Wall Street WARZONE

Bailout Rage & Financial Reform: Will Meltdown 2012 Finally Drive Wall Street Banks into Bankruptcy? Will Second “Great Depression” Finally Clean Up Wall Street’s Toxic Culture?

by Paul B Farrell, JD, PhD
| | 4/14/2010

Another meltdown coming, soon? Yes. Maybe as early as 2012. More bailouts? No lessons were learned in the last one. But new Wall Street bailouts? Fuggetabout it. Not only can’t we afford them, there will be a populist revolution fighting them: All hell will break loose. First: We got the Bush-Cheney-Greenspan dotcom crash. Second, the Bush-Bernanke-Paulson subprime credit meltdown. Third, the coming Obama-Bernanke-Goldman anti-bailouts revolution. Robert Shiller predicted a “third epidemic,” to follow Wall Street’s 2008 meltdown, one that “will spread irrational pessimism and distrust, not exuberance.” It’s coming soon.

Yes, a “revolution.” Rolling Stone’s ever-provocative Matt Taibbi warned of an attack brewing in “The Big Takeover, how Wall Street insiders are using the bailout to stage a revolution.” Wall Street’s arrogant assumption that Main Street will bail them out when they fail again will backfire, with huge unintended consequences, the “Great Depression II.” Wall Street thinks it’s invincible, after avoiding the big one with the $787 billion TARP bailouts and an estimated $23.7 trillion in debt from The Fed and taxpayers. No, not avoided, merely delayed. And the next crash will grow ever bigger the more we delay it by pushing new debt onto future generations.

In “Future Bailouts of America: The Price Tag For Future Bailouts, Not Just Fannie & Freddie”, New York Times columnist Gretchen Mongenson updates ideas we found earlier in books like Barry Ritholtz’  Bailout Nation, which exposes America’s new ”Socialist-Capitalism” a new ideology that “privatizes profits” for Wall Street’s too-political-to-fail banks and leaves “socialized risk” for the taxpayers. Morgenson says:

Once a small membership organization comprising Fannie Mae and Freddie Mac, the mortgage finance giants, and the occasional troubled auto company, the Future Bailouts of America Club now includes a long list largely populated by financial institutions. We can’t be sure who the specific members of this club are — regulators simply say they know ’em when they see ’em. But this much is certain: They’ve seen a lot of them lately. [And] as taxpayers, we obviously can’t rely on lawmakers to address the risks … But because we are footing the bills for these rescues — and will do so again if more crises occur [Washington] should at least tell us the price tag.

Tell us the price tag? Never happen. That assumes everyone sets aside their ideological and commercial differences and jointly makes rational plans based on the so-called “facts.” While that quixotic notion makes journalists happy, more information won’t help the rest of the human race. The human brain, the ideologue’s brain, the politician’s brain and the Main Street investors’ brains all share the same infinite capacity to ignore “facts” that don’t agree with their preconceived beliefs, as proven daily with the climate change wars. Still, we can hope like Marvin Phaup, a research scholar at George Washington University. Morgenson notes Phaup is:

… an expert on government guarantees, his wholly sensible view is that it is dangerous for possible bailout costs to remain unmeasured and, of course, unrecognized in the budget. “If we are extending the safety net, extending the implied guarantee to the debts of a lot of other financial institutions, and we know those guarantees are valuable and costly, then we ought to start budgeting for it,” Mr. Phaup said in an interview. “We can’t reduce the costs of these subsidies if we can’t recognize them.”

The truth is, politicians, their lobbyists and corporate donors do not want costs “recognized.” Phaup should know. He was the Congressional Budget Office researcher who stepped on a landmine back in 1996 when he put a cost on taxpayer guarantees of Fannie and Freddie. Wow, did he ever live to regret exposing those “facts.”

In 1995, the report said, the value of the companies’ government subsidy totaled $6.5 billion … The C.B.O. report enraged Fannie and Freddie because it also showed how much of that financial benefit — fully one-third — the companies kept for themselves, their managers and their stockholders. … counter to the companies’ claims, Fannie and Freddie did not pass along all the benefits to homeowners in the form of lower mortgage rates. …

Fast-forward to today, and the government guarantees for Fannie and Freddie have become painfully explicit. … Today’s implied guarantees extend well beyond Fannie and Freddie. But owning up to future obligations associated with government backing is something that lawmakers are likely to fight vigorously. (Consider Social Security.) But ignoring such obligations doesn’t make them go away. …  if we assign a value to the guarantees, the government would be better able to charge for it.

But the sad truth is that politicians hate transparency as passionate as Wall Street and Corporate America. Transparancy exposes not just the facts about real conts, underlying policies and freespending voting patterns, transparency also exposes their personal greed, ideology and incompetence:

Lawmakers interested in re-election have little incentive to be truthful about what implied guarantees of powerful companies will cost the taxpayer. Better to brush it under the rug or pretend the costs don’t exist. Then, when they must be paid, policy makers can argue that it’s an unforeseen emergency and an odious necessity. [And] as the number of firms with implicit government backing has risen because of the crisis, so too have the expected costs [that] will be ignored until the recipient of the guarantee collapses — the precise moment when the guarantee is likely to cost taxpayers the most. Three years into the crisis, we are no closer to reining in too-powerful-to-fail companies or eliminating the risks they pose to taxpayers. Both goals are achievable, yet our legislators refuse to do what is necessary to protect us from trillion-dollar bailouts down the road.

Morgenson’s right. Wall Street is driving America headlong into another meltdown. Fast. But when she concludes “we are footing the bills for these rescues — and will do so again if more crises occur,” I says Americans will not buy it again. Yeds, Congress and the White House will wave the red flag of economic catastrophe, as we saw when Paulson waved his three-page $787 billion TARP proposal in Congress’ face. But in today’s  anti-government populist mood, the masses will rebel, expect to see an aggressive “tea party of no-no” public revolution.

But there’s a far bigger reason: America’s got too much debt … we can’t print enough paper money … can’t borrow from foreigners …  we’re going broke … the “Future Bailouts of America” is a non-starter … Americans won’t tolerate expanding the “Bailout Nation” into the “Bankrupt Nation” … We’ve avoided, delayed and deferred “it” for too long … you better prepare for the “Second Great Depression” … it’s coming soon … and as Morgenson, Phaup and so many others warn … we’re in denial about “the facts” … we won’t act till it’s too late.

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