A prominent feature of societies in irreversible decline is that their leadership is incapable of addressing a crisis in any manner other than the perpetuation of the cronyism that created the problem in the first place:

Mr. Paulson and other U.S. officials have long been promising foreign finance ministers that Fannie Mae and Freddie Mac securities are as good as U.S. Treasury bonds while yielding higher interest. The resulting investment in these two mortgage-packaging agencies was a major factor in their $200 billion bailout. Letting their securities go under would have ended Dollar Hegemony for good. So getting foreign acquiescence in financing future U.S. balance-of-payments deficit is inextricably bound up with how to resolve the U.S. financial and real estate bubble.

Its bursting has prompted Congress to authorize $700 billion supposedly to re-inflate the property market. The Troubled Asset Relief Program (TARP) gives Wall Street money in the hope that it will lend enough to start inflating asset prices again, enable borrowers to get rich by going into debt again – “wealth creation” Alan Greenspan-style. It is as if the neoliberal bubble years 2002-07 were a golden age to be recovered, not the road to financial perdition. In doing this, Mr. Paulson is using junk economics to cope with the junk mortgage problem that in turn was based on junk mathematical models. His problem is to keep the fantasy going.

Congress has caught onto the game being played. Now that the bailout looks like a last-minute giveaway to insiders while the giving is good, Congress held hearings last week to ask why the Treasury abandoned its plan to buy the “troubled assets” (junk mortgages) that Mr. Paulson had originally said was the problem. Why has the Treasury bought $250 billion of ersatz “preferred common stock” in banks at prices far above what private investors such as Warren Buffett paid?

Drawing a picture of a just-pretend world to rationalize Wall Street’s free lunch, Mr. Paulson sought to deflect the issue by postulating a series of “ifs.” The Treasury’s $250 billion in bank stock would give lenders money that might be used to re-inflate the credit supply if banks chose to re-enter the commercial paper market and provide more mortgages on easier terms. This trickle-down patter talk is what passes for neoliberal economic theory these days. The fantasy is for banks to restore “balance” by granting more credit, increasing the indebtedness of bank customers so as to restore the housing market to its former degree of unaffordability.

Congressional interrogators pointed out that banks were not lending more money. Mortgage interest rates have risen, not fallen, even though the Fed is supplying banks with credit at only a quarter of a percentage point (an average of about 0.30 per cent last week). Credit standards (understandably) have been tightened to require prospective buyers to put up more of their own money. Foreclosures and evictions are up and real estate prices continue to plunge. Also plunging almost straight down has been the Dow Jones Industrial Average, sinking below the 8000 mark last week to the lowest levels in years. Nothing is working out the way Mr. Paulson promised.

Nor did he intend it to do so. But the cat is out of the bag. Everyone realizes that the TARP is merely just a big pot of money, to be laddled out, like a tasty stew, to people smart enough and influential enough to demand some. So, of course, the line of supplicants is getting longer and longer, the auto industry, bankrupt states, like California, and even cities like San Jose.

But, not to worry, bailouts are only for banks, not for participants in the real economy. Prime Minister Gordon Brown of the United Kingdom made that clear when he asserted that the European Union would challenge any assistance to the US auto industry as an illegal subsidy before the World Trade Organization. Strangely, Brown and the EU have been silent, or, as they say over in the liberal blogosphere, crickets, in regard to the trillions already poured into US financial institutions.

Meanwhile, the oversight board for the bailout is devoid of members, and the Federal Reserve is refusing to publicly release information in regard to the financial institutions that have received the 2,000,000,000,000 released to date or the collateral posted by them. Predictably, the Democratic point person, Representative Barney Frank, is supportive of the Fed's refusal, and the Obama economic team has no comment, despite prior commitments to transparency in governmental operations. What a way to run an economy! If only we could bring back the Marx Brothers. With a good script writer, they would produce a classic comparable to one of their masterpieces, Duck Soup.

Labels: American Empire, Bailout of Finance Capitalists, Barack Obama, Credit Crunch, Democrats, Global Recession, Housing Bubble