Thanks, Mike

I have been traveling with my real job, and I have to thank my research partner, Mike Davis for his excellent work here.  Mike and I have been friends from the early days of my radio show, and we think a lot alike.  I appreciate his excellent articles here, and glad he can take up some of the writing slack.  My friend Carl asked if I was ok, and I am, I hope to be back after the Thanksgiving holiday to write regularly again.  I just hope we still have a country to write about…I hear they’re bailing out Citigroup now…I guess that means they can hire more people to call and dun the common folks who don’t get bailed out? 

Back Soon!

Steve

Paulson’s Cascade of Lies About the Bailout

Well to those of you that have been keeping up with this bailout hypocracy shouldn’t be surprised to find out that now we know who threatened “martial law” to Congress if they didn’t pass the bailout bill……It was U.S. Treasury secretary Henry Paulson and we also know why he threatened “martial law”…because it would give him dictatorial powers over the money in the treasury without any oversight or ability of anyone to question him……This video with judge Andrew Napalitano explains it:

…….Since the bailout bill was passed Paulson has spent more money in one month than the Bush administration has in 8 years. Here’s two excellent videos to hopefully open some people’s eyes as to what the bailout was really about:

Why the Bail Out is UNCONSTITUTIONAL: Judge Napolitano

Paulson’s Cascade of Lies

By MICHAEL HUDSON

On Thursday, November 20, Treasury Secretary Henry Paulson presented, even by his own lamentably low standards, an amazingly deceptive speech at the Ronald Reagan Presidential Library in Simi Valley, California. In its false  framing of Washington’s financial giveaway to Wall Street it rivaled some of the outstanding fables created by the Master Imagineer himself, for whom the library is named.

What prompted the speech seems have been Congressional criticism of Mr. Paulson’s bait-and-switch transfer of public funds to Wall Street, and the Federal Reserve’s transfer of an amount twice as high as Congress’s $700 billion. His most urgent aim was to ward off accusations that the Treasury and Federal Reserve have acted illegally. “Federal law, and in particular the Anti-Deficiency Act, prohibits Treasury from spending money, lending money, and guaranteeing or buying assets without Congressional approval. The Federal Reserve can and does lend on a secured basis, but only if it expects not to realize losses.” (Italics added.)

But Congress did not approve the Treasury’s $250 billion of “preferred” stock investments in Wall Street banks. The  happy recipients, their stockholders and officers evidently worried precisely that this “investment” would end up taking losses. That is why the Treasury stands in back of bona fide creditors. That is why “preferred” stock was preferred by existing stockholders to loans and guarantees (which have priority in case of bankruptcy), not to mention the conditions that Congress thought it had laid down calling for these institutions to renegotiate mortgages to bring them in line with the debtor’s ability to pay.

The Fed has refused to let Congress know any details – any details at all – about its cash-for-trash swaps with these institutions. This is what concerns Congress, and what has prompted  reporters at Bloomberg to bring a lawsuit in order to discover and publicize the details. It is not hard to see why this curiosity exists. The only reasonable explanation as to why investment banks, American International Group (A.I.G.) and commercial banks apparently headed by Citibank (whose shares plunged yet  another 26 per cent on Thursday) have turned over a trillion dollars worth of illiquid mortgage securities, junk bonds and who knows what other junk to the Fed is to avoid taking a loss on these bad loans and investments. As Mr. Paulson explained matters, “the Federal Reserve has statutory authority to lend against a pool of mortgage loans on a fully secured basis. The Fed was able to assist the JPMorgan purchase because they believed that there was a reasonable prospect of avoiding losses.”

Mr. Paulson then set about dissembling the character of the U.S. and global financial system. “Our financial system,” he claimed, “is built on the hard work of our citizens; it is built on the savings of our citizens.”

This is where he seeks to spread the disinformation about the explosion of debt that now burdens the U.S. economy, which  is the result of autonomous credit-creation by the commercial banking system and has nothing to do with the savings habits of “our citizens”. The basic financial principle of modern banking is that “loans create deposits.” The bank loan comes first – then the deposit or “saving.”

Here’s how it works. A bank’s marketing department seeks to drum up customers for debt. A borrower will go into a bank and sign a promissory note, and the bank then creates a checking account in the amount that is stipulated. The note calls for a specific rate of interest to be paid – a rate much higher than that which the bank can borrow from the Federal Reserve or in the money market in general. One benchmark global rate to bankers is the London Interbank Borrowing Overnight Rate (LIBOR), and the other is the Federal Reserve’s discount rate to banks. (Japanese banks also provided loans to large financial institutions at under 1% per year, spurring the international “carry trade,” borrowing cheap in yen and then converting the funds into other currencies and lending at a higher rate.)

None of this involves saving. It involves credit creation in which banks have a legal monopoly, with funding monetized by the U.S, Japanese and other major foreign central banks. This free credit creation is at the root of the problem, not the natural growth of savings.

“If the financial system were allowed to collapse,” Mr. Paulson warned, “it is the American people who would pay the price. This has never been just about the banks; it has always been about continued prosperity and opportunity for all Americans.” Not really. Wall Street is hardly  so altruistic. It has increasingly made its money off Americans by engaging in increasingly predatory, extractive lending to the economy. That is what has caused the U.S. debt burden to soar so far ahead of the ability of debtors to pay. It also is what is now diverting spending away from consumption and (for companies) new capital investment to pay creditors.

Not content with misrepresenting how the U.S. economy works, Mr. Paulson then drew a picture of the global economy that also is a travesty. “The world was awash in money looking for higher return,” he explained, “and much of this money was invested in U.S. assets.”

Not exactly. The world economy has been awash in the U.S. payments deficit, which has swollen the reserves of central banks in the creditor nations from Asia to Western Europe. These central banks have recycled $4 trillion of their dollar inflows to the United States under dollar hegemony. Rather than seeking a “higher return,” central banks have found themselves obliged to invest in low-yielding U.S. Treasury securities, or somewhat higher Fannie Mae and Freddie Mac securities. These returns are much lower than U.S. investors have sought in buying up foreign companies and their stocks, whose price appreciation far exceeded the rate that foreign economies were able to recoup on their dollar recycling to the United States.

Mr. Paulson’s speech looks like a major salvo in the Bush Administration’s attempt to make both the Wall Street bailout and the U.S. predatory finance irreversible, while the government replaces public debt (Treasury bonds) for Wall Street’s bad gambles. His errors are calculated to misinform, as are most lobbying efforts by the banking and financial sector. One can only hope that Congress will question his testimony that has repeatedly followed this line with more acumen than prompted its earlier acceptance of the Treasury’s bailout act. It’s time to clean up this act.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

Read the full article @ counterpunch.org