Abusing money for power

For me, the most remarkable part of writing The Great Crash of 2008 with Ross Garnaut was diving into the murky depths of Wall St’s extraordinary manipulation of money. In the book, we called this “Clever Money”. It was the story of how, over many years, Wall St took the plain vanilla process of securitisation, twisted and stretched it, to produce a batch of ruinous financial instruments: securitisations of securitisations, which bore no resemblance to the goals and form of their constituent parts.

There were other dimensions to the GFC – greed, housing bubbles and global imbalances. But it was the sophistication and scale of clever money embedded in shadow banking that marked the GFC boom and bust cycle out as a unique episode in financial history.

But beneath the technical elements of labyrinthine instruments such as CDOs, hybrids and synthetics, there was another battle going on. It was a struggle for the power to control money.

Banks are the gatekeepers of money. Not just actual money, yours and mine, but money per se. Banks work within and around the rules that we, the people, through our government, have established to determine the value of money. Through the methods of clever money, Wall St seized control of those rules and in doing so, made untold wealth.

It happened some time after the millennium. Private securitisation markets in the US had operated effectively for decades, but suddenly exploded with sub-prime and various other securitisation products, many of which carried the AAA moniker of zero credit risk. In effect, that moniker said that those products were money. Those that bought these products therefore rightly thought that they were lending their own money simply in exchange for more money.

Of course nothing could have been further from the truth. But Wall St had created its own money machine. It clipped the ticket as the various transactions of synthetically stretched money passed though its hands. What power!

The rest is history. Out in the real economy, those changed rules and accelerated transactions blew giant asset bubbles, which, when they reached some critical juncture, simply burst. And the whole collateralised house of cards fell in on itself.

But it isn’t over.

The scam was so enormous, so fundamental, that it tore a hole in the greatest and most dynamic economy in the history of the world. The US government had no choice but to step in and nationalise critical parts of the financial system. If they had not done so we would have faced the unthinkable, a complete collapse in the rules that constitute money. And chaos.

We could argue black and blue about where the US government went wrong in seizing back the rules that control money. Where it should have done more and might have done less. But the fact is it did the right thing, and enough of it, to reassure the world, including you, that the paper in your wallet has value.

And now it faces the consequences.

Before the great Wall St rip-off, US public debt stood at around 65% of US GDP. After the collapse of the scam, US government debt rocketed above 95% of GDP as the public took on the dual tasks of bailing out the debts left behind by Wall St’s collapsed ponzi scheme, as well as stimulating a devastated economy.

The debt-ceiling debacle now gripping the United States is a fight over this debt. The Democrats want to raise the debt ceiling so that they can borrow more and pump that money into the hole in the real economy. The Republicans want to cut the borrowing so that the integrity of the US Budget is preserved and US Treasuries, the key stone of global money, keep their AAA rating and value.

At least, that’s the struggle in theory. If we look a little closer, however, the fight exhibits the same ghostly lineaments that defined the actions of Wall St in the years that they seized power. The debt-ceiling debate is about power and abusing the rules of money to get it.

Consider, the Obama administration has offered the following to resolve the impasse, from Washington Monthly:

* Democrats asked Republicans to pass a clean bill, just as GOP leaders had supported many times in the past. Republicans said, “No.”

* Democrats invited Republicans to Biden-led bipartisan talks. Republicans quit.

* Democrats offered a $2.4 trillion debt-reduction package, 83% of which would come from spending cuts. Republicans said, “No.”

* Democrats sought a Grand Bargain, with more than $4 trillion in savings. Republicans said, “No.”

* Several Democrats offered some preliminary support for the “Gang of Six” blueprint. Republicans said, “No.”

* Many more Democrats signaled support for the McConnell/Reid “Plan B.” Republicans said, “No.”

The sticking point for Republicans is that they simply will not raise taxes to help close the very deficit they so despise. Even though tax rates are at historically record lows as a percentage of GDP.

I understand the need for a balanced Budget to keep the rules of value intact. But, I also know a bald-faced grab for power when I see one.

Houses and Holes
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  1. It’s shows how far removed these elected officials ‘of the people’ really are.

    And so the empire crumbles…

    • “It was the story of how, over many years, Wall St took the plain vanilla process of securitisation, twisted and stretched it, to produce a batch of ruinous financial instruments….”

      Throw in the investment grade ratings by agencies high on the fumes of a residential property bubble and the ease of cross border capital flows and you have the perfect recipe for a near systemic collapse, and a virtual nuclear economic fallout.

    • Beautifully cogniscient H&H. I was hoping to pick up a copy of your book in the recent Borders sell-off. Unfortunately I missed the stampede..

  2. Different China Fanboy

    In most if not all other countries when programs/budgets get passed the funding is passed to pay for it. What is happening there is that they have approved programs but the debt ceiling is a separate vote. Democrats are actually wanting to fund programs that have already been passed through congress. We’ll have the absurd situation in which people who voted for the programs will now vote against funding those programs!

  3. Any nation that would even remotely consider someone like Sarah Palin as a presidential candidate is going down the toilet fast!

    It would almost be like if we had Goolia Gillard at the helm,,,,oh wait,,,,doh!

    • I think the late, great George Carlin was right, WRT US politics – their is only an illusion of choice.

      I must admit the Republicans are really digging their own grave here – the lack of common sense is astounding, even the most hard core Austerian can see the US tax/welfare system is broken and needs relief in the short term whilst unemployment is 20% (because of a lack of spending) before fixing the structural elements in the medium term (i.e without kicking cans down roads)

      Even Ron Paul has said they need to keep SS/MC going in the long run – its not the fault of those who couldn’t save for their retirement and healthcare (either from a lack of real interest rates, job opportunities or inflated healthcare prices).

  4. H&H that is a very good summary, and you’re hit on the key issue now with this political impasse. Both sides find it hard to agree on anything. They need to resolve the fundamentals of the economy, but it looks like that won’t happen. The sad part is that the US can save themselves, but internally they refuse to.

    Nothing has been learn’t from the Great Recession/GFC, and this will just roll down the road until the bond market says that’s it. Don’t discount a war or two if history is anything to go by. In the mean time the bankers/politicians get richer at the expense of everything else.

  5. H&H

    A merciless grab for power for sure but at least in politics the perpetrators are often exposed and pay.

    Not so the banksters. Banksters whether using securitisation or balance sheet techniques created cheap money which they turned into their and a few others income.

    GS may have said that he new it would not last (ie the expansion of credit) but he’s very wrong about not ending in tears. When you turn far too much debt into income many get badly burnt without fail.

    The mining boom did not save Australia from the GFC, government cash handouts and the continuance of turning debt to income did. But that’s over!

    If GS, the government, the opposition and the MSM will not fathom this point in their own lust for power, what hope those that carry debt burden?

  6. To be fair, I think all Americans can also blame themselves…its about time the population realised that they cant get everything they want at the bribe-fest that we call ‘elections’…

    If 6% of people approve of Congress performance, why do they keep getting voted back in.

    I also think the GOP has copped a bad wrap during all this. The debt limit is $14 trillion!!!

    People seem to not admit that this is a crazy amount of money (not to mention unfunded promises made that will cost 10’s of trillions more).

    People may say its crazy to play this game…but I would say its crazy to keep delaying the cuts that need to be made.

    Yes the GOP are being sticklers for no tax increases, but that is symbolic…they are saying, we are going to save our way out of this debt whole…not give the polticians more money to spend.

    The Tea Party did give Congress a good shake-up in the mid-terms, so its not as if this is unexpected

      • But what is the alternative Prince…I am of the beleif that some form of massive economic downturn is unavoidable…we cant keep living in a credit-fuelled Matrix…time to take the blue pill (or was it the red one)…whichever one brought Neo to the real world and saw it for what it was.

        I agree the GOP are being numbskulls in general, but I dont think the Democrats are copping their fair share of the blame

        • “I am of the beleif that some form of massive economic downturn is unavoidable” –
          Stavros, there is a lot of truth in what you say – eventually, we all have to balance income & expenditure – but lets do that over a whole economic cycle.
          The partisan politics, and total disregard for the impact on the American people, of the current US Congress could well lead to a massive economic downturn.
          But I don’t accept that it is inevitable.
          All the recent history aside, the core issue for the US is Productivity. They have to get the people back to work producing goods that the world will buy. But no one sees their problems in this light, let alone taking action to make it happen.

          • Peter, I agree that a slow unwinding of the credit bubble appears to be the logical path…but I disagree with this approach for a few reasons:
            1) The way in which the impact is cushioned will be corrupt and simply reflect the way in which politicians favour some over others…so who is entitled to be cushioned? Who gets industry assistance (bail out)?
            2) The longer we cushion the impact…the longer it will take to have a proper recovery. Its like a bandaid..it will hurt more overall if we muddle through for the next decade or two like Japan has
            3) There are ways to tame the worst of this depression. We have better welfare models now that can provide food and shelter to most needy. Because even during the boom years, we had more and more people become homeless in Oz…so I think this actually gives us a chance to reevaluate what is important for society etc..

            I know its not the message people out there want to hear, but its the logical, fair and most compassionate way to deal with a credit bubble of this size

    • Stavros – There is plenty of blame to go around but the reason the GOP is copping a bad rap is their sheer hypocrisy throughout this farcical episode. The politicians that are ranting about the debt ceiling and refuse to entertain any kind of compromise are the same people who voted for the policies that caused the deficit in the first place (Bush tax cuts, wars in Iraq/Afghanistan, TARP, etc etc).

      • Fair call RA…its total hyposcrisy from the GOP to argue for cuts to medicaid while supporting trillions of way expenditure.

        As a libertarian, my military budget would be a big fat 0…without big Government, we wouldnt have wars like the ones we do now.

  7. There is one big issue that most of economist (and general public) are not able to see. They assume that government policies “fail” because they are wrong and not because they are not created to “succeed” (improve life of the majority).

    Let’s try something different:

    Assume that instead of “prosperity for all”, goal of all economic government policies is to make ruling class better off.
    Do they succeed?

    It seems to me, that whatever economic policy governments create, they are almost always successful (achieve the goal of making the rich richer).

    And while we (the majority) are looking for better economic theory that “will work”, we are missing the key problem – our political systems are broken (non-democratic, corrupted, dictatorial …)

  8. Cannot strongly reccommend enough (on this subject) the 2010 film “Inside Job”. From Wikipedia:
    “Inside Job (2010) is a documentary film about the late-2000s financial crisis directed by Charles H. Ferguson. The film was screened at the Cannes Film Festival in May 2010 and won the 2010 Academy Award for Best Documentary Feature.
    “Ferguson has described the film as being about “the systemic corruption of the United States by the financial services industry and the consequences of that systemic corruption.”
    “In five parts, the film explores how changes in the policy environment and banking practices helped create the financial crisis. Inside Job was well received by film critics who praised its pacing, research, and exposition of complex material.”

    • Fabian Aldersey

      Inside Job is an enjoyable film. As always, we need to bear in mind that it’s showing a particular viewpoint (much like A Current Affair, Today Tonight or Michael Moore’s films).

      I asked Glenn Hubbard about his role in it, he said they talked for an hour about various aspects of the crisis. The film only ends up showing a minute or so of footage, focusing on Glenn’s guest-speaking arrangements. Obviously Glenn must have argued the other issues well enough, if that’s all the film maker could use.

      Glenn said it’s not his favourite movie (a bit of an understatement).

      I enjoyed it, but it’s always good to remember that we’re only being shown what the director wants to show us.

  9. It is a bootstrapped/infinite loop power grab that can’t be fixed by democracy/election:
    1. Threaten financial armageddon and blackmail taxpayers into a bailout.
    2. Then use some of that bailout money to lobby the congress, spread propaganda through MSM and get some more concessions at the expense of taxpayers -Recent example is the “one time” Tax holiday for the second time for bringing back overseas profits
    3. Repeat step 1.

  10. “The debt ceiling distraction will blow over in a few weeks. But it will be necessary to invent even bigger phony debates in the future to prevent you from (to paraphrase George Carlin) “sitting around the kitchen table figuring out how badly you’re getting fucked by a system that threw you overboard 30 fucking years ago.”


    Watch the video at the end, kinda says it all.

    • Great article, although its somewhat depressing to see the same strategies starting to be employed here, albeit far more primitively.

  11. > But beneath the technical elements of
    > labyrinthine instruments such as CDOs,
    > hybrids and synthetics, there was
    > another battle going on. It was a
    > struggle for the power to control
    > money.

    But it could only succeed after the successful struggle of the “money” to control the power which resulted in repealing of the Glass-Steagall Act and other legislative changes.

  12. “In effect, that moniker said that those products were money”

    I posit to you Mr H&H, that your above quote IS in fact “a complete collapse in the rules that constitute money”.

    Thus, it is not that we WOULD have faced the unthinkable – chaos, it is that we are LIVING chaos.

    I agree that the “US (& other) government had no choice but to step in and nationalise critical parts of the financial system”, however this has just further collapsed the rules that constitute money & as long as governments continue this process the more chaotic things will become.

    The system is completely illiquid & in the words of Melchior Palyi;

    “By slow attrition, the result is likely to be the same as in the case of outright money-printing by the government itself. The old-fashioned technique of paper money inflation ‘worked’ faster than its modern, seemingly less reprehensible counterpart that camouflages the production of fiat money by channeling it through the money market and the central bank. The latter’s liquidity consists exclusively of its gold reserve that tends to decline in proportion to its liabilities. The attrition of the gold reserve accelerates when the gathering of inflationary expectations induces non-resident owners of dollar balances to withdraw them (with residents joining, too). There can be little doubt of the final outcome, unless the process is brought to a halt.”

  13. It seems like the Republicans are running a scorched earth policy because they got screwed so hard at the last election. They think that when it comes to the next election that the electorate will blame it all on Obama and vote them back into the White House.

    Heck of a political gamble for the supposed “conservative party”.

    • I recall at the time of his inauguration it being said by some that the presidency was a poisoned chalice and that the Republicans were not displeased with the result for the very reason you mention.

      Unfortunately, it is also true that Obama has been a very poor leader in economic terms, seeking advice from and extending the role of key players in the GFC. His rhetoric may be OK (personally not a fan) but his lack of decisive action has sealed his fate.

      And I guess as H&H points to here, this further confirms the inadequacies of both parties and their capture by financial interests.

      • Different China Fanboy

        He looks good in a suit and speaks well. Basically he would make a good new reader …and I assume he was probably a good lawyer, but he’s a shocker as president.

        Hard to find areas where he clearly outperforms George W Bush (other than looking good in a suit and speaking well).

  14. Great post, H&H.

    It looks more and more like what’s going on there is simply a Class War.


    The rich in the US no longer make their money in the US, so they have no reason to care about the US as a nation. Note, for example, the capital flows between the US & the Caymans – $3.8 trillion going to the Caymans, from a GDP of $13 trillion?

    And Greece is no exception::

  15. ceteris paribus

    Fascinating article.

    Just who runs the US? Certainly, whoever they are, they are not letting the current President anywhere near the reins of government.

    At times like the current debt crisis, what is needed is a benevolent dictator, who could just “re-approrpiate” chunks of the people’s commonwealth, stolen with impunity by the gamers. Given the complexity of their financial strategies, however, I am assuming you believe that any restoration through the law is virtually impossible?

  16. H&H, thought you might like to know that Bill Mitchell has a go at your article on his blog today.

  17. just a point, despite ‘conventional wisdom’, empirically tax receipts go up when tax rates are cut.

    Also lets not discount the policy of the govt to promote home ownership in subprime areas, this meddling by big govt into economy always produces unintended consequences (politicians never think past stage one and self-interest), the banks greed and shadow banking added fuel to the fire.