When Did We Start Talking About Trillions of Dollars?

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.

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Numerian

Numerian is a devoted author and poster on The Agonist, specializing in business, finance, the global economy, and politics. In real life he goes by the non-nom de plume of Garrett Glass and hides out in Oak Park, IL, where he spends time writing novels on early Christianity (and an occasional tract on God and religion). You can follow his writing career on his website, jehoshuathebook.com.

14 CommentsLeave a comment

  • I don’t recall trillions before the great rape and pillage of the American taxpayer. Let’s see; that would be the shrub Jr., no? 2008?
    A fine year for marking and remembering, yes?


    “We’re all of us children in a vast kindergarten trying to spell God’s name with the wrong alphabet blocks.” ~ Edwin Arlington Robinson

  • Brilliant.

    But, as your piece so eloquently shows, some kinda explanation as to what to do contra Deep Liquidity. I’ve been re-listening to the podcast Ian Welsh and Stirling Newberry did with Jay Ackroyd a month or so ago, and Stirling (as he did with his solo podcast) kept repeating how deep liquidity controlled things. Or, I guess as others have put it, shadow banking, or rich rentiers who sit on top of 2nd or 3rd worlds.

    As to the very real point you make about international institutions failing to come together to solve a crisis, well, at least global warming will matter for em.

  • Such power typically rests only with a central bank, or in the case of the US, with the Fed and with Fannie and Freddie when they purchase mortgage securities using government money borrowed at 0% interest.

    The private sector needs unlimited amounts of this liquidity given to the market cheaply by these governmental powers in order for Deep Liquidity to accomplish much of anything. At the moment, Deep Liquidity is stymied even though the Fed is as accommodating as they could ever wish. This is because the liquidity is blocked at the banking level. Neither big banks nor small banks care to lend, partly because they need the liquidity to help themselves regenerate the capital they just blew threw during the past credit collapse. Also, there has been a sea change in the credit worthiness of the American consumer, much for the worse. The consumer has no more assets to use as collateral or which could be blown up in value during a bubble. They have no income given the high levels of unemployment. They are simply poor credit risks, so the banks are held back from lending, and in fact are contracting credit faster than anyone can remember.

    Deep Liquidity can get access to cheap credit as always, but it can’t put it to work, so for the moment it has lost its ability to dictate the global economy.

  • Thanks for the answer!

    After thinking on your reply, I guess my new question is: what are the rentiers thinking to invest in? The (hopefully) new or the old? With all the conservadem talk about even the need to regulate greenhouse gases, how willing are the old money people to finance something for their grandchildren, rather than the Saudi Arabian position? Isn’t that the most pertinent question?

    Don’t these people see what the world’s coming to?

  • to understand you, I have to try to picture the economy as a web of real activities. I am unable to translate your essay into the nitty gritty

    seems to me that there are at least two aspects

    1. the legasy of some sort of past foolishness
    — what is the dangerous condition
    — what needs to be done about it

    2. the challenge going forward
    — what patterns/routines/incentives should we encourage
    — how?

  • are a big problem. But they aren’t the only problem.

    Fifteen Bank Closures In 2010 After Six More U.S. Banks Fail – Update
    1/29/2010 9:26 PM ET

    (RTTNews) – The Federal Deposit Insurance Corporation or FDIC announced Friday the shuttering of the 15th U.S. bank in 2010, after the 140 bank closures in 2009, following the closure of Bainbridge Island, Washington-based American Marine Bank by the Washington Department of Financial Institutions. Another five banks were also closed on Friday by the regulators, with the assets of the failed banks beings assumed by other banks in an FDIC assisted transaction.

    The only bone I would pick with your essay is, “…the American consumer has now lived through a stock market bubble and a housing bubble…”.

    We are a long way from getting through the housing bubble. It could easily be argued that our governement built the bubble and enabled the banks…, if not forced…, them to develop the schemes to keep it going. We are going to be paying for it for a long time…, what comes after trillions?

  • A lot of the damage was covered up instead of being reconciled.

    It’s like sweeping cat shit under the rug instead of scooping it up and throwing it out the door to be disinfected by the sun. Can’t see it anymore but the smell is undeniable.

    I did inhale.

  • as important and necessary as banking reform is for the future…, it isn’t going to do much for us now.

    The term “bubble” may be a misnomer to describe this housing “thing”. The Tulip Mania and Dot.com bulbbles were merely speculative bubbles based on people believing that prices would continue to rise and they would make money on their investments. The housing “thing” was a differnt animal altogether (though speculation was an element). Our government has been running the U.S. economy on housing for many years now. It kept people employed and entire industries thriving. But to build houses…, you have to sell houses. That’s were the government pushed the banks and Fannie and Freddy into engineering this crisis. Whether it was low interest rates or Alt. A or no down payment or liar loans…, it kept houses selling…, and people working and an economy going…, and going. It was risky…, so that risk was spread…, globally. But once the saturation point hit and houses were no longer selling…, the Ponzi scheme collaped and an entire global economy hit the skids.

    Then we were “sold” one of those trillion dollar Bail Outs to buy up the “toxic assests” that the housing “thing” caused. It didn’t take long to realize that a trillion wouldn’t come close to helping cure that debt problem. But they gave the money to the Big Banks anyway…, with no strings attached. Some say that we have poured over 23 of those trillions of dollars on the “thing”…, and I can’t see where we have solved any of the root problem. To use your metaphor…, they swept the cat shit under the rug.., by changing the accounting rules for Big Banks. Do we even know how many trillions of dollars it would take to get that cat shit out in the sun?

    Instead of asking again…, what comes after trillions? I will ask…, are we pouring gasoline on a fire?

    Hat tip to Ilargi.

    http://www.huffingtonpost.com/2010/01/27/home-sales-december-2009_n_438530.html

    US New Home Sales Fall 7.6% in December

    New home sales posted an unexpected drop in December, capping the industry’s worst year on record and fueling concern that the housing market turnaround could falter. Last month’s results were the weakest since March and were only 4 percent above the bottom last January. The data showed the housing recovery remains limp despite newly expanded tax incentives to spur sales. Many in the industry, however, expect sales to pick up as the April 30 deadline for the tax credit nears.

    Only 374,000 new homes were sold last year, down 23 percent from a year earlier and the weakest year on records dating back to 1963. December’s sales were nearly 9 percent below the same month last year. This year, the National Association of Home Builders is forecasting more than 500,000 sales. Even if that happens, “it hardly makes you ecstatic,” said Bernard Markstein, senior economist at the trade group, noting that the industry clocked more than 1 million sales a year from 2003 through 2006.

  • There is a long cycle at play here over the past 25 years of ascendancy for the financial services industry. Prior to Reagan the industry was an adjunct, utilitarian service to the overall economy, but gradually it became the dominant sector in the global economy, a classic tail wagging the dog situation. Financial services demanded too much of the economy’s wealth and production, caught up in a Ponzi finance frenzy that got out of control. The blow up was spectacular, and there is no way they can recover their peak position. In fact, the cycle is heading in reverse as financial services shrinks over time to its more typical position as lubricant of economic activity, not the determinant of economic activity.

    Along with the banks and insurances companies and investment companies on the way down, the hedge fund and private equity industries will follow suit. The whole equity extraction business, built on excessive amounts of leverage, is now dying out.

    What Volcker is doing is pointing the way for this diminution of the entire financial industry. Even though he is no longer a central bank executive, he is in some respects more powerful as long as he has Obama’s ear. He also is one of the few players on the global scene with any credibility. People will listen to him now because they have to, despite all the best lobbying efforts of the industry. Bank CEOs and their lobbyists can spend all the money they want, and get Congress to pass whatever legislation they want, but the Ponzi finance pyramid has broken and we now will spend 25 years watching the building blocks fall down one by one. Don’t be surprised if in a few years you read articles about the Masters of the Universe leaving the industry for what they think are greener pastures like entrepreneurship or wine growing. Most of them will be disappointed.

    Did you notice Steve Schwarzman of the Blackstone Group complaining yesterday of all the bank bashing going on? It is just starting to dawn on these people that the party is over – the days of cheap and massive amounts of leverage are not coming back.

    Did you also notice the stock market taking a beating the past week. This was said to be in direct reaction to the Volcker Plan, but the market hasn’t quite grasped the depth of the problem. Volcker, by shrinking the banks, is prepared to put the global economy on credit rations forever – perhaps 50% credit availability compared to the 2007 peak. It is impossible to estimate how damaging this really is to the stock market, but at the very least, Volcker is prepared to dismantle a huge prop to stock market growth over the past ten years. The question now becomes not whether the stock market will test the lows of March of 2009 (666 for the S&P 500), but how it will be possible for the market to avoid collapsing below those lows.

  • The financial instruments associated with the housing boom were designed to be opaque. The legal documentation was never intended to illuminate. Appraisals were deliberately over-inflated. Housing statistics were distorted and misleading.

    The Ponzi finance frenzy that took hold even blinded the industry itself. At a point, certainly by 2002, repayment for many mortgages became predicated on the home buyer refinancing or selling the property at a profit. After a while, for almost all of the sub-prime transactions that had 100% financing, that became the only way out for both lender and borrower. Housing values simply had to keep going up for the bubble to continue – the slightest hiccup and the whole edifice would fall down. This dynamic blinded everybody – economists, analysts, bank CEOs, mortgage brokers, the Fed, and homebuyers. Since housing prices had never gone down nationally, they could only therefore go up. There was a remarkable amount of willful blindness at work here, as everyone embraced a bright, glorious, profitable, and guaranteed future. Talk about opacity.

    The answer as to what to do going forward, is nothing. The Ponzi finance dynamic is now operating in reverse and has a dynamic all its own whatever the government does. Housing values will reach their nadir at some point, I would guess 20% to 30% lower on average from here. Then, there will be a decade of stagnation at the bottom, with false starts and bottom fishers getting destroyed. That’s how these bubbles play out. Time and again they have demonstrated that the collapse takes as long as the boom, and this boom started around 1996. At the bottom, the general opinion will be that owning a home is for fools or wealthy people who can afford the large maintenance costs. Making money on the resale of the home will be long forgotten. Banks will despise the mortgage business. When you see this you may want to consider investing in housing again.

    The only thing the government should be doing is ameliorating the deep social pain that will continue for some time. The government is not doing this. It is not supporting food banks and social agencies – it is letting them go out of business. It is instead trying to resurrect the bubble and keep prices for homes artificially high. This is a terrible misallocation of the nation’s scarce resources.

  • Because they couldn’t play in the mortgage backed securitization game, they were forced to lend to commercial real estate projects. These are going sour at a rapid if not escalating pace.

    The FDIC is going to need a Treasury infusion before this is over. This is manageable as long as the closures are for regional and community banks. The real problem will be how much more capital the FDIC will need when a Citigroup folds.

    Bear in mind the smaller banks pose a problem due to bad lending decisions, a problem the industry and regulators have handled in the past, even including the S&L debacle. But the big nine behemoths of the industry pose transcendentally greater problems, including the systemic risk that any one of them can drag down all the others, they are so intertwined in their trading and securitization businesses. These are the players that have caused the numeraire of banking to become trillions, not billions.

  • two things bad, in the past, as far as I gather

    we took on a lot of debt, to no particular purpose (except speculation and fee/rent for finance) and that makes us vulnerable (debt heavy, and with overvalued assets [houses])

    and I assume that the necessary corrolary is that we missed opportunities to put resources into more productive uses

    a third thing, I guess, was to increase the division of rich and poor, which is a kind of missed opportunity

    fuzzy, but I more or less get it

    the going forward stuff, I understand your general point, but there has to be better and worse

    politically, the administration cannot just say “we’re screwed”

    in a grab bag of policies, I would like to see the “too big to fail” bank/brokers split up
    that would actually be popular
    but I see no will to do it

    anyway, I would like to see it, but I don’t know if it is most important

    generally, I would like to see credit focused in a more productive way

    but hard to see how that will happen without deflating housing and creating a political firestorm that sweeps in rightwing radicals (maybe on the way anyway)

    I suspect that the number one most helpful policy would be to tax the rich

    but we are still suffering the Reagan ideological hangover there

    I guess you are right. we are pretty screwed

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