The Big Banks are Financial Vampires
At a Jungian dream seminar I once attended, led by the late Fr. Michael Dwinell, the vampire was presented as the archetype for addiction, a monster that reducea its victim and those close to him to zombies. But that is a subject for another place and time.
Similarly, the big banks of Wall Street, still holding debt assets at their face value for purposes of calculating their balance sheets, have become veritable vampires, lacking solvency themselves and frantically attempting to suck money out of any convenient victims, whether they be the Federal Reserve, the U. S. Treasury, investors, or debtors, most notably their mortgagors and credit card holders. The latest propaganda meme put out by the banks is the threat of “strategic defaulters,” loosely defined as homeowners who can make their house payments but walk away from the house because it is underwater. The meme has the same deceitful purpose as Reagan’s non-existent “welfare queens” and Bush’s “war on terror”: to conceal the real reasons behind otherwise unacceptable public policies.
It would not be too far out to say that the archetype for financial meltdown is the vampire.
For the last few months it has been more and more obvious to me that the behavior of the big banks can be explained only by assuming that they are insolvent and are remaining in existence only through accounting dishonesty, that is, valuing their assets far above their real value. Before I decided to write a blog post setting out these conclusions, a recent post on Naked Capitalism, Strategic Defaulters are the New Welfare Queens, made such an article superfluous. Here’s an excerpt:
So why all this hysteria about strategic defaulters? If I were conspiracy-minded, I’d say this is a very clever push to stoke jealousy among what is left of the middle class to keep the focus off the way the banksters wrecked the economy, got lots of cash and prizes, and have every reason to repeat that profitable exercise. So focus public ire instead about the commies in our midst, um, the new welfare queens, aka various forms of alleged housing deadbeats. The immediate reason is that the more people are made to resent the breaks they fantasize their neighbors are getting, the more they will oppose deep principal mods, which historically is what banks always did when they had a borrower get in trouble who still had a remotely viable income.
Why would the banks oppose principal mods? It will force an end to extend and pretend, and when THAT happens, a lot of financial firms will be shown to be undercapitalized and in need of rescue or resolution (as we and others have pointed out repeatedly, Mike Konczal’s conservative analysis of second mortgage portfolios at the four biggest US banks, Bank of America, JP Morgan, Citigroup, and Wells Fargo, shows that they probably need another $150 billion in equity among them, and others contend the writedowns on seconds should be much more aggressive than Konczal assumed).
The entire article is well-worth reading.
The term “deep principal mods” means that either the banks would be forced to carry the debts on their books at actual value, taking into account the decline in collateral values (the bursting of the housing bubble, in other words) or bankruptcy courts would be empowered to adjust mortgage principals downwards to reflect the actual value of the mortgaged property. The latter process is known as “cram down” and a bill to give bankruptcy cram down power was defeated in Congress by the finance lobby.
The basis of the problem is politics and denial. The housing bubble was, for the most part, a bipartisan project, hence the reluctance of either major political party to make it an issue. The mainstream media, including its economic experts, was inexcusably negligent for years in ignoring the housing bubble and they are reluctant to admit that the emperor has no clothes. With a few exceptions, it is still spouting economic nonsense. Economist Dean Baker has been chronicling this willful blindness for years and his has been a lone voice in the wilderness.
Disconnection from reality eventually exacts a fearsome price. We have already experienced housing value losses in excess of $6 trillion and the reduction in demand that invariably results from such a loss. The financial reform bill, despite all the hype it has been given by its proponents, is inadequate to address the real causes of our current malaise and does little to lessen the likelihood of another speculative bubble and meltdown. Nevertheless, it is a start.
7/19/2010 Update:
Nobel laureate Joseph Stiglitz puts it very well in his latest column:
The “innovations” unleashed by modern finance did not lead to higher long-term efficiency, faster growth, or more prosperity for all. Instead, they were designed to circumvent accounting standards and to evade and avoid taxes that are required to finance the public investments in infrastructure and technology – like the Internet – that underlie real growth, not the phantom growth promoted by the financial sector.
The financial sector pontificated not only about how to create a dynamic economy, but also about what to do in the event of a recession (which, according to their ideology, could be caused only by a failure of government, not of markets). Whenever an economy enters recession, revenues fall, and expenditures – say, for unemployment benefits – increase. So deficits grow.
Financial-sector deficit hawks said that governments should focus on eliminating deficits, preferably by cutting back on expenditures. The reduced deficits would restore confidence, which would restore investment – and thus growth. But, as plausible as this line of reasoning may sound, the historical evidence repeatedly refutes it.