2nd FOLLOW-UP INTERVIEW WITH PROFESSOR JACK RASMUS
[Note: The following is an interview with Jack Rasmus, a professor of economics at St. Mary’s College and Santa Clara University in Northern California. A first interview was conducted with Professor Rasmus on March 2, 2009, focusing on the Obama Bank Bailout and Stimulus Program that had just been announced. The 2nd interview below is an update, covering events that have occurred since March.. Professor Rasmus is a member of the newly formed National Steering Committee of the Workers Emergency Recovery Campaign (WERC). The 2nd interview was conducted on April 26, 2009, by Alan Benjamin, organizer for the WERC.]
U&I: Since we last talked a lot new has happened with the banking crisis. Banks are now saying they are profitable and the stock market has risen. They are saying the banking crisis has ‘turned the corner’ and may even be over. Is it?
Rasmus: No. Quite the contrary. The financial side of the economic crisis is continuing to deepen. You know, all this talk about the banking crisis stabilizing and recovery beginning reminds me of what happened just a year ago almost to this day. In April 2008 CEOs of the big banks trotted out in orchestrated press conferences and proclaimed the crisis was over, following the so-called ‘rescue’ of Bear Stearns bank in March 2008. Half of those bank CEOs would be gone, fired, before the end of the year as the crisis intensified below the radar and then erupted once again in August-September last year. Something similar may be happening once again. Just look at the continuing collapse of housing. Foreclosures are still rising. Delinquencies and defaults still increasing. On the residential mortgage side the problems are spreading from subprime mortgages to the less risky ‘Alt-A’ and supposedly safest ‘prime’ mortgages. According to data released just last week by Standard & Poor’s, the business rating agency, almost $300 billion in subprime mortgages are now classified as nonperforming. Another $225 billion of ‘Alt A’ mortgages. And even about $30 billion of prime. In fact, prime mortgages are showing the fastest rise in defaults of the three. RealtyTrac, the real estate reporting service, reported foreclosure activity is up 24% compared to the end of last year. Fannie Mae, the US government agency that has bought $800 billion of mortgage loans, reported the largest surge in delinquencies in January ever since it started keeping data in 1998. That’s not a picture of having turned the corner. I think what’s behind this is that we are now starting to see a second wave of residential mortgage problems, as 6 million workers have been laid off and losing jobs since last October. There’s at least another $500 billion in losses due to home mortgages coming. But two even bigger bombs are just around the corner. One is Commercial Property losses, now just beginning. There’s over a $1 trillion more in losses coming there, over 50% of which will hit the banks. The second bomb is the securitized consumer loans markets—that’s auto loans, student loans, credit cards and the like. That’s more than another $1 trillion. All this is going to hit the banks 6 to 12 months from now, and tear another even larger hole in their balance sheets than subprimes did. Another deeper problem beginning to grow involves the growing losses in the defined benefit pension plans which, on average, have lost more than a third of their values. Watch that one too.
U&I: What we’re hearing from the capitalist press is that bank stocks are rising and along with it the stock market in general. How is that possible given the scenario you just presented?
Rasmus: It’s what they call a classic ‘bear market rally’. Some of the banks are reporting profits. That’s true. Not surprising, given that the Federal Reserve is giving them free money at 0.25% interest and they’re continuing to loan at 5% to 8% for mortgages, and to companies at rates as high as 20%. The Fed and US Treasury have pumped $4 trillion into them since last September and Fed-Treasury have announced they will provide another $8 trillion. That’s $12 trillion committed to the banks and other financial institutions. Compare that to only $27 billion this year for jobs in Obama’s economic stimulus package. The banks’ new found profitability is also being boosted by allowing them to falsely report now the value of assets on their books. This is part of the ‘mark to market’ accounting issue. Up until a few weeks ago, banks had to report the total losses on their securitized loans, most of which had fallen to only 10cents on the dollar. That’s called ‘mark to market’ pricing. But a few weeks ago Congress allowed them to suspend mark to market accounting. Now the government is allowing them to falsely report assets on their balance sheets at 90-95 cents on the dollar vs the real market value of those assets at 10 cents on the dollar. No wonder they all of a sudden appear ‘profitable’. But it’s a false, engineered profitability. It’s all part of an orchestrated joint effort by the government and the banks to make it appear as if the financial crisis is now stabilizing, which it isn’t. Anyone throwing their money into bank stocks at the moment should come talk to me. I have a better deal for them, a bridge in New York I’d like to sell them.
U&I: Can you explain what’s behind big banks like JP Morgan Chase and Goldman Sachs announcing they want to pay back the cash the government gave them under the TARP program last fall? Where are they getting the money to pay it back? Are they borrowing it at zero interest rates from the Fed and paying it back, or something else?
Rasmus: This goes back to TARP, as you say. Under TARP, then Treasury Secretary Paulson found out he couldn’t buy the bad assets from the banks because they refused to sell them to him at their true (low) market prices. Paulson said the sky would fall without the $700 billion with which to buy the bad assets. Buying up the bad assets was necessary to ‘get credit moving again’. But when the banks refused to sell the bad assets to the government at anything but bloated prices he, Paulson, had to show he was doing something. So he threw $250 billion immediately to his big 10 banking buddies, including JP Morgan and Goldman Sachs. With it came certain reporting requirements and limits on executive pay. Now they want to get out from under that government inspection possibility (still not being enforced adequately I might add). They also want to give themselves big bonuses again. It’s interesting, isn’t it, that Goldman Sachs recently reported it had $164 billion in cash on hand. It either took taxpayer money under TARP it didn’t need, or else it is now lying about having $164 billion. Ditto for the other big banks. Why should the banks want to take government money with strings attached, when they can get unlimited ‘free’ money at zero interest from the Federal Reserve today? Wouldn’t it be nice if you and I could go to the Fed and get a 0.25% loan to buy a car, pay for college tuition, or buy a house? We can’t. Only the banks can. Goes to show you who the Fed and banking system is really set up for, doesn’t it?
U&I: Last time you described how the new Obama-Geithner bailout plan would work. There were three parts, if I remember, wasn’t there? The government says the bailout is beginning to work. Is it?
Rasmus: After Geithner announced the original bailout, which I reported last time, the banks and private investors lobbied hard for changes. Some key changes in the government plan were made. First of all, any zero interest loans that investors get from the government are now considered ‘non recourse’. That means if they buy up bad assets and the prices of those assets fall again, then they, the investors (which include big players like private hedge funds, private equity firms, and the like) don’t have to pay back the loans to the government. Nice deal, isn’t it? It’s a ‘win they win’, ‘lose they win’ proposition. Something like a loaded dice game. That’s to get the investors to buy up the ‘bad securitized assets’ on banks balance sheets. Those are the packaged securities with subprimes, student and auto loans, and the like bundled in them that are now worth only around 10 cents on the dollar. It’s a hidden way to make the taxpayer pay for the almost certain losses without having to go to Congress and get the money, like they did with TARP. The money for the ‘non recourse’ loans for investors will come from the Federal Reserve which doesn’t have to go to Congress. The Fed will simply print the money for the loans. For the non-securitized loans held by the banks the problem is a little different. These are a different kind of loans which banks get to keep on their books at over-inflated value, say around 98 cents on the dollar, when the loans are actually worth 50 cents. The banks don’t want to sell these at 50cents because they’ll have to record 48 cents of losses. So the government will make up the other 48 cents for them. This money will come from the FDIC, the Federal Deposit Insurance Corp. Most of the FDIC’s money will eventually come from the Fed as well. So you see, that’s how Geithner and Obama plan to do an end run and give trillions more to the banks without having to appear to go to Congress and ask for it directly. It’s a shell game. A more clever version of the TARP. Even so, it appears investors are balking. They only want to ‘cherry pick’ the loans they can make the most profit on. They’ll leave most of the securitized loans in the banks.
U&I: What about the third element of the Obama bailout plan announced in March, the Housing Affordability Act? What’s been happening there?
Rasmus: That’s a program designed to subsidize the home builders who haven’t been able to sell their inventory of new homes still on the market, as well as subsidize the mortgage lenders and mortgage servicers. 80% of the mortgage servicing, by the way, is done by the five largest banks. Little of that $275 billion allocated is earmarked to help the 5-7 million expected to go into foreclosure over the next few years. It’s mostly going to subsidize lenders to get them to lower their mortgage rates for new buyers looking to buy up the foreclosures and unsold inventory. Modifying principal and interest payments are still largely voluntary by the lenders. There is a provision in the law that would allow a court to enforce a mortgage modification. That’s called the ‘cramdown’ provision. But the banks and lenders are lobbying aggressively to prevent that provision.
U&I: There’s a lot of talk in the press and from government officials that, just like the banks ‘turning the corner’ and starting to recover, that the real economy is showing signs of the same. They are saying ‘green shoots’ of recovery are beginning to emerge. What’s your take on all that?
Rasmus: Those ‘green shoots’ are really ‘weeds and crabgrass’. The so-called recovery is nothing more than a ‘dead cat bounce’. It happened last spring, when the government passed a $165 billion stimulus package. This year’s package is a similar $180 billion, about the same in an economy much worse. It will have the same kind of temporary, tepid effect. Unlike the banking sector, which at least can claim a false appearance of phoney bank profits, there isn’t even that for the real economy. We have been running job losses of about a million a month, when properly calculated, since last November. That’s six months straight at a million a month. We are around 15 million unemployed now. Last December I wrote and predicted 20 million jobless by the end of 2009 and we are well on track, and may even exceed that number. That’s the key problem right now. You can’t get any kind of economic recovery with that kind of continuing job loss. In fact, it’s a job loss rate that, at even the official 600,000 a month, tracks almost exactly what happened in 1929-1930. And if the true losses are calculated, we are losing jobs today at a rate even faster than 1929-1930. The job losses are causing a collapse in consumption, which makes up 70% of the US economy. In addition to losing jobs, consumers are also cutting back consumption because of foreclosures, home equity values falling, fears of job loss even if they still have one, worries about their 401ks collapsing further, tighter credit terms from the banks, credit card rate balances rising to 29.99%. All these factors will cause further collapse of consumption that in turn will exacerbate the mortgage market problems as well as provoke the crisis in the consumer loan markets (autos, student, credit cards) that I noted above. Meanwhile, to make matters still worse, world trade is in freefall and export sales are plummeting. State and local governments are raising fees and taxes while cutting jobs and services. Business capital spending is down 40%. And Moody’s business research is predicting a tripling of the corporate default rate from around the current 5% to more than 15%. This is all a timebomb in the making. It’s not a scenario even close to recovery. Put another way, as bad as the banking sector still is, the locus of the economic crisis has moved, in my opinion, to the ‘real’, non-financial sector of the economy. And if the real economy and jobs continue to worsen at the current pace, then watch for another, even bigger financial sector blowout in 2010. You see, it’s not simply a financial crisis but a combined, inter-related general economic-financial crisis. The biggest problem right now, however, is the 20 million unemployed.
U&I: That’s a scenario that looks a lot like a Depression. Are we in a Depression yet? If so, what will the Government have to do to stop it that it’s not doing today?
Rasmus: No, we are not yet in a Depression, but we’re headed there–fast. Don’t forget, the Depression of the 1930s was accompanied by unemployment of 25%, 30-40% if farm labor is included. Production fell nearly 50%. Prices fell 50-70%. The stock market plummeted 90%. We’re not at that yet, but certainly on track toward it. We’ll see in about a year. If we go on with job losses and the collapse of consumption and business spending and trade at the current pace, accelerating consumer and business defaults later this year will lead to another financial bust in 2010 and then we’ll be in it. If you look at the 1930s, the first 18 months, 1929-30, looked a lot like today, 2008-09. It was not yet a bona fide depression. Both today and 1929-1930 are what I call an ‘Epic Recession’. Not a depression but far worse than recession. An unstable state that, if not corrected, will evolve likely into a depression. I explain this in great detail in my forthcoming book, ‘EPIC RECESSION AND FINANCIAL CRISIS: PRELUDE TO GLOBAL DEPRESSION’, coming out later this year, published by Pluto Press in England and Palgrave here in the U.S. The important thing about the Great Depression is that the steep declines of 1929-1934 were associated with a series of four banking crises. In between the banking crisis were deepening unemployment, business defaults, collapsing consumption, and falling prices. Roosevelt’s second ‘New Deal’, of 1935-37, didn’t end the depression. It only stopped it from falling further. And when business interests forced the beginning of the dismantling of the New Deal in 1937, the economy quickly fell back into Depression in 1938 and continued to stagnate thereafter. It wasn’t until 1942 that the full recovery occurred. That’s World War II. But it’s important to know that it wasn’t simply spending on bullets and guns that ended the Depression. More important was the massive government spending on infrastructure, buildings, new factories and such, all financed by the government and taxpayer. That is what ended the Depression. And what kept it from coming back in 1945 was the massive shift in incomes to workers during the War. Here’s two facts that should not be overlooked. First, in 1929 the wealthiest 1% of households had 22% of all income. By 1945 they had only 8%. Their share remained at that level until the late 1970s and then accelerated again. By 2006 the richest 1% were back up to 22%. In other words, massive shifts in the distribution of income are directly related to Depressions. We wont prevent a Depression unless we can re-shift income once again, from investors and bankers back to workers and their families. That will take not only a massive jobs creation program, but longer term programs that re-shift income as well. By longer term I mean specifically programs like single payer universal health care and the creation of national retirement pool that guarantees everyone a decent livable retirement. Also, we must re-unionize the economy. Unions provide significantly more income for their members. That’s why the Employee Free Choice Act is key. Not only because it is a just thing to do. But because unions play a key historic role in ensuring more equitable distribution of income. It’s not by accident that the unionization of the economy had fallen to less than 9% in 1929 and consumption collapsed so badly and fast in the 1930s. Union membership is once again around that today in the private sector. If the workforce were today at the 22% union rate in 1980, it would mean 15 million more members in unions. That’s 15 million making 25% more income a year. That’s a trillion dollars a year in spending power. EFCA, single payer health care, and retirement reform are thus keys to avoiding a Depression. Also essential is the shift of government public investment in the economy. Here’s the second fact to remember: in 1929 the government was only 3% of the economy. A rise in government spending to 20% in 1935 only checked the Depression’s fall but did not ensure recovery. Today, government spending is only 20%. We need to increase public investment to 40%. That’s the level of spending in 1942. That’s what ended the depression. That does not mean necessarily war spending, which today does not produce very many jobs per dollar invested. I’m talking about job intensive public investment in health care, education schools, alternative energy, public services, and the like. Public investment must also rise to 40% to prevent a depression.
U&I: You published a recovery program earlier this year that you shared with the San Francisco Labor Council. What are some of the major provisions in that plan?
Rasmus: Briefly, as I said before, jobs and restoring consumption are the key. My program therefore calls for spending $1 trillion immediately on job retention and creation, to create 20 million jobs at $50K per job. Second, we must stop the collapse of housing and foreclosures driving that collapse. My program calls for a full nationalization of the residential mortgage and small business property markets. Not a bailout, but a nationalization putting the markets under full government financial and operational control. The program calls as well for nationalizing the consumer credit markets, that is the auto and student loan markets in particular. I envision a phased deepening of the nationalization of the banking sector. A new banking structure where banking is just another regulated utility, at least the consumer side of that sector. We will also have to fully nationalize the Federal Reserve System, which is now still too influenced by the banks themselves. This was only partially done in the 1930s. It’s time to complete the job. In addition to the jobs, housing and banking aspects, the program calls for a longer run redistribution of income by instituting single payer health care, a new national pension pool, passing the EFCA, and a reunionization of the economy. It also reinstitutes ‘Regulation Q’, which was repealed in the 1970s, which puts a single digit ceiling on credit card rates. To help pay for all this, the plan requires the repatriation of the $4-$6 trillion stuffed by wealthy US investors, hedge funds, and corporations today in 27 offshore tax havens which is costing us at least $500 billion a year in lost tax revenue. Refusal to put their money back in the US would result in 3x fines every 90 days plus potential criminal violations by repeat refusers. A major restructuring of the tax system is also part of the program, primarily in the form of rolling back capital gains, dividends, inheritance, foreign profits and other capital incomes taxes to their 1979 levels. Finally, the program calls for the payroll tax to be levied on all forms of incomes, not just wages, at the current tax rate. And a value added tax on all intermediate goods to fund a national retirement pool.
U&I: Last year you predicted in your published articles that there would be multiple bank collapse before they happened, and that mass layoffs would emerge by the end of 2008. Can you share some predictions for the coming year or so?
Rasmus: Be glad to. First, the so-called recovery is nothing more than the ‘dead cat bounce’ I mentioned. The economy will continue to deteriorate in 2009. Second, job losses rise to the 20 million by year end. Home prices will fall another 20%, in addition to the roughly 25% so far. The Obama-Geithner PIPP-TALF-HASP bank bailout program will produce few and insufficient results. As a consequence, there will be renewed discussion and debate on what form ‘bank nationalization’ should take. There will be a second economic stimulus bill before the end of the year. Business and consumer defaults will rise precipitously and become more obvious in the news, in particular commercial property defaults and consumer auto-student loan defaults. General Motors will be allowed to enter chapter 11 bankruptcy, and autoworkers will lose their defined benefit pensions. Global economies will continue to weaken, especially Japan, the U.K., and Spain. The Baltic and other eastern European countries will be severely impacted, provoking banking problems elsewhere in Europe. Although we haven’t discussed this, foreign buyers of US bonds—including China—will slowly but progressively cut back their purchases, forcing the Federal Reserve to print more money to cover deficits from the bank bailouts. That will set in motion a progressive decline of the dollar as a global currency. The IMF will fail to raise the $1.1 trillion it has called for, most of which is earmarked for eastern Europe.
1st INTERVIEW WITH PROFESSOR JACK RASMUS
[Note: Following is an interview with Jack Rasmus, a professor of economics at St. Mary’s College and Santa Clara University in Northern California. Professor Rasmus is a member of the newly formed National Steering Committee of the Workers Emergency Recovery Campaign (WERC). The interview was conducted on March 2, 2009, by Alan Benjamin, organizer for the WERC.]
WERC: What is your assessment of Obama’s economic recovery plan? Can you describe it for our readers and tell us if you think it will deliver the jobs and benefits that people are anxiously awaiting?
Jack Rasmus: The Obama plan has five major components, The first is the $787 billion stimulus plan that was adopted recently by the U.S. Congress. The second, third and fourth parts aim to resuscitate the financial markets: Part 2 is the PPIF, or Public-Private Investment Fund; Part 3 is the TALF, or Term Asset-Backed Securities Loan Facility; and Part 4 is the Homeowner Affordability and Stability Plan. The fifth component is Obama’s proposed 2009 budget – which is likely to be modified substantially by the Republicans before it is finally adopted.
As for the stimulus package: As I have stated repeatedly, it’s too little too late. First, it’s not a jobs bill. By the end of 2009, there could be a total of 20 million people unemployed. We are now at 14 million jobs lost, and the job losses are accelerating. Over the past three months, we lost one million jobs each month, when job losses are calculated correctly. This package is not going to regenerate the jobs that we are talking about – and jobs are the most important thing, because job loss is what’s driving the collapse of consumption and bringing down the economy.
Thirty-eight percent of the stimulus package goes to providing aid; that is, unemployment, food stamps, vets’ benefits, medical aid, COBRA – as well as aid to state and local governments. This is all necessary, but what it shows is that this plan is aimed at softening the collapse, not at creating jobs. This aid will have little effect in terms of job creation. As for the aid to state and local governments, it is nowhere near the amount needed to halt the massive job cuts in state after state.
WERC: This is clear. In California, Republican Governor Arnold Schwarzenegger is demanding that public-sector workers across the state take two days off per month with no pay. His plan also calls for tens of thousands of layoffs statewide.
The Progressive States Network (PSN) reported that the Obama stimulus plan would cover less than half of projected state deficits. The authors of the PSN report note, “A new study by the Center on Budget and Policy Priorities details that state deficits are projected to be $350 billion over the next 30 months. But the stimulus recovery plan includes only about $150 billion that can be used to address those shortfalls, meaning that 55% to 60% of projected state deficits will remain.”
Rasmus: Indeed. These “shortfalls” will mean millions of destroyed jobs, lives, families, and entire communities.
To continue with the stimulus plan: Another 38% of the package, or $300 billion, is tax cuts: (1) business tax cuts, (2) reversing the alternative minimum tax; and (3) payroll tax cuts. The business tax cuts will not have any effect in stimulating the economy. Some economists in fact are arguing they will have a negative effect insofar as the spending from the tax cuts will be less than the amount of the tax cuts; they call this “negative multipliers.”
When you’re in a deep downturn like this, businesses sit on their tax cuts, waiting for better days ahead; they use the money to pay off their debts and that sort of thing. Even the payroll taxes will have virtually no effect in terms of consumption and stimulating the economy.
Only 24% of the stimulus plan, or $200 billion, will go to federal spending, with just $27 billion allocated this year to job-creating expenditures. The rest is long-term alternative energy technology and other similar projects, all of which are capital intensive.
The point is this: It’s not a jobs bill. Obama says the plan will create 3 million to 4 million jobs. But over what time period? It’s over multiple years, with the hope that the biggest impact will come in the second year.
This year the total spending impact of this bill, dollar-wise, is only $180 billion, which is roughly what the 2008 stimulus package was last year. It had virtually no effect last year, and the conditions are even worse this year. We will continue to be gushing jobs this year at the continued rate of half a million to 1 million jobs per month.
We’re going to be in very bad shape at the end of the year. The number one cause driving foreclosures is job loss. I was just reading a statistic today that 72% of all the sub-prime loans issued between 2005 and 2007 are going to default. In other words, we haven’t seen the total impact of the housing price collapse. Housing prices will fall at least another 20%. There is no light at the end of this downturn tunnel.
With 20 million unemployed at the end of the year, with an additional 5 million to 7 million people losing their homes to foreclosure, the stimulus plan fails miserably when it comes to creating jobs – so bad that I predict they will have to come up with a Stimulus Plan II at some point.
So if there is not a program this year to deal with this situation, the odds go up significantly that what I call an epic recession will become a classic global depression in 2010. We are on the cusp of this now. The momentum is moving in that direction.
WERC: Let’s look at the other components of Obama’s program. You mentioned that the administration is putting most of its hopes into reviving the banking system as a means to jump-start the economy.
In mid-February Treasury Secretary Tim Geithner announced that up to $1 trillion would be allocated by the Treasury to “provide financing for private investors to buy ‘distressed securities.’” Geithner said that the goal is to clean up the banks’ “toxic assets so that the credit crunch that is hobbling the economy can be ended.” What is your take on the Public-Private Investment Fund, or PPIF?
Rasmus: This is really Part Two of the big banks’ rescue plan – and the $1 trillion figure that Geithner presents is just for starters; the figure is going to increase significantly.
As you say, they plan to use taxpayer money to help the banks and investors buy bad assets that exist in these banks and financial institutions. It’s the existence of these bad assets that prevent the banks from making loans to businesses and homeowners. It’s what’s been clogging up the system.
But the Treasury has refused to deal with these bad assets. If you go back to then-Treasury Secretary Henry Paulson and the Troubled Assets Relief Plan (TARP), you can see that we gave the banks $700 billion in bailout funding. But Paulson didn’t buy up the bad assets, which was the whole idea behind the rescue plan. Why is that?
It’s because the banks are on strike. The banks don’t want to lend, or if they do, it’s at ridiculously high rates. They don’t want to sell all the bad assets on their books because they are essentially worthless now, and they don’t want to sell at their worthless market price.
If they sold them at their market price, they would have even greater losses than they have now. They don’t want to loan when their balance sheets are so negative, because if they loan, that reduces their reserves on hand. And this is freezing up the system.
Paulson and TARP could not buy them at above-market prices because Congress was looking over their shoulders and saying, “Hey! What are you doing, subsidizing these banks, giving them more than the market value of these assets?”
So, Paulson looked around, saw that he couldn’t do anything, and did nothing in relation to these bad assets.
Today, with the PPIF, we have essentially the same situation, but with a little twist.
What they’re trying to do with PPIF is to create a market price to sell these bad assets, thereby subsidizing not only the banks but the investors who would buy them. In other words, this $1 trillion is designed to give money incentives to the banks to make up the difference between what the price would be and what the market value would be. So, they are giving the banks a windfall to encourage them to sell at above-market price.
At the same time, they’re giving an incentive to the investors; in other words, they are subsidizing the investors as well, with taxpayer money, to come in and buy. They hope this will create a new market price that will take off on its own and unblock the lending. It’s going to cost well over $1 trillion to get that going, and it’s really questionable whether investors will want to buy those bad assets at any price.
WERC: All the business media report that investors are not willing to buy these assets, even at higher rates. …
Rasmus: That’s right. And if the $1 trillion doesn’t work, the government is prepared to throw more money at them. The investors know this, so they are going to sit and wait, saying that the price is not high enough and that you have to subsidize us even more. With the government already so committed to this effort, they will throw more money at the banks. Geithner and Obama are already saying that this is just a start, and that we may have to throw more money into this bad assets plan some time soon.
WERC: Some economists, and even some top-level financial gurus such as former Federal Reserve chief Alan Greenspan, are saying that the government should simply take over and nationalize these bad assets. They say the Obama plan is doomed to fail.
Rasmus: The banks would love this. Keep in mind that Obama and Geithner are not talking about confiscating these bad assets. What they are talking about is buying them. But they would have to buy at above-market price because the banks won’t sell them. The bankers are holding out for even-higher prices. That’s the crux of the problem.
And when Greenspan and the others talk about nationalization, we must be clear, this is a misnomer. They don’t really mean nationalization. Buying preferred stock or even common stock does not amount to nationalization. It’s just partial receivership, or subsidization, at taxpayer expense.
Seizure of private companies on behalf of investors is not nationalization. Their goal is to buy the bad assets and then sell them back to private investors at below-market prices – all at taxpayers’ expense.
WERC: What is the total amount of bad assets, assuming there’s agreement on the amount?
Rasmus: Professor Rubini at New York University estimates that there’s at least $3.6 trillion in bad assets. Fortune magazine says $4 trillion. Geithner, last June, indicated he thought there was about $6 trillion.
So to buy these bad assets, the taxpayers would have to fork over $6 trillion.
WERC: The figure is staggering. Clearly, this situation calls out for true nationalization.
Rasmus: Yes, it does. But what is true nationalization? It means totally taking over these banks and financial institutions – with bondholders and shareholders not just taking a haircut, but taking a scalping. It means getting rid of management. It means consolidating and running these banks on behalf of the interests of the working-class majority in the country. You don’t pay dividends. You don’t pay stock shares. You take full day-to-day operational control of all strategic decision-making. You run it and turn over the profits for public investment, not to line the pockets of private investors.
Without a doubt, what we need is a fully nationalized banking system.
WERC: Many of the initiators of the Workers Emergency Recovery Campaign are calling for the nationalization of the banks without compensation. They also say that the $700 billion in the Paulson plan – funds that are simply sitting in the banks waiting to ride out the recession – should be confiscated by the government and placed at the service of job creation.
Today, the government could nationalize the banks and use that $1 trillion in the PPIF fund – just to give one example – to put people back to work. If we assume a living wage of $50,000 per worker for one year, and if we multiply this number by the 20 million projected unemployed workers, this gives us exactly $1 trillion. Shouldn’t the Obama administration earmark that $1 trillion to provide unionized, living-wage jobs for one year to the 20 million unemployed? Isn’t this a better way to jump-start the economy?
Rasmus: That’s the point I have been making all along. People are referring to the Great Depression. But what got us out of the Depression? It was not the New Deal.
The New Deal did not really come on the scene till 1935, with some success. It stopped the decline, but it did not generate the recovery, and after two years, Roosevelt and others started dismantling the New Deal. Once they started doing this and trying to balance the budget, in mid-1937, we went right back into the Depression. We did not come out of the Depression till 1942. Why was this? It was because government spending, i.e., public investment, rose from 20 percent to 40 percent of annual Gross Domestic Product (GDP), the total annual spending in the economy.
WERC: How are they planning to finance the PPIF? Would it be through the Treasury?
Rasmus: Yes. They’ve got about $190 billion left over from that $700 billion TARP fund, and they will put in initially another $810 million, again, to subsidize the investors and the banks with the hope that they will come into the market to start buying and selling the bad assets at above the market price. They want to induce a market and a price, and they hope that once they do this, all the investors will step in and follow suit. But that’s a big if. I don’t see it coming.
Now the second part of the financial plan is designed to work in conjunction with the PPIF, and that’s the TALF, or Term-Backed Securities Loan Facility. This will be run by the Federal Reserve.
The Fed had $200 billion assigned for this last November 2008, but it just held onto it. Now in about a week they are going to issue another $800 billion. So they’ll have an additional $1 trillion for TALF.
WERC: Will this mean that the Federal Reserve will issue bonds for the TALF?
Rasmus: Not exactly. The idea is for the Fed to lend money to investors, particularly investors in the hedge funds, money-marked mutual funds, and private equity funds – that is, to the shadow banks that are responsible for so much of the speculation that got us into the mess we’re in today – so that they can buy the bad assets. As you see, they are coming at it from two directions.
But bad assets of what? The plan is to buy up the securitized bonds and loans associated with consumer credit. We are on the verge of another sub-prime-like bust in the consumer credit markets – meaning auto loans, student loans, credit card loans, and commercial property loans.
The whole idea here is that the Fed will loan money to hedge funds and private equity funds to buy these bad assets that are about to collapse. Estimates are that defaults on credit cards alone are going to rise from their current 2% to 3% today to 8% to 10%.
It’s ironic, when you think about it, that the government is going to try to resurrect this thing through the shadow banking system and securitized markets, which collapsed from more than a trillion dollars in credit a few years ago and which have lost close to $4 trillion total. The hedge funds have lost $1 trillion of their total value, and yet we are going to give them money to buy out all these bad assets … all of this to try to stimulate and increase the lending to industry, to commerce, and the like.
This doesn’t make any sense. It just shows that the government has absolutely no confidence that the commercial banks can lead a recovery.
The question is: Is anyone going to re-enter into these securitized markets that have collapsed and buy up these bad assets, even with these government loans? Does anyone want to touch the toxic securitized markets? I don’t think so. Even with loans … unless the government gives them interest-free loans – and if that happens, the government should just enter and take over these consumer credit markets and provide credit directly through the Fed the auto, student, commercial property and other markets. Let the Fed provide the funds directly to, for instance, credit unions as the local loaning institutions. Why have middle-men come in and skim off the profits?
We must also keep in mind that the $2 trillion they are throwing at the banks with this plan is just the beginning. Everyone is lining up at the trough for a taxpayer payout.
WERC: Let’s talk now about the Homeowner Affordability and Stability Plan, which is both the third financial package and the fourth component of the Obama recovery plan.
Rasmus: There are two parts to it. The first is $200 billion to go to Fannie Mae and Freddie Mac, because they already ran through the $200 billion we gave them back in August 2008. They have bought up the bad housing loans, or mortgage loans – and as their values continue to fall as housing prices fall, the values of the loans they bought up have collapsed. So they have run through their $200 billion, and they need $200 billion more.
It’s not really going to improve anything when you just keep buying up these bad loans. That’s the first part.
Regarding the second part, we have to keep in mind that Fannie Mae, Freddie Mac, and AIG, which is now supposedly “government owned,” only constitute about 20% to 30% of the housing market. That leaves 70% to 80% of the bad housing mortgage market, which the government had not been addressing. It’s this other portion that the Homeowner Affordability and Stability Plan now addresses – but with only $75 billion, a paltry sum!
And even this $75 billion is targeting subsidies to mortgage lenders; in other words, it’s trickle-down once again – that is, give money to the mortgage lenders to have the government and taxpayers pay to lower the interest rates on new home loans – up to $75 billion, which is not all the many home loans.
And what’s even more outrageous, these loans are to go to new buyers – not to those 5 million to 7 million homeowners who face foreclosure, delinquency, or default. The government is not attempting to do anything about people who are losing their homes. What they plan to do is subsidize the markets, so that the lenders can create new, affordable buyers to buy up some of the foreclosed homes.
This is a sop, a freebie, thrown to the mortgage lenders who are asked to come in buy some of the foreclosures and some of the huge stock of homes, to help them sell all the new homes. So really, it’s a plan to benefit the mortgage lenders and construction firms holding all these new, unsold homes.
WERC: Now, let’s get to the last item: the 2009 budget. This is the part that many are touting as New Deal and even “socialist,” if we are to believe Rush Limbaugh.
Rasmus: This is a $3.6 trillion budget with a lot of spending. There is going to be a firestorm over it. Watch the Republicans, the corporations and the banking interests come out of the woodwork. The gloves are going to come off. This is where the big split in the capitalist class is going to reveal itself, because there are some proposals in this plan that would shift income. It’s a shift that is insufficient, – too little too late, once again – but it is certainly moving in a better direction.
This is what we know so far about the budget:
It will increase taxes on the wealthiest 2% of households – but it will only increase taxes from 35% to 39.5%. This will effect people making more than $250,000 per year. This amounts to a rollback to the Clinton period. But that tax increase on the top-margin rate does not take effect until 2011, when the Bush tax cuts expire. This is absurd. It should take effect in 2009. They shouldn’t be putting it off, when funding is needed so desperately to stop teacher layoffs, prevent home foreclosures, or to stop autoworker layoffs.
What’s more, they will not come close to obtaining the funding they need for a real economic recovery by only rolling back the capital gains’ and capital incomes’ tax cuts only to the 1990s levels. They have to roll them back to the pre-Reagan, pre-1980s, rates. They have to raise these rates back to 50%, minimum.
So there is some increase in the tax rate, but it is delayed and it is far less than what is needed. Again, 2009 is a critical juncture year. If the declining situation is not reversed, the odds increase that we will be moving in 2010 to a global recession. There really is no way out without a real redistribution of income, reversing the redistribution of income from workers to investors and corporations that has been going on since 1980.
Second, on healthcare. The budget calls for $634 billion in healthcare funding, but this is only half of what is needed for single-payer. Also, if this funding goes to the private insurance companies, as appears to be the case, there will be no real solution to the healthcare crisis in our country. Only single-payer offers a solution.
Third, the budget calls for deprivatizing student loans. This is one point that is commendable in the plan.
The details of the plan are only emerging. We will have to monitor it closely. But one thing is certain: What has been proposed by the Obama administration is likely to be modified substantially by the Republicans and centrist Democrats. There is going to be a big fight, with major changes expected.
WERC: The government is talking about incurring a $1.75 trillion deficit with this budget. What does this mean? How will the deficit be financed?
Rasmus: First, it should be noted that the real deficit by 2010 will be $2.25 trillion.
One way they are talking about financing this deficit is with carbon credits. These are carbon pollution permits. The government is expecting a $526 billion revenue from this source, though it’s questionable whether they will be able to raise this amount. Governments and corporations in Europe want to give corporations credits for free. They’ll try that here too.
They will issue more Treasury bonds, and they will simply have go to the printing presses and print more money. Clearly, they are in a bind – especially if the economy continues to tank.
WERC: You have made many predictions that have actually come true – unlike just about every mainstream economist and forecaster. What are your predictions today?
Rasmus: We’re on the knife’s edge of a transition between this epic recession and a depression. The bank bailout will require trillions more dollars. And even then, the impact is likely to be marginal.
The depression could be triggered by one or more of the following factors: sovereign debt crises in Eastern Europe, deepening job losses in the United States, the collapse of the treasuries’ markets; the collapse of the global bond markets. These are among the many possible scenarios.
WERC: What is to be done?
Rasmus: I have outlined some policy recommendations here. Readers who would like to delve into this question in greater depth can go to my website, which is www.kyklosproductions.com. You can also see my latest article in the March 2009 of “Z” Magazine, where I describe my full set of proposals for recovery as an alternative to the Obama program.