Next fight and crisis will be about raising debt ceiling

With the fiscal cliff avoided, Obama now faces other challenges soon, including the need to raise the $16.4 trillion borrowing limit. He also has to deal with the more than $100 billion in automatic spending cuts that were delayed for just two months.

The spending cuts will probably be replaced by more targeted cuts that could be over a longer period as well. Speaking form Hawaii where he is on a family vacation, Obama said he is willing to consider more spending cuts and tax increases to help reduce the deficit.

On the debt ceiling, Obama claimed he would not compromise on the issue. Last time, the Congress had a standoff over the issue and the US credit rating was downgraded. Republicans want to use the issue as leverage to force the Democrats to make more spending cuts. Obama warned about any attempt to block an increase:

"If Congress refuses to give the United States the ability to pay its bills on time, the consequences for the entire global economy could be catastrophic. Our families and our businesses cannot afford that dangerous game again."

Immediately after the House finally passed the fiscal cliff deal, Obama said

: "I will not have another debate with this Congress over whether or not they should pay the bills that they've already racked up through the laws that they passed."

Actually the US has already reached the spending limit of $16.394 trillion. Since it cannot borrow money in the markets, "extraordinary measures" are being used to pay bills on time. This can go on only for a couple of months. The issue must be solved soon. Both Obama and Senate minority leader McConnell both agree that the debate on the issue should be resolved early and not at the last minute. To cover just a year of borrowing, the debt limit will need to be increased by almost a trillion dollars.

The Government Accountability Office estimates that the increased costs of borrowing during the standoff was about $19 billion in interest during the next decade. If the Congress did not approve an increase some analysts think that Obama could simply invoke the 14th Amendment to the US Constitution that says:

"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

According to this view, Obama could then simply order the Treasury Secretary to keep borrowing to pay bills. The White House has claimed that it would not use this strategy. It is regarded as risky politically. Joseph Minarik, a former chief economist at the White House Budget Office said

:"It is hard to imagine any Treasury secretary, or any president, allowing himself -- or herself -- to be the first to default on the public debt. That having been said, no one knows what other options lurk in the file cabinets of the attorneys in the Treasury. They aren't talking."..

While Obama may not want to have a long debate that would involve trading off spending cuts for a hike in the spending limit, he may not have any choice. Mitch McConnell put the matter bluntly:"The president may not want to have a fight about government spending over the next few months, but it's the fight he is going to have, because it's a debate the country needs." In a Yahoo op-ed McConnell said that Obama must deliver a serious plan to cut government spending. Unless the Republicans see some significant movement on that front there will probably be no agreement about raising the debt ceiling let alone the delayed multi-billion dollar spending cuts.

Show us the Money..

This is another view of how the bailout might be framed but it also shows how much Paulson made while he was within the system and how much he made when he left to join government. The fact the CEOs of many of these failing giants get giant benefits sickens people. Greider points out how Buffet makes a great deal to help out Goldman Sachs and claims that the government could do the same thing rather than leaving the taxpayer for the most part 0ut in the cold as does the present rescue plan.


Show Us the MoneyBy William Greider
25/09/08 "The Nation' -- - Taxpayers should wake up the politicians and ask them to tell Wall Street: "We want the same deal Warren Buffett got." The Omaha billionaire announced he is playing White Knight to Goldman Sachs by investing $5 billion in the endangered investment house. What a big-hearted guy. Buffett is an old-fashioned capitalist who invests in companies for the long term and I am a big admirer. But Warren Buffett did not get to be a billionaire by committing public-spirited acts of charity. He plays to win. So his deal with Goldman Sachs is carefully wired to produce gorgeous returns for Buffett's Berkshire Hathaway. Upfront, he gets a 10 percent ownership stake in preferential shares that will pay a 10 percent dividend--even if Goldman's stock price keeps falling. But Buffett also gets the right to buy $5 billion in common shares at below the market price. So if Goldman flourishes in these hard times, Buffett will win big as its stock price soars.
To sweeten his chances, the Omaha sage quickly announced that he endorses the $700 billion bailout plan proposed by Treasury Secretary Paulson. Let's follow the bouncing ball. Buffett puts some of his capital at risk on terms that are smartly protected from loss. Then Buffett urges the taxpayers to put their money on the line too. Only the taxpayers don't have any deal. They are the naked investors in this drama, asked to put up many billions to rescue Wall Street firms with nothing more than a vague promise it will save the Republic. I am reminded of the oldest rule in the financial business: "Get it in writing."
Warren Buffett's intervention provides a clarifying moment because it demonstrates what's wrong with the bipartisan bailout Congress is preparing to authorize. There's nothing illegitimate in what Buffett accomplished. The overlapping terms and contingencies he secured for his capital are standard practice in Wall Street deal-making. Investment bankers work out the fine print and put it in enforceable contracts or the deal doesn't happen.
Hank Paulson was a star in that world. When he left as chief executive to become Treasury Secretary in 2006, Goldman awarded him $110 million in cash to cover remaining stock options and restricted stock, in addition to $51 million to repurchase family shares. These payments were on top of the approximately $500 million in Goldman shares Paulson sold when he joined the government.
Doing hard-nosed deals in the Buffett style is essentially what the federal government should be doing now--bank by bank--as it intervenes to rescue the financial system from ruin. In our situation, the public treasury is the White Knight because private capital is afraid to play. The federal government has all the leverage it needs to demand very stern terms. That includes demanding an equivalent equity stake in banks or brokerages it assists, but also the power to impose explicit commandments and prohibitions on how these rescued firms must behave. The threat that banks will refuse to play is a meaningless whine from the banking industry. If bankers find a better deal from private lenders, they should take it. Otherwise, they are down the tubes.
The underlying power relationship in this crisis has been artfully obscured by the bailout sponsors because they decline to explain clearly what the bailout really is intended to accomplish. First, they said it was to restore calm in markets. Then they said it was the rotten assets centered in mortgage securities. But the problem is more accurately described as the great deflation of Wall Street's illusions--inflated prices, profits, deals, commissions and bonuses. You name it, they ran it up to stratospheric levels. Now the dream is dying and values are falling, but have not yet hit bottom.
To put it more concretely, the banks and investment houses have lost massive amounts of capital--a hole that is real, not psychological. Maybe $1 trillion, possibly twice that. We can't say exactly, because the banks have still not come clean and because assets in bank portfolios continue to lose value as housing prices continue to deflate.
The great capital losses mean Wall Street is sure to get smaller--a lot smaller--with fewer firms, less leveraged deals based on inadequate capital and a general retreat from its domineering role in economic life. Personally, I believe a smaller Wall Street will be good for the country, part of restoring balance to the damaged economy.
In any case, it is folly for Washington to imagine that it can--or should--simply replenish Wall Street's great loss. That essentially is what Paulson's blanket bailout attempts to do--restore conditions to "normal" by buying up the bad assets from banks at inflated prices. In other words, supply the missing capital that private lenders won't provide. Good luck with that.
"Normal" is not in the cards. Trying to accomplish this, given present realities is not in the country's interest. It also resembles King Canute trying to command the tides.
The real goal for government intervention should be to manage Wall Street's inescapble downward adjustments in ways as peaceable as possible. Stabilize the shrinking financial system so it will keep the the real economy going, that is, insure that credit and capital flows continue, while Wall Street is gradually cut down to normal size. There is real pain in that for everyone, but the objective is concrete and manageable.
Washington would exercise an activist supervisory role and offer deals in exchange for cooperative, compliant behavior. Bank regulatory agencies, including the Federal Reserve, already do this with troubled banks; now they have to step up with a more forceful hand. Banking watchdogs estimate at least 100 (maybe 200) banks are already doomed to fail. But another 1,000 banks are still solvent but on the edge. These can be managed to safe ground with tougher regulatory controls and some aid. Subsidiary financial markets need similar treatment and liquidity injections if they seize up.
At center stage are the big, bad players--the mega-banks and some others--who took the extreme risks and are now conveniently described as"too big to fail." If that's so, then one goal of government should be to make them get smaller, either through market forces or by lawful edict. The public likewise needs a new federal agency to manage the deal-making--something like the Reconstruction Finance Corporation during the New Deal--and determine which major banks can be cleaned up and stabilized, which ones cannot. The objective is not to save everyone--that is not what the nation needs--but to wind up with a broadly balanced financial system, chastened by new rules and ready to serve the rest of us, rather than eat us alive.
Only the federal government can do this. But I am suggesting government should mimic the hard-headed assumptions and practices that are commonplace in Wall Street. Don't take wishful promises in exchange for your money. Insist on hedges to protect the broad public interest. And get it in writing.
Maybe Warren Buffett and some other trustworthy capitalists would come to Washington during this emergency and show government officials how to make real deals. These are savvy people. Many are genuinely interested in helping the country get out of this mess. We could offer them a dollar a year.
Update: After I filed the above, the New York Times reported that Bill Gross, managing partner of Pimco, the giant bond investment house, is offering to serve as expert advisor to help Treasury sort through the rotten bank assets. "If the Treasury wanted to use our help, it would come, you know, free and clear," Gross said. Like Warren Buffett, Gross is a brilliant capitalist who plays to win. I happen to know him and I trust him. He has an enlightened understanding of global capitalism, not just financial markets and monetary economics but the deeper tides of history. In fact, Gross should be the next president's pick for chairman of the Federal Reserve. I don't know his politics, though I assume he is Republican.

US monetary crisis

This article details the manner in which the dollar props up US hegemony in the world. With the weakening dollar many countries are reducing their dollar holdings and buying other currencies such as the Euro. Of course many people are also buying precious metals such as gold. The article has an interesting and lengthy analysis of the situation. It is at countercurrents.

James Petras: The Great Financial Crisis

Petras almost always has interesting analyses but he certainly can't beat that Palm Beach banker:
as one prominent banker in
Palm Springs told me "Nobody knows who's got a turd (worthless
investments) in his brief case.






/CounterPunch.org/ 8/25/07


The Great Financial Crisis


By JAMES PETRAS

All the major financial analysts claim the ongoing and deepening
financial crisis is in large part the result of investor uncertainty.
This is because the investment banks, derivatives and hedge funds
placed
high risk, sub-prime mortgages and junk bonds, along with other more
reliable debt paper into packages and sold them to institutional and
private bankers who in turn 'retailed' them around the world.

The rating agencies, who are paid by the sellers, all gave top billing
(AA, AAA) to these hybrid securities, mortgages and junk bonds,
encouraging investment advisers to push them on to risk-averse client
looking for higher returns than Treasury notes. Most of the investors
do
not know whose and what paper they are holding, nor how much their
hedge
funds are losing or have lost. Those who can, have pulled out. The
banks
are reticent to loan to any applicant. Leverage funds are a dirty word
among lenders. Hedge funds are either selling assets to pay loans or
not
telling what they own or owe. Derivatives have been deflowered. Central

Banks in the US, Japan and the European Union have poured (and keep
pouring) over $250 billion to the private banks hoping to create
liquidity but the banks won't lend--because, as one prominent banker in

Palm Springs told me "Nobody knows who's got a turd (worthless
investments) in his brief case."

Meanwhile, Goldman Sach, Bear Stearns and Lehman Brothers are all
closing down bankrupt investment funds or trying to prop them up. The
Fed props up all the worst speculators in the name of 'saving the
financial system' - in a way that it would never prop up the failing
American health system. The financial system has the 'runs' and
infusions of Fed funds have failed to block the 'run for cover'.

"Everybody for himselfand don't look back', is the watchword of leading

equity bankers. The Democrats are calling for the usual inconsequential

Congressional hearings about what went wrong. Congressmen Levin and
Barney Frank will ask the wrong questions to the wrong people--going
after the weakest fall guys--the rating agencies--for overrating the
fraudulent deals, not the dealmakers themselves. The 'turds' in the
briefcases are big and smelly but no one knows how big: $250 billion or

$500 billion. There are a lot of bankers and hedge fund billionaires
walking around with invisible clothespins on their noses.

Where is Greenspan, since he started the whole scam with his low
interest, deregulated financial markets? The homely hero of all
hedge-derivatives-innovative financial scamsters sanctioned, approved
and promoted the pyramid swindles. He's off advising Deutsch Bank and
suckering the international bankers for $100,000 fees for his failed
financial recipes. But for those speculators who made a bundle and
left,
Greenspan is not part of the emerging turd culture. For them he is
still
the financial genius who made their fortunes.

So unless the fund directors come clean, empty their brief cases and
open their balance sheets we won't know who are carrying the turds: The

great unknowns include the unredeemable bonds, the worthless mortgages
and the illiquid hedge funds. Without knowledge of the size and scope
of
the turds, the great uncertainty has frozen most investments and
loans--it is paralyzing the financial system. Even Fannie Mae and
Freddie Mac (the federally-funded mortgage companies) can't come in and

buy up the 'turds' (otherwise known as 'bad debts'), no matter how many

hundreds of billions of US taxpayers' money they are willing to spend.

All the financial wizards, the super-smart scientific, mathematical,
guaranteed 30% per year investment advisers have less credibility than
a
street corner con man. The most arrogant, pretentious, scientific
speculators have been humbled; especially those oracles who practiced
what is call among the insiders as 'Quantitative investment'.

Quantitative investing (QI), the use of complex computer models in
making investment decisions, was used and promoted by some of the
reputedly smartest and highest regarded 'gurus' of Wall Street. For a
decade the complex mathematical modeling produced extraordinary profits

for Renaissance funds, Goldman Sachs and numerous other asset managers
and hedge funds. With the massive sell-offs of assets to pay debts and
the desperate drive for liquidity, all the assumptions of the QI went
out the window. "The Model" cannot account for any crisis which calls
into question 'historical trends'. The best and the brightest are
baffled. At first, the QI geniuses said the crisis was a localized
problem for the sub-prime bottom-dwelling speculators. But as their own

funds dropped they blamed hysterical investors who over-reacted. "A
problem of perceptions", they psychologized. But their funds continued
to decline: the Market wasn't acting as their 'model' dictated. Hearsay

flourished, skeptics surged.

"What's the problem: The Market or the Model?", one QI practitioner
asked his colleagues.

The answer from the Market: "It's the model stupid: All the QI use
historical models that extrapolated past patterns into the future as if

capitalism is a crisis-free system which changed incrementally and in
which investors borrowed rationally to leverage purchases in line with
their capacity to pay back any losses. That's Main-Street folklore for
retail brokers and the daily fare of American Enterprise ideologues."

Scientific mathematical modeling in the Great Casino predictably turned

out to be as fallible as numerology spun by Shamans to explain the life

cycle.

No one's going out of the window of the upper stories of high rise
offices--yet. What's keeping the suicide rate down is precisely what's
keeping investors running: no one knows how many hundreds of billions
in
worthless paper is being held. With the demise of the mathematical
modeling speculative science, we are now in the period of the Mystical
Black Hole. The big investment houses and hedge funds are holding back
on revelations, hoping that investment confidence will return if
investors are kept in the dark about how much they lost. This is a step

below Voodoo Economics. How can investor confidence return if they
don't
know if the big turds are in the briefcase of the Renaissance Funds,
Goldman Sachs, First Quadrant or any one or all of a thousand and one
Ali Baba hedge funds?

Let them lose their pants, writes orthodox Market pundits like Marty
Wolf in the /Financial Times/. "In order to value risk, they should
lose
properly. To bail them out", they argue, "is a moral hazard." Meaning
of
course, that if the hype and scam speculators are covered by a Federal
Bank bail out, they lose nothing, and will repeat swindling in the
future. Bailouts are a formula for financial scam recidivism. So much,
alas, for the advice of orthodox market experts. European Central Banks

and the US Federal Reserve know what class they represent: Real
existing
speculator plungers, not textbook risk-calculating value-oriented
entrepreneurs, are their reference group. The risk of letting the bad
boys sink is that there are too many of them, working in most of the
most powerful investment houses, managing too many funds, for the most
powerful financiers.

"There are no good financiers and bad speculators", one philosophically

inclined fund manager (who is likely carrying a turd) put it, "We are
all in this together, if we sink so does the whole financial system."
Is
this a self-interested plea for financial solidarity, a closet Marxist
or a prophet of doom? Nobody knows till we delve into the Black Hole of

the financial crisis. That won't happen till the brief cases open.

/James Petras, a former Professor of Sociology at Binghamton
University,
New York, owns a 50 year membership in the class struggle, is an
adviser
to the landless and jobless in Brazil and Argentina and is co-author
of/
Globalization Unmasked/ (Zed). His new book with Henry Veltmeyer,
/Social Movements and the State: Brazil, Ecuador, Bolivia and
Argentina/, will be published in October 2005./
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