1. Transparency: Seeing the $500 Trillion Elephant in the Room
Criminal negligence by bank executives and possibly government officials in the collapsing derivatives market is the giant elephant in the room of our present economic shock.
According to the New York Times (Times Topics - Derivatives) the world derivatives market is $531 trillion, with JP Morgan Chase holding some $90 trillion, the most of any bank. (To understand the size of this market, readers should note that the US GDP is $14 trillion, and the total world gross product is about $55 trillion.) What worries me most is that the media has not been reporting on how much of the derivatives market is bad debt, with various remedies debated, including a progressive proposal, while meetings are surely occurring now behind closed doors to sort out this scandalous financial train wreck.
Throughout the 1990s, some federal regulators, including Brooksley Born, the head of the Commodity Futures Trading Commission, argued that derivatives required federal oversight to protect the financial system. But the financial industry lobbied heavily against such measures, and won backing from Alan Greenspan, Robert Rubin and Lawrence Summers as well as those in the investments sector who were reaping gigantic bonuses for selling uncollateralized derivatives contracts, which they knew were, in the words of Warren Buffet, "financial weapons of mass destruction."
Why are the banks not fulfilling their end of the understanding that if the US taxpayers provide the blank check (of $700 billion) they will open the liquidity tap so that the economy can continue to operate? The corporate media don't explain this. Is it because the banks don't know how much bad derivatives debt they owe and they don't know when it is due? Are they holding our blank check until they have some idea of how much of our money they will need to clear away their malfeasance?
This is why I was disappointed to read that Jeff Madrick (Beyond Rubinomics, The Nation 1/19/09), writing that the United States is in a "state of emergency" brought on by unscrupulous and/or incompetent bankers nonetheless believes, "The three phalanxes of attack are clear: provide the capital and asset support for the banks and shadow banks; stanch the mortgage defaults; stimulate the economy aggressively." Yes to the second two actions, but no, I see little reason to pay off the bankers' gambling debts, when we have no idea how much they have lost, how much they have pocketed (as commissions vigorish and outright profits from sales of derivatives contracts before the crash) and how much of our money they will actually allow to be circulated to keep us out of a depression.
2. Justice: Who Should Pay and Who Should Say How Much
The proper approach when the officers of public companies have bankrupted them and may have participated in the crime of the century is to remove them from their offices; put their insolvent banks into receivership; hire thousands of additional federal agents tasked to investigate their fiduciary (or other) crimes; (perhaps) enforce a bank holiday on the entire category of derivatives contracts with an eye to rendering them null and void or payable over many years; and empower our elected officials to (at last) transform the private aspects of the Federal Reserve into a purely governmental agency to ensure liquidity and banking decisions made in coordination with the economic approach of our elected officials in the executive and legislative branches of the federal government. The last thing the Obama administration's recovery program needs now is to foster the conflict of interest inherent in a privately owned Federal Reserve, fully capable of self-dealing decisions made in the interests of the banking sector at the expense of the rest of us, (as they clearly have done with the first $350 billion blank check).
Bottom line: progressives and Americans generally can do better than to fall immediately into line with the bankers inside and outside the Obama administration. Yes, there is an emergency, and this is the time to propose new ideas that will further the progressive goals of fairness, transparency and speaking truth to power. This is not the moment to ignore the giant elephant in the room. It is the time to take that elephant out to pasture, along with George W. Bush, and provide the capital and asset support we the people need now. It is clearly the time to take the necessary steps to ensure that bankers are doing their duty to serve, not exploit, this long emergency.
I hope to see The Nation in future issues, and the Obama administration going forward, fearlessly exposing what should now be clear: the emperor has no clothes and we are all paying a still untold price for pretending that there is some great genius behind the secret curtain of these wizards of Wall Street. Sometimes even the president of the United States has to stand naked, and this goes double now regarding those responsible for our present troubles.
On the other hand, this is one of those rare moments in history (as was the Great Depression), when progressive changes can be brought into being: if we are able to see beyond conventional wisdom, challenge entrenched power's ability to set the agenda and propose a better way forward in the interests of the vast majority. Why on earth do the people of the United States have to pay interest to the banks in order to create money for the purposes of advancing our economic goals? Let the banks borrow from us, and pay us interest. After all, now that the banks are insolvent it is the United States that backs the dollar, not the other way round. And it never should have been otherwise.
Something will surely be done to monitor and control the derivatives market going forward, and cancelation of a category of contracts would raise constitutional issues. However, the most important priority now is what actions will result in the least human misery for the vast majority who will struggle to stay afloat in the underlying economy, not the interests of the few insiders who rigged a little known market to reap an untold windfall for those at the top who could afford to "play the market" but whose now outed ponzi scheme threatens to swamp the real economy for years to come. Why back those bankers who offered insurance they knew they couldn't pay, but now owe, when we could better spend it on jobs, food, infrastructure, education, health care and a green transformation as recommended by Lisa Margonelli in the same issue of The Nation.
The problem, to paraphrase Jerry Seinfeld, is that the banks were very good at receiving the premium payments and commissions on the insurance they sold, but they are not very good at paying off on what they promised to insure when they took the premiums. And that (they said) was the whole point of derivatives.
But this is not the time to laugh off their crimes, as meetings are occurring behind closed doors, and Bank of America and Wells Fargo are completing their latest acquisitions deals while holding the taxpayers' blank checks. I hope to read future issues of The Nation offering the banking consortium not first and foremost "capital and asset support" but an offer they can't refuse, from the people who are signing those blank checks.
3. Clarity: Let's Keep Our Eyes on the Ball and Follow the Money
My positive feelings about our president have rekindled the hopes many of us lost with the assassinations of the sixties, and engendered in the younger generation a first taste of understanding why the Kennedy brothers and King were essential elements in the change that came to America in our youth. Barack Obama is very bright. He has a high emotional intelligence quotient and his elevation at this moment of history offers us the possibility of "seeing things that never were and asking why not?" Now is one of those rare moments when we as a people can see things with fresh eyes, and do things that are out of the box. Yes we can! It's been a long time comin', but change has come to America!
However, though the president's political capital is at a high level it could be wasted if he does not spend it wisely now. If he allows illegitimate power to throw too much more of our good money after the bad, in what appears to be a series of unexpected discoveries of more and more bank debt that must, as a first priority, be paid off, he could find himself politically insolvent, and America will inherit a whirlwind of chaos, and a world of increasing pain. And then all of the other needed changes, put off for a decade or more, will also be at risk, as high hopes are dashed and youthful hopes are seen as childish dreams, and we return to business as usual. For truly, it is the economy (stupid) upon which presidents are judged.
I will suggest now several steps I hope the president will take, but my goal is not so much for my ideas to be adopted as it is my desire to see a lively debate lead to a thoroughly and transparently vetted plan. But my first draft would look something like this:
1. An end to keeping vital information from the American people, because they won't understand, or because only insiders can be trusted.
It is time for a presidential fireside chat with the American people, explicitly explaining what the derivates market is, its effects on our present circumstances, what our various options are, the likely ramifications of each, and what his judgment is regarding the best course.
The president should declare a bank holiday on categories of derivative contracts, and a timetable for establishing a clearinghouse with new rules for each type of financial instrument, along with a date certain for opening the markets on trading (most types) again. During this holiday the exposure of each bank would be established and the results published, after plans had been set in motion to contain, or wind down the debt. For instance, it has been proposed that in some cases the seller of a derivative who cannot pay off on what is owed might be allowed to pay some portion of the debt along with repaying, over time, the premiums they received.
2. The convening of an international convention of finance ministers as soon as possible, and then heads of state, to reach agreements regarding the world derivatives market. The goal of this convention is to forestall an uncontrolled unwinding of a series of untimed shocks to the world economy as new discoveries of previously hidden financial landmines are triggered.
Keep in mind that derivatives are both extremely dangerous due to the likely enormous sizes of the contracted debt obligations that will be exposed by each bank, and not really part of the so-called real economy, which underlie the derivatives contracts.
In other words, the world still has the same real assets (food, water, metals, oil, technical knowledge, productive capacity, etc.) that we had before this crisis. We need to be willing to let go of some of our ideas about "the free market," at least temporarily, in order to reach a point where we can do a hard reset on the world economic system, and start over after acknowledging that some of us broke the "free market" rules, and it ruined the game. We need to agree that it is in the world's interest to agree to a "do over." But first, we need to establish the new rules of the game regarding the existing derivatives market debt and the possible curtailment or continuance of each of the various categories.
Later, there will be a need to establish worldwide standards regarding currency manipulation by nations (such as China) that also contributed to the unsustainable bubble and in time, labor market and environmental standards suitable to the "flattening" world.
3. The hiring, or deputizing of financial law enforcement officers, under the FBI, IRS, SEC and/or Treasury Department, to investigate the very serious crimes, under existing federal and state law, that led to our present crisis. The failures of regulation and enforcement under the Bush administration should not be tacitly tolerated by pretending that no one knew laws and fiduciary responsibilities were being violated. Bank robbery by white color criminals is still bank robbery, and tens of billions of dollars are missing from the life savings of responsible, hard working people, retirement funds and from our children's futures. Arrogant, reckless law breaking perpetrated in the interests of greed cannot be tolerated in a society that claims the fundamental value of the rule of law and equal protection, under our constitution.
4. The functions of the Federal Reserve as well as the ownership of the insolvent banks should be in the hands of the United States. Banks, and bankers who had been trusted with the power to create both how many dollars (through the Federal Reserve) and how much debt (through the private lending decisions made by individual banks) would best serve our common good have manifestly failed in their responsibilities. For the time being, or permanently, the theory that the bankers' power provides a useful check on our elected leaders' economic strategy must be put aside, so as to avoid both the appearance of a conflict of interest and actual conflicts of interest between the banks and the people of the United States. After all, it is our taxpayers, our citizens, who possess the credit (good faith) in the world that now makes possible the very survival of the banks, by lending them the money they need to continue functioning, not the other way around.
Do the American people even know that banks, until now, lend money and are paid billions in interest payments when the United States could, and now clearly should, create dollars on our own, and lend them to the banks, earning interest for the taxpayers? Let banks borrow from us at the (wholesale) "prime rate," and act in a free market to lend at whatever rate the market allows above the prime, when this crisis ends. But for now, let's stop playing along with the odd wizards of Wall Street, have the courage to go behind the curtain and be transparently honest about where we are now. The emperor has no clothes and he is broke. And Yes We Can go it alone.
Actually, the banks have already been nationalized, except that presently those privately held corporations are receiving an unearned windfall and the taxpayers are receiving the bill. We should be mad as hell, and we shouldn't be taking it anymore!
In response to those who will be against any form or element of nationalization of the banking system, repeating the conventional wisdom about the inefficiency or incompetence of governments running anything, we can truthfully respond that the bankers couldn't have done worse. And, experience has shown that Medicare and nationalized healthcare systems worldwide are twice as efficient as private HMOs, earning higher customer satisfaction grades along with better medical outcomes while spending far, far less on administrative costs.
It is time to give up believing childish stories, whether they are about prudent bankers or great oracles behind Oz-like curtains a la Alan Greenspan, whose counsel must be followed lest we anger the gods of incomprehensible banking instruments. Let us now pull back the curtain, question "authority" and remember that those sanctified members of the insider elect supported unregulated derivatives and failed to warn us of the oncoming crash.
Our ideas and interests need a seat at the president's round table to balance the possible preconceived dogmas of his banker-advisors (Summers, Geithner, Volcker). Let us hope that their backgrounds will turn out to be great assets in guiding the president to better serve the people. History showed that the first SEC head, Joe Kennedy, who knew the wiles of the rascals of Wall Street because he was one, did turn his skills to shut the door on those who would have tried to follow his example.
Let us hope the president and his advisors will be both patriotic and wily, but let us also support our president by formulating a set of ideas that are not first and foremost in the interests of the fortunate few at the expense of the rest of us, and that of the economy as a whole. When the first $350 billion was demanded for the banks, a rising by the taxpayers moved congress to reject the first draft and some changes were made to the plan.
Now, with our ally President Obama deliberating the next steps in our recovery plan, but surrounded by many of the bankers who blocked regulation of the derivatives market and failed to sound the alarm of the oncoming end to the banking sector's looting of America (for whatever reason, whether errors of omission or commission) let us be the Martin to his Lyndon, by providing a triangulating cover of ideas for our leader to throw into the balance, as we struggle together to "overcome" the crisis that the over-concentration of money power has wrought in America.
And let us keep our eyes on the prize, which is not garnered by laying sacrifices at the feet of false gods, but seeing things that never were and asking, why not?
David Calhoun Mendelsohn is an award winning radio and television documentarian, environmental commissioner, former Treasurer of the National Jobs for All Coalition, and a practicing psychotherapist in New York.