Looking into the Continuing Financial Crisis – What Is To Be Done?

by Randy Shannon

Treasurer, PA 4th CD Chapter

Progressive Democrats of America

December 30, 2009

The chart at the right from the St. Louis Federal Reserve shows that  banks have record low liquid assets, and that they continue to decline even though the recession is over.

These banks must maintain sufficient ALLL, or Allowance for Loan and Lease Losses, to cover their Nonperforming Loans. The chart shows that Nonperforming Loans almost equal the banks’ total assets, and loan losses are growing.

A recent Detroit News story reports that the US Treasury will give GMAC – General Motors Acceptance Corporation – an additional $3.5 billion of capital. This is on top of $13.4 billion already given to GMAC by US taxpayers to prevent GMAC from going bankrupt due to its bad housing loans.

Earlier this week the Treasury announced that it would loan unlimited amounts of money to Fannie Mae and Freddie Mac, removing the renewable cap on taxpayers transfers to the mortgage lenders.

The chart at the right shows that while credit card charge-offs are rising at Bank of America, the provisions for credit card losses are falling. The fall in provisions for credit card losses at Bank of America and the extremely low ALLL to capital ratio is due to another level of speculation by the banks. They are gambling that their attempt to create a false image of high earnings by minimizing the capital to cover losses will pay off in higher stock prices.

The risk to this gamble is that continuing credit card delinquency and more failed home and commercial mortgages will confront the financial system with another crisis of solvency. The banks are willing to take this risk because they continue to directly control the US Treasury and the Federal Reserve and indirectly control a majority in the US Congress. They believe another bailout is a lock.

This control was challenged only once when a storm of opposition to the first bailout by an enraged public resulted in a No vote in Congress. As documented by Michael Moore in his new film, Capitalism, A Love Story, this vote was reversed through a carefully orchestrated campaign in the media and behind closed doors to thwart the public’s will. Treasury Secretary Henry Paulson threatened Congress with the imposition of martial law if the vote were not reversed.

If the first vote of Congress to deny the bailout had stuck, these insolvent banks would have been liquidated and their owners would have taken the losses instead of the US taxpayers. This was the procedure used during and after the depression to deal with banks that were ruined due to either stupidity or corruption. Now that the banks have so much power financially and politically their owners can use the Congress to make the American people cover their losses.

The experience of Japan over the last two decades has already shown that transfering the public treasury to the private banks does not cure the economic crisis that was precipitated by their greed. It actually deepens and prolongs the crisis. There are three reasons.

First, the criminal and incompetent bankers are rewarded instead of punished. In our crisis Goldman Sachs, JP Morgan, Citibank, and others had record earnings and bonuses.  These banks are incentivized to continue, even escalate, the speculative practices that lead to the crisis. Their key people hold the positions of power in the Obama administration.

Secondly, by transfering $13 trillion of public money to the banks, their position of power in the government and in the economy are strengthened to the detriment of both democratic decision making and the productive use of capital. The transfer of money to the banks in Japan continued for years without solving the banking crisis. This is the path down which we have started.

Thirdly, the financial crisis precipitated an economic crisis that had been building for years, mainly due to the 30 year decline in workers earnings and their families purchasing power, and the export of productive capital overseas by the banks. Only the reversal of this trend can lay the economic foundation for a financial recovery. The transfer of the public treasury to the bankers instead of into an Industrial and Infrastructure Reinvestment Authority robs the country of any chance to recover.

We can see the data that delinquencies continue to rise. The balance sheets of the banks are again approaching insolvency despite the $13 trillion bailout. This is due to the economic crisis of the working people of this country who are overworked and underpaid, as well as the 7 million unemployed, the homeless, and the hungry.

The bankers solution to this problem is to increase the transfer of public money to their coffers. The Senate healthcare bill that makes it a crime not to buy health insurance is a model of this solution. The cap and trade bill that forces carbon emitters to buy pollution credits from Wall Street banks is another model of this solution. This is the road to hell for the United States that has been laid out by the financial elite and their lackeys in the US Congress and Senate.

A solution to this problem that would result in prosperity for the great majority of our people is really simple in its execution. We don’t need a revolution. The Federal Reserve must be nationalized. The insolvent banks must be liquidated and reorganized with their owners taking the loss. The giant banks must be broken up. The US Treasury must begin to issue greenback dollars instead of borrowing our money from the Federal Reserve. The global war machine must be downsized and production for destruction minimized.

An industrial and infrastructure reinvestment bank must be established with the recovered funds, which would finance by loans and grants building a new energy-efficient transportation system, and the mines, mills, and foundries to supply it. An emergency jobs program must be established to rebuild the social safety net and restore the health of our communities. A national single payer universal healthcare system must be established to make healthcare available to all US residents at a reasonable cost and high quality. A carbon tax must be instituted to reduce carbon emissions and to encourage consumption of low carbon commodities with a public dividend.

The Roosevelt administration’s New Deal showed what Americans can do when the going gets tough. But to get the New Deal started required a massive movement of the people demanding change that ousted the backward and bought-off politicians. The American people voted for this change in 2008. When President Obama won the election he stated that his election was not the change we seek but only the beginning of that change. It has become clear over this year that Obama is surrounded by powerful bankers and blocked by their lackeys in Congress.

The 2010 election must be another step toward the change we seek. There are already several bills in Congress to advance an agenda of peace and prosperity. After 2009 it is much clearer that the financial elite, the insurance companies, the big pharmaceutical companies are supporting war and austerity.

Jason Altmire is working for them when he lobbied with the Blue Dogs to gut the public option in the healthcare bill. Jason Altmire is working for them when he voted to give a $302 billion bailout to foreign banks. Bob Casey is working for them when he voted to deny Americans the right to buy US manufactured drugs from Canada. We need to field honest progressive candidates against these corrupt politicians so that voters have a real choice in November. Progressive candidates must step up in the Democratic primaries and, if necessary, run as independents in the November general election.

U.S. Treasury plans to inject around $3.5 billion into GMAC

David Shepardson / Detroit News Washington Bureau
Washington — The Treasury Department plans to announce as early Wednesday afternoon that it will give GMAC Inc. around $3.5 billion in additional capital, sources told The Detroit News.

Detroit-based GMAC and the Treasury Department have been in talks for months to finalize the amount of money the company would receive. The Treasury Department said earlier this year it would invest up to $5.6 billion more in GMAC — on top of $13.4 billion GMAC has received over the last year.

GMAC spokeswoman Gina Proia declined to say how much the company expected to get.

“As we have previously stated, GMAC has been conducting a strategic review of its business and evaluating options to address the challenges at ResCap and the mortgage operations,” Proia said referring to GMAC’s residential mortgage unit. “Critical objectives in the process would be to take actions that position GMAC for improved financial performance and to repay the U.S. government.”

GMAC obtained bank holding status last December making it eligible for Treasury aid. However, unlike other financial institutions that went through “stress tests,” the Detroit-based auto finance company wasn’t able to raise enough outside capital to assure regulators that it was prepared for a new downturn.

The Treasury Department holds a 35.4 percent equity stake in the company. An official announcement on new funding is expected in the coming days, officials said.

GMAC is the primary lender to most GM and Chrysler dealers and customers, and its financial health is critical to the domestic auto industry’s turnaround.

15 thoughts on “Looking into the Continuing Financial Crisis – What Is To Be Done?”

  1. Randy,

    I don’t understand. You say “The US Treasury must begin to issue greenback dollars instead of borrowing our money from the Federal Reserve.” What does this mean?

    Your “simple solution” may be simple to state but is politically pretty difficult to effect: “A solution to this problem that would result in prosperity for the great majority of our people is really simple in its execution. The Federal Reserve must be nationalized. The insolvent banks must be liquidated and reorganized with their owners taking the loss. The giant banks must be broken up. The US Treasury must begin to issue greenback dollars instead of borrowing our money from the Federal Reserve. The global war machine must be downsized and production for destruction minimized.”

    I also think we shouldn’t romanticize the Depression years or oversimplify what happened. While it’s the masses that make history it’s still the ruling class that weighs political end economic options, and the mass movement is only part of the balance, even if it’s the most important part in the long run.

    Lastly, I am not used to this method of discussion. How does it work?

    Thanks.

    Ted

    1. Ted,

      This ruling class has backed itself into an untenable position by allowing greed to run rampant over reason. Now their only solution is to pauperize the American people.

      That reality limits their options and greatly increases the impact of what progressives say and do. Even though the progressive movement is small, poorly organized, and underfunded, its audience is enormous and eager for answers. History calls on progressives to run for office now.

  2. When the US has to get its money from the Federal Reserve, which are private banks, these banks have the money printed and then ‘lend’ it to the government at interest. In short, the US pays interest on its ‘own’ money. If the Fed were nationalized, we could avoid the interest payment on money printed, even if we still wrestled with the down-the-road inflationary problem. But if more of it goes into productive investment, rather than producing weapons of destruction, which have a more limited ripple effect, even inflation can be somewhat restricted.

    1. Carl is right.

      Pull a bill out of your wallet. Look at your money. It is clearly labeled “Federal Reserve Note.” The money we are using is issued by a private bank called the Federal Reserve System. The US government borrows all of its currency at interest. Most of the money in circulation is created by bank debt at interest.

      Before the Federal Reserve Act of 1913 a “Greenback dollar” carried the label “US Treasury Note” or “Silver Certificate” and was issued by the US Government, not borrowed from banks at interest.

      President Kennedy issued an executive order authorizing the US Treasurer to issue silver certificates. These certificates challenged the domination of the Federal Reserve Notes that are backed by absolutely nothing. Between the time of this order and his assassination, the Treasury issued $4.3 billion in money. After his assassination, the Treasury stopped issuing money.

      Executive Order 11110 AMENDMENT OF EXECUTIVE ORDER NO. 10289

      AS AMENDED, RELATING TO THE PERFORMANCE OF CERTAIN FUNCTIONS AFFECTING THE DEPARTMENT OF THE TREASURY

      By virtue of the authority vested in me by section 301 of title 3 of the United States Code, it is ordered as follows:

      Section 1. Executive Order No. 10289 of September 19, 1951, as amended, is hereby further amended-

      By adding at the end of paragraph 1 thereof the following subparagraph (j):

      (j) The authority vested in the President by paragraph (b) of section 43 of the Act of May 12,1933, as amended (31 U.S.C.821(b)), to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury not then held for redemption of any outstanding silver certificates, to prescribe the denomination of such silver certificates, and to coin standard silver dollars and subsidiary silver currency for their redemption

      and —

      Byrevoking subparagraphs (b) and (c) of paragraph 2 thereof.

      Sec. 2. The amendments made by this Order shall not affect any act done, or any right accruing or accrued or any suit or proceeding had or commenced in any civil or criminal cause prior to the date of this Order but all such liabilities shall continue and may be enforced as if said amendments had not been made.

      John F. Kennedy The White House, June 4, 1963.

  3. Thank you for the clear explanation. Finally I understand the financial issue facing us and its correct resolution! I very much hope that you will get Congress to act for our sake! How can we help? — George

    1. Are there any honest progressive candidates out there? Who are they, I will work for them? Is Joe Sestak one?

  4. Comment by Mel Rothenberg”

    This is an excellent article exposing the stranglehold that the
    financial industry continues to have over the US economy. It would
    have been better if Shannon had traced out the cancerous growth of
    finance capital over the past three decades, linked it to the
    abandonment of manufacturing and the production of real goods and
    services in favor of speculative financial instruments.

    Most significantly for working people, was the deliberate adoption of
    an economic growth strategy which predictably, and deliberately would
    depress wages by failing to produce sufficient living wage jobs, and
    reduce tens of millions to economic insecurity and increasing poverty.

    Until we have a movement capable of pressing effectively for the deep
    structural changes necessary to undermine this model, we will be at
    its mercy. The significant reforms that Shannon proposes are
    necessary but not sufficient and electing scattered progressives to
    Congress by itself will do little to accomplish to achieve them.

    Shannon is right in claiming that a New New deal requires a mass
    upsurge. The issue is how it will be generated. Traditionally this
    has occurred through the mobilization of oppressed sectors around
    focused grievances, and the coming together of these sectors around a
    common program – a program in direct opposition to the ruling
    paradigm. Until this is accomplished, focusing primarily on
    electoral campaigns is putting the cart before the horse.

    Mel Rothenberg

  5. While I agree with Randy that “the global war machine must be downsized and production for destruction minimized” the statement seems a bit out of place in this article. How much does the global war machine contribute to banker interests, the federal reserve, and government bailouts of “too big to fail” banks.
    Also, would a campaign to collectively move our money out of major banks and into community banks and credit unions be an effective step? just stumbled on a friend’s post of a link to moveyourmoney.info

    1. Ben thanks for you comments. They raise some important issues.

      In regards to the banks’ interest in the war machine, there are two important aspects. First, the large merchant banks, especially The Carlyle Group, own most of the military industries and extract very high profits from this production compared to any other field of industry. Thus war boosts bank profits and an endless global war on terror secures the stability of some key banks. Secondly, the rapidly escalating military operations in Colombia and Afghanistan are carried out to protect the drug money laundering operations of the major international banks. The level of cash flow, around $300 billion per year, from drug money laundering saved some of the banks from insolvency during the recent financial crisis according to a report last month from the UN Office on Drugs and Crime. Over 90% of cocaine is from Colombia where we are building a series of new military bases, and over 90% of opium is from Afghanistan where we overthrew the Taliban that had banned opium production.

      Moving your money to a community bank will not affect the standing of the megabanks or their control over the government and economy. That must be accomplished by political action. However, I have my money in community banks and credit unions because I don’t want my money in the hands of drug money launderers or criminal speculators.

  6. Hmmm, so Bank of America has about 20% market share of the credit card market translating to about $150 billion outstanding debt. So am I seeing that chart correctly? Say the charge off rate currently is at 13% then BA has about $19.5 billion in charge offs — over three times its $6 billion provision. I’d say if BA was a person, he’d already be insolvent.

    I completely agree with the solutions, however, I think the ideas are plain and simple, the EXECUTION though, is not. Rothenburg makes it clear why. “Until we have a movement capable of pressing effectively for the deep structural changes necessary to undermine this model, we will be at its mercy…Shannon is right in claiming that a New New deal requires a mass upsurge. The issue is how it will be generated.” Because of how deep the influence/infiltration of corporate interests are in government, how well that machine has obfuscated on so many levels, we do need some form of that thing called revolution.

  7. In September 2008 while campaigning as the Green Party candidate for Congress in the 14th District I came up with similar proposals, which I brought up during Mike Doyle’s and my joint interview with the Post-Gazette editors. The Post-Gazette ignored my proposals, while Doyle started running ads that tended to mislead listeners into thinking he opposed the bailout bill. Here is the proposal from my website:
    http://www.votenorth.org/node/71
    It still holds up well.

  8. Randy lays out an excellent disquisition of the stranglehold financial interests have over this country. I had never heard of Paulson issuing a threat to declare martial law if congress did not pass the bailout. Do you have a reference?
    The plain fact that Obama is firmly in the orbit of Goldman Sachs aka the US Treasury Dept, is perhaps the most disappointing revelation so far in his presidency. Does anyone still expect him to make a Rooseveltian statement like “the wealthy interests hate me and I welcome their hate”?
    He is more like Herbert Hoover, very smart guy but unable to think outside the existing paradigm. So far, he shows no signs of being a transformative leader, which we can all agree the times scream for.
    As all the air goes out of the emotional surge that got him elected, the GOP will probably come roaring back to congress as the Obama voters stay home (re: Clinton’s 2nd year). Maybe the conventional wisdom is right: no strong social movements will develop til things get a lot worse. Unfortunatly, that level of social instability would also be a perfect breeding ground for the authoritarian right.

    1. Leah, yes you would be insolvent. But BOA is hiking interest rates and planning for your Congressman to give more of your childrens’ tax dollars to bail them out.

      Rob, here are two recordings referring to the martial law threat. One on the floor of the House by Cong. Brad Sherman of CA and a radio interview of Sen. James Inhofe of OK. Inhofe confirms that Paulson was behind the threat.

      1. Although it’s quite likely that then Treasury Secretary Paulson threatened Marshall Law, I judge the words of either U.S. senators from Oklahoma through a very jaundiced eye.

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