It was Illinois senator Everett McKinley Dirksen who once said, back in the 1960s: ”œA billion here, a billion there, and pretty soon you are talking about real money.” Dirksen was old enough to remember when an appropriation bill in front of Congress for $50,000,000 was a big thing ”“ and that’s exactly how the request would be printed in the bill and how the media would report on it: ”œ$50,000,000”, not ”œ$50 million”.
The era of billions quickly put a stop to that practice. Newspapers didn’t want to waste space writing out all the zeroes, and anyway the eye glazed over at a certain point and couldn’t easily digest the amounts involved. And that’s been a problem ever since during the Age of Billions ”“ we could not digest the enormity of the amounts involved.
The media still try. They stack dollar bills all the way to the moon and back, or wrap them figuratively around the equator multiple times, just to shock us into some comprehension of what a billion means. It doesn’t work. We say to ourselves, ”œboy, that’s a lot of money”, and shrug our shoulders.
So what are we going to do now that the Age of Trillions has arrived? There is no doubt it is here, courtesy of the US financial industry. Its heralds are Hank Paulson, Tim Geithner, and Ben Bernanke. Forty years after another trio of Americans ”“ Neil Armstrong, Buzz Aldrin, and Michael Collins ”“ achieved immortality by serving on the first mission to land on the moon, the trio of Paulson, Geithner and Bernanke have achieved their own form of infamy by being the first Americans to traffic in a trillion dollars.
To earn this distinction, you have to be able to move a trillion dollars around, in fairly short order, something no one has been able to do before. The three of them got very close during the onset of the financial crisis, when they went in front of the Congress on their knees and begged for authority to spend $700 billion to begin bailing out the banks, lest the world come to an end. They admitted afterwards they made this number up. They might have needed less, and they might have needed more, even as much as a trillion dollars, though that was no doubt deemed too unfathomably large an amount for Congress to grant. $700 billion sounded just right, like Goldilocks’ bowl of porridge.
Once that door was open, Ben Bernanke went all the way straight over the trillion dollar threshold, by ordering the Federal Reserve to begin buying distressed securities from the banks. He took the Fed balance sheet from $800 billion of pristine Treasury securities to around $2 trillion of dubious mortgage-backed securities. It was the Fed’s own version of cash-for-clunkers, and he decided he could do this without any approval from Congress.
Not to be outdone, Hank Paulson and his successor at the Treasury Department, Tim Geithner, found it necessary to increase the annual government deficit from $400 billion to $1.9 trillion, mostly for the bank bailouts, and last year the Treasury had to borrow this amount in order to meet its obligations (no one thinks anymore of asking the taxpayers to pay for these deficits). So these two worthy gentlemen have joined Bernanke in becoming the first humans to move one trillion dollars in a short period of time.
Now that the United States has graduated to an altogether higher fiscal plane of existence, we should ask ourselves what this means. It’s an important question because hardly any Americans have any way to comprehend the magnitude of these amounts, and the devastation that has washed over this country as a consequence. While we can now stack our trillion dollar bills from here to Mars or beyond, that type of analogy doesn’t really help people.
It’s better to put a trillion dollars into the context of what it would buy. We’ve already mentioned that prior to the financial crisis that began in 2007, the federal budget deficit was about $400 billion annually. This was the George W. Bush deficit, resulting from huge tax cuts for the rich, an expensive drug deal with the pharmaceutical companies, and a big expansion in the military budget. There were some deficit scolds back then ”“ none of them in the Republican party ”“ warning about this horrendous deficit. Little did they know that when the financial crisis hit, and it was time to bail out the Wall Street bankers who funded the Republican party, Bush in his final year would add three trillion dollars to his deficits.
This increased spending would have bought us five more Iraq Wars, the current one having cost us about $600 billion. Three trillion dollars would have more than solved the looming baby boomer retirement problem when that generation starts collecting Social Security. It would easily have ameliorated the current health care crisis, with money left over to fix the nation’s schools, roads, bridges, rail system, etc.
Since the Gross National Product of the US is around $15 trillion annually, the $3 trillion spent by Bush on the financial industry represents 20% of all the wealth built up in this country that year. Another way to look at this is to note that $1 trillion is the amount of money the income tax generates in the US every year. Imagine if the US tried to raise in taxes here and now even just an extra $1 trillion; a doubling of the tax burden on the average American would create massive poverty and a depression. Bush raised three times that amount entirely by borrowing it, pushing the national Home Equity Line of Credit into a danger zone.
Since President Obama took office, he has added another trillion dollars to the bailout program. Like Bush, he borrowed every penny of it ”“ he had no choice because Americans are in no position to absorb increased taxes. Despite all this generosity, the banks have refused to increase their lending to consumers or businesses, and the investment banks which converted to commercial bank status to save their skins have refused to loan any money to anybody. Yet bonuses have soared in these institutions, in some cases to record high levels. Fed up with this, or perhaps reading the populist tea leaves among the population at large, President Obama has taken to lashing out at the cupidity of the banks and has proposed a major overhaul of the industry promulgated by one of his advisers, Paul Volcker.
Obama’s economic adviser, Larry Summers, was asked this week what this overhaul meant specifically for big banks like JP Morgan Chase and Goldman Sachs. Summers declined to talk about individual banks and confined himself to generalities. He sounded like one of those company spokesmen who refuse to talk about some poor customer they screwed over because ”œconfidentiality” prevents it. It’s a convenient fig leaf for corporations to dredge up a mythical confidentiality ethic whenever they don’t want to talk about something terrible they have done to someone. Larry Summers has no reason to use this dodge. Everybody knows all about the financial institutions which are the beneficiaries of the bank bailout.
Despite the fact that there are over 8,000 financial institutions in the US, only nine of them merit any discussion when it comes to the credit crisis and the bailout mess. You can probably name them as easily as I can: JP Morgan Chase, Goldman Sachs, Citigroup, Bank of America, Wells Fargo, Morgan Stanley, and the three wards of the state ”“ AIG, Fannie Mae, and Freddie Mac. Some regional banks dabble in the securitization and derivatives products that are critical factors in the financial collapse, but this list of nine players is pretty much it.
It therefore bears repeating over and over that this financial crisis in the US was not brought to us by the banking or financial industry in general, but by nine financial institutions only. We can qualify this a bit by describing them as the nine surviving financial institutions: Merrill Lynch, Bear Stearns, Lehman Bros., Countrywide, Washington Mutual and quite a few smaller mortgage brokers were also deeply involved but have paid the ultimate price for their folly.
A second qualification has to do with the foreign banks that also created and peddled over-rated and over-priced and falsely-represented mortgage securities. There are about 20 of these banks located overseas, like Barclays Bank, Deutsche Bank, Hong Kong and Shanghai Bank, and Union Bank of Switzerland. Top executives of all 30 of the biggest surviving global banks most responsible for the credit crisis were located this week in Davos, Switzerland at the annual smooch fest of bazillionaire bank CEOs and the government leaders who have enabled them over the years. In fact, that was where Larry Summers was speaking about reform measures. If he really were interested in reform, he would have summoned all of these bank executives into one room and knocked heads together. That, unfortunately, wasn’t possible, because these very same executives were meeting privately to discuss how they were going to lobby governments so as to avoid any punitive measures or meaningful reform.
And right there is where you see the problem. Despite the fact that in the United States the banking problem isn’t really a problem with the banking industry, but with nine identifiable financial companies, three of which are already owned by the government, these companies have enormous political and economic clout. Nor is it that individually these companies are too big to fail that is so important, as the fact that collectively this sector of finance is too big in every respect. Fannie and Freddie are now the sole buyers of mortgage securities and are entirely responsible for the ”œrecovery”, such as it is, that has occurred in the US housing market last year. Citigroup, Chase, Bank of America and Wells Fargo collectively own over half of all consumer deposits in the US. They dominate the credit card and auto loan and home equity loan markets. Along with Goldman Sachs and Morgan Stanley, their combined revenues and earnings dwarf any other sector among the S&P 500 stocks.
In short, the financial sector as represented simply by the six largest surviving institutions not owned by the government, absorbs a dominant and increasingly unhealthy percentage of all the wealth generated in this country. What needs to be broken up is not just the banks individually which are all too big to fail, it is the sector of the economy they represent ”“ the cartel that they operate ”“ the monied interests they represent ”“ and the sheer amount of wealth that they command and wield to their advantage.
Which brings us back to trillions rather than billions of dollars, because collectively these nine companies control trillions of dollars of assets. These assets, and the power that has accreted to these banks, were in a sense given to them by the government. Neither the Clinton nor the Bush administrations objected when time and again these banks gobbled up other banks in a bid to become the biggest and baddest bank on the block. In fact, most of the men running these companies aren’t bankers at all capable or interested in making loans. They are serial acquirers of other companies ”“ traders in controlling interests of their competitors. Nor did the government object when Goldman Sachs and other investment banks sought approval to expand their leverage from 12:1 to 30:1, all the better to generate tens of millions of dollars in bonuses for their top executives, knowing full well that if their bets failed with all that leverage at stake, the government would come in to save them. And after all this was done, the government turned a blind eye to what went on in these institutions by abdicating its responsibility to regulate and monitor these companies.
Thus grew Leviathan ”“ a state within a state, a financial cartel far more powerful and dangerous than OPEC, and capable of manipulating and influencing the government to acquiesce in its wishes and rescue it from its mistakes.
Leviathan still exists, forcing the government to feed it trillions of dollars of taxpayer money to plug holes in its capital structure. It remains unfettered by government, the media, and the people who are forced to support it and suffer from its excesses. It is unchallenged except for the recent natterings of the President, to whom it pays no attention, and the threats emanating from Paul Volcker, who is like Gulliver among the giants.
It is a small comfort to realize that this cartel is doomed to collapse at some point. It lives off the wealth created by others, by extracting fees and commissions at every step of a financial transaction. It has exhausted the capacity of the general public to feed it larger and larger amounts of wealth, because the American consumer has now lived through a stock market bubble and a housing bubble, and has nothing left to inflate. That has forced the cartel to turn to the federal government and begin extracting trillions of dollars of equity in the form of bailouts, equity for example on the Federal Reserve balance sheet that took a century to build and was destroyed within nine months, replaced by defaulted securities conveniently dumped on the Fed by these nine institutions.
To accomplish this, these banks have turned enablers like Bernanke, Paulson and Geithner into trillion dollar bag men, shuffling the nation’s wealth into the biggest racket this country has ever known. Perhaps at some point Bernanke or Geithner, who are still in office, will develop a conscience and refuse to serve as money men for their masters. Perhaps they will be replaced, and perhaps Paul Volcker’s trust-busting reforms will be approved by a Congress that can no longer be bought by banking lobbyists. Perhaps, perhaps, perhaps…but until that time, we will have to wait until the last penny of wealth is drained from the Treasury and bankruptcy looms for this nation before the banking cartel can be defeated.