the end of the year.’ Upon that endorsement, the government backed bondholders on the banks’ behalf. The economy deteriorated.

Six months later, nobody would lend to Irish banks. Irish austerity promises didn’t change the fact that Irish banks weren’t big enough to contain their waste. By November, 2010, banks paid for $60 billion Euro of maturing bonds with emergency ECB loans, and the ECB became the backbone for the Irish bank guarantee scheme, whose participants included Ireland’s big financial firms: Irish Life & Permanent p.l.c., Bank of Ireland, Allied Irish Bank p.l.c., Anglo Irish Bank Corporation Limited, and Irish Nationwide Building Society. Irish Government Debt doubled from 65.3 billion Euro to 118 billion Euro since 2009.

The ECB deemed the bailout a success. Yet, by the summer of 2011, Ireland was downgraded to a notch above junk and households (and foreigners) accelerated extracting money from Irish banks, weakening the banks’ funding base further. The Irish government now owes 110 billion Euros to the banks, the National Asset Management Agency (NAMA, aka “bad bank”) the EU, ECB and IMF, with no way to repay it.

Spain

According to a recent Business Week article, Spanish banks hold 30 billion Euros ($41 billion) of “unsellable” real estate loans. Just like in the US where smaller banks got hit hardest, small and mid-sized Spanish banks did too. In addition, about 308 billion Euros worth of Spanish loans are ‘troubled.’ Home prices in Spain are off 28% from their April, 2007 peak, with land values in the outskirts of urban areas, down by as much as 75%.

In economic desperation, the public elected conservative party leader, Mariano Rajoy, as Prime Minister in the end of 2011 who promised to lead Spain to economic recovery, by invoking austerity measures in return for backing to help the biggest Spanish banks.

Meanwhile, the top six Spanish banks sit on $33 billion of foreclosed assets having set aside 105 billion Euros in write-downs against bad loans since 2008, with another 60 billion Euros to come. The backdrop is a 23% unemployment rate, triple its 7.9% May, 2009 level. Property transactions continue to decline. Foreclosures keep ramping up. The gap between what banks want to sell foreclosed or troubled property at, and what investors are wiling to pay continues to widen, forcing more small and mid-size banks to buckle under larger than anticipated losses, which in turn squeezes liquidity out of local usage.

Greece

According to an SEC report from the National Bank of Greece (NBR) for the year ending 2010 – loans to businesses and households were expected to “remain under considerable pressure…[due to] “downward pressure on household disposable incomes and firms’ profitability from the austerity measures… are likely to impair further demand for loans.” They weren’t kidding. In order for the NCB (or any bank) to reduce its dependency on ECB funding, it has to reduce loans to its own economy.

The ECB agreed to accept worse collateral (with junk ratings), including bank issued bonds with Greek government guarantees (under a May, 2010 rule change for all member countries). The ECB bought Greek (and other) government bonds in the secondary markets, to support their value and thus, their value as loan collateral. As with the Fed’s QE measures, Euro-style – this only perpetuates a fantasy of demand.

After four rounds of austerity measures, nationwide protests, 110 billion Euros in IMF and ECB bailouts to keep bondholders (and banks) happy, escalating interest rates driving borrowing costs higher, a downgrade to junk, and a Prime Minister swap; Greece remains in tatters with more pain to come.

Italy and Portugal

Last summer, S&P warned it would downgrade Portugal if it didn’t play ball with the IMF and EU over a 78 billion Euro bailout. So Portugal towed the austerity line. Its economy deteriorated. S&P downgraded it to junk status.

The IMF and EU declared that Italy too, needed ‘structural reform’, meaning public austerity and privatization.  National assets went up for fire-sale, as they did in Spain and Portugal, to the highest international bidder. Now, the high borrowing costs the government faces as a result of bolstering the banking system, paying bondholders and selling infrastructure, has resulted in more downgrades and dim prospects.

According to the Italian Central Bank, 500 Italian cities are facing losses on derivatives contracts. JPM Chase and Banco IMI are accepting Italian government bonds as collateral, rather than less risky US Treasuries or cash, certain that the ECB will step in to buy, and thus prop up, Italian bonds if needed, as they did in August, 2011.

As Greece showed, using high-cost sovereign debt as collateral leads to more bailouts to ensure big lenders get their money back. JPM Chase, having weathered the US subprime crisis with support from the US Fed, isn’t about to lose on that bet. Meanwhile, several Italian towns, the City of Milan and the Tuscan region, are suing the big American, German, Swiss and French banks over derivative losses and misleading asset purchases, who will likely get bailout money anyway.

Bailout Economics Doesn’t Work

ECB bailout money didn’t (and won’t) go towards helping any European country’s local economy, any more than it went to aiding the mainstream US economy. The ECB and IMF, at the Fed, US Treasury and US administration’s urging, camouflaged the insolvency of European banks, perpetuating losses with bailouts, and forcing cowardly governments to support them, while turning a blind eye to boosting core economies.

Meanwhile, banks with access to the ECB’s ‘window’ are taking the money and immediately putting it back into the ECB as reserves. Overnight deposits at the ECB continue to break records, currently hovering around 500 billion Euro ($640 billion). As in the US, European banks aren’t using that liquidity to help fix local economies, but hoarding it to preserve themselves. The amount on reserve is 98% of the total made available in emergency 3-year loans in late December at 1% interest; banks get 0.25%, which means they are paying 0.75% interest for the loans, far less than the market would charge them.

The die has been cast. Central entities like the Fed, ECB, and IMF perpetuate strategies that further undermine economies, through emergency loan facilities and  bailouts, with rating agency downgrades spurring them on. Governments attempt to raise money at harsher terms PLUS repay the bailouts that caused those terms to be higher. Banks hoard cheap money which doesn’t help populations, exacerbating the damaging economic effects. Unfortunately, this won't end any time soon. 

My 2011 Holiday Book List

That time of year again! I want to wish everyone a lovely, healthy and peaceful holiday season. If you’ve got any down time, here are some books to consider for your reading list (in addition, of course, to Black Tuesday :)) Some will make you ponder, some will make you angry, and others will make you smile.  Happy New Year!

Nonfiction

1) Why America Failed: The Roots of Imperial Decline  by Morris Berman

An intensely thought-provoking read. Berman pulls no punches in laying bare the truths behind America’s hustling culture, and how destructive that mentality has been for the country since its inception. The book is a post-mortem of a societal notion that at its core, relies upon crushing the weak to become stronger.

2) Vultures Picnic: In Pursuit of Petroleum Pigs, Power Pirates, and High-Finance Carnivores by Greg Palast

Palast strikes again – lazer-beaming on the corporate kings that literally feed upon the carcasses of the human population – whether in financial terms by ripping off small towns, pension funds and mortgage holders, or through the slaughtering of forests, sea-life, animals, and village children. Vultures’ Picnic is an eye-opening, heart-pumping, mind-blowing experience that should not, MUST not, be missed.

3) With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful by Glenn Greenwald

Before Jon Corzine dodged Congressional questions about MF Global’s stealing $1.2 billion in customer funds with impunity, there was Glenn Greenwald. In this book, he  walks us through Watergate, the Iran-Contra scandal, and Obama's shielding of Bush-era officials, revealing how the media, both political parties, and the courts conspire to foster a system that effectively exalts torture, war crimes, domestic spying, and financial fraud committed by the elite at the expense of everyone else.

4) Tropic of Chaos: Climate Change and the New Geography of Violence  by Christian Parenti

Parenti’s epic new book describes the harrowing condition of catastrophic convergence, or the “collision of political, economic and environmental disasters.” It is a wake-up call to humanity, particularly to the richest nations (with the U.S. at the top of that list). The detrimental effects of our environmental gluttony at the heart of our economic avarice are not blurry fatalistic hypotheses—they are here, today. Parenti breaks them down.

5) Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy by Yalman Onaran with a forward by Shelia Bair

With Bank of America trading below $5 and the world’s biggest banks merely appearing solvent due to enormous government subsidies, Zombie Banks is crucial reading. In extremely accessible prose, Onaran shows how ongoing government backing of risk-laden banks will only prolong global economic crises.

6) Getting Steamed to Overcome Corporatism: Build it Together and Win by Ralph Nader

This book is Vintage corporate-raider Nader, and it reads like a horror story, delineating a  terrifying cornucopia of corporate crimes that not only continue unabated, but constantly pummel us financially, socially, physically, and mentally. Nader's commentary on this astonishing array of corporate transgressions (during just one year) is imbued with the passion and experience of decades as a crusader for justice. 

7) Throw Them All Out by Peter Schweizer

Schweizer spares neither political party in his exhaustive research on how politicians use their knowledge, position, and influence to make money – for themselves. This book will disgust you – because it reveals the extent to which the people that make the laws in this country, don’t abide by them when it comes to personal wealth accumulation.

8) The 99%: How the Occupy Wall Street Movement is Changing America by Alternet Editors

There remains no meaningful federal opposition to the systemic destruction of Main Street's economy by the titans of Big Finance. The Occupy movement, physically and conceptually, could be that opposition. This book gathers in-depth information abut this struggle from Naomi Klein, Amy Goodman, James Galbratih, Robert Johnson  Yves Smith, myself and many others.

Fiction

9) The Sense of an Ending  by Julian Barnes

I have been a Julian Barnes fan since reading one of his earlier novels, Talking it Over. No one gets the human condition better than Barnes. This book follows the story of a man facing his old age, trying to make sense of his past – but it’s so much more. I finished it in one plane ride. You won’t want to put it down.

10) The Devil Himself: A Novel  by Eric Dezenhall

This fall, I had the pleasure of sharing an NPR radio show segment with Eric Dezenhall and had no idea beforehand, that he was a novelist. I’m glad that I know this now. The Devil Himself is fast-paced, intricately woven historical fiction, focusing on World War II in America and a colorful set of  ‘gangstas’ fighting Nazis.

11) IQ84  by Haruki Murakami

I just started reading this book (global economic crises taking up so much mental space and all) and am completely hooked. More ethereal and darker than Murakami’s other novels, it follows the story of a young woman encountering an alternate reality, and an aspiring writer at the precipice of a life shaken to its core.

For the kids:

12) Turbie the Turtle Duck by Rich Arons

Political Cartoonist Rich Arons focuses his immense talent in the direction of children’s books. Turbie the Turtle-Duck is reminiscent of the best of Dr. Seuss from Turbie, the turtle-duck himself, to all the wonderful inhabitants of the Lost Isle of Animoxie, like the Pea-cocker spaniels at High-Biscuit Forest and elephant mice at Cheesy-Tree Park.  The best review – my three-year- old niece wants me to get her a turtle-duck NOW.

13) The Rise of the Seven Stones (The Gem Series) by Jamie Austin

This book, the first in a series, came out last year, but in kindle form, this year. Debut author, Jamie Austin weaves an enchanging story that is JK Rowling’esque. it begins in Manhattan where twelve-year-old Lillian is struggling to make sense of her parent's impending divorce. She and her younger brother James are sent away to their eccentric grandmother. On their first night in her home, they are transported to a bizarre universe., shrunken down to the size of a mite, and lost inside the world of their grandmother's magical brooch. It’s terrific.