Scary Year End Treasury and Fed Reports

By: Teddy
Published On: 12/16/2008 11:47:04 PM

Year end accounting reports are hitting the streets, and the Federal Reserve and US Treasury are no exception, and it is giving new meaning to the oxymoron "honest banker."
But what does it all really mean?
Would anyone in their right mind invest in a company which reported a Net Operating  Cost that increased 266.3% in 2008 compared to 2007? Badly managed outfit, right? Well, the official Treasury's chart of "Gross Cost, Revenues, and Net Cost" of the USA shows its net operating cost as being a deficit of over $1 trillion dollars (compared to 2007's net operating cost as a deficit of $275.5 billion. The actual Balance Sheet for the United States as presented in the official report, shows a position of Assets of $1,974.6 Billions minus Liabilities of ($12,178.2 Billions) or a Net Position of Assets Minus Liabilities of ($10,203.5 Billions). That's compared to the 2007 deficit, which at the time we naively thought huge, of $9,205.8 Billions. Looks like a bankruptcy, eh?

The Report admits "Current Trends Are Not Sustainable." The GAO goes on to say, with its usual frankness, "The federal government did not maintain effective internal control over financial reporting, including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2008." That is, Bush's administration ignores the law and accountability.

At the moment, aware of the spectre of Japan's decade-long economic-financial decline in the 1990's, the government apparently fears deflation far more than inflation, and it is true that the CPI (Consumer Price Index) declined 1.7% in November. Strangely, based on its fascination with the Japanese experience, the Federal Reserve is applying exactly the same methods to fight deflation as did Bank of Japan, despite the fact the methods did not work: i.e., lowering discount rates to zero percent. The dollar's recent strong rally has faltered and it is once again under attack. Foreign purchases of US securities are dropping fast---- just when we need more of them to finance our deficit. And so on. Read the full report at http://www.fms.treas.gov/fr/08...

It is worth asking, too, what happened to all the gold in Fort Knox as a result of the more-or-less secret gold carry trade enacted by the US Treasury in the 1990's. As one investment advisor has said, "...just wait until Pres. Obama asks how much of the original Fort Knox gold still remains the unencumbered property of the U.S. government. Surprise, surprise." In other words, even if the gold is still there, do we actually own it any longer? Therefore, what is the ultimate backing for all those dollars Bernanke continues to create out of thin air? Or, are we like Zimbabwe?

The Federal Reserve, remember, is organized in fact by the banks themselves, it is not fully an accountable part of the government's executive chain of command, and some think it has become more powerful than the Presidency itself. Bernanke, on his own, has completely re-written its mission so that the Fed is now the "lender of last resort." He has doubled the size of its balance sheet of assets and liabilities, and, by making huge special loans to selected big banks, changed its makeup from 2007's safe holdings of Treasury notes and bonds and a little gold, selling off half of the Federal Reserves' Treasuries to fund additional loans, and encumbering what was left with "off balance sheet" swaps of some $220 billion---- isn't that a nice bureaucratic way of saying Enron accounting has taken up residence in the federal government? Result: the Federal Reserve's balance sheet went from $800 billion of reliable assets to maybe $250 billion of "unencumbered" Treasuries.

On the liability side, the Fed has borrowed and acquired deposits to fund the loans to equal the amount of the new currency "printed." In two months the Fed has added almost $1 trillion new credit to the economy. Also, there are the Fed's new inventions of the MMIF (Money Market Investor Funding Facility) to guarantee up to 90 percent of $600 Billion in loans to that sector; the CPFF (Commercial Paper Funding Facility) which in 2 months has already purchased $300 Billion in commercial paper; and  TALF (Term Asset-Backed Securities Loan Facility) to lend $200 billion to support mortgage-backed securities, all of which will amount to, for starters, another trillion dollars of credit. All of this is completely beyond the old framework of government as provided for by the Constitution, and its products sound as exotic and dangerous as all the fancy derivatives invented by similar Wall Street geniuses (MMIF? Sounds like such creatures as the CDS's or Credit Default Swaps of Wall Street in not being fully understood, perhaps?) The Federal Reserve can "create" money like this, but the US Treasury cannot; what it spends must be paid for out of future taxes or other receipts.

What strikes me is not so much the obvious mess we're in, but what must lie ahead. There is more at work under the surface than simply another "recession" or "adjustment." What we have here is a major historical change.  Several historians/financial writers believe that in 2008 the US economy and financial structure took a lethal hit. Henry C. K. Liu, writing in Asia Times Online, ( http://www.atimes.com/atimes/C... said that the credit crash "turned out to be a catastrophic, global financial perfect storm," which may even "spell the end of the cowboy finance capitalism of the past two decades in which risks are socialized and gains privatized, with debt manipulated to act as phantom capital." In other words, death to the "free market" greed-sanctified, globalized corporation-dominant economic philosophy so beloved of Republicans (and the DLC).

This does not, I think, mean the end of corporate dominance, however. Not even the virtual nationalization of banks means creeping socialism; it may instead mean the opposite: that the banks and/or corporations are in fact formally taking over the government through the back door---- creeping corporate feudalism, in other words.  It is happening so fast, so subtly, so unremarked upon, that the final sea change to our republic will have occurred and be in place before we the poor slob people even know what has happened.
   


Comments



Economic Reality v. Digital Abstractions? (FMArouet21 - 12/17/2008 11:29:48 AM)
Thanks, Teddy, for this piece of research, which pulls together several important themes.

As this greatest economic crisis of the past century unfolds, it seems to me that Bernard Madoff's $50 billiion Ponzi scam is not so much an aberration as it is a microcosm, a reality nicely captured in Toles' savage cartoon in today's WaPo.

Madoff's $50 billion scam really has only one major difference with the astronomical leverage ratios and Wild West CDO and CDS trading strategies engaged in by "legitimate" hedge funds, insurance companies, investment banks, and regular commercial banks: Bernie Madoff will get to go to jail someday, while the "legitimate" players will have their devastated balance sheets replenished by bailout dollars created out of thin air. AIG, CitiGroup, and other malefactors will have their uncovered obligations propped up by hundeds of billions of federal dollars, and their criminally negligent executives will end up keeping their jobs, salaries, bonuses, multiple homes, corporate executive jets, and fleets of luxury cars.

Yesterday Daily Kos diarist "bonddad" posted some very interesting charts of economic activity. "New Deal democrat" posted some interesting charts on deflationary trends. Note also the rapidly plunging indices for commodity prices.

The charts all reflect that there is substantial downward momentum for economic activity and prices. While no one can predict when the U.S. economy will hit bottom, the trendlines suggest that we will not sharply pivot on a dime--or on a trillion dollars (or two, or three).

Thus far the bailout funds for the financial sector appear to be having little or no positive effect on the real economy, for the funds seem merely to be shoring up red ink balance sheets or even making possible the purchase of attractive takeover targets, rather than serving the intended purpose of unfreezing credit for businesses and consumers.

We may have reached a digital monetary divide in which monetary and even fiscal policies have become divorced from the real economy of the producing, buying and selling of goods and services. "Money" is now a digital representation of value sitting somewhere on a hard drive. My money is on my bank's hard drive and on my brokerage firm's hard drive. My obligations are on my credit card company's hard drive and my mortgage company's hard drive. My financial transactions are the instantaneous transfer of a few electronic bits from one hard drive to another to settle accounts.

These days the Federal Reserve and the U.S. Treasury do not even need to print money. Someone at the Fed or Treasury simply decrees that "X" billions or trillions of dollars are hereby created out of nothing, and the resulting digital expressions of value are then disbursed through the banking system or as direct digital subsidies to corporate entities. So here is my basic question: numbers serve as essential abstractions for counting things in the real world, such as employment figures, unemployment claims, housing prices, commodity prices, shipping volumes, trade balances, votes, etc. But can mere invented, abstract numbers (in this case, digital expressions of value created out of thin air and then placed on federal government hard drives) have much effect on the real economy?

No serious economist doubts that now is the time for massive federal deficit spending in order to provide economic stimulus. What I do not see so far is how the bailout funds or the Federal Reserve's monetary legerdemain are stimulating any economic activity at all, for the funds seem to be rewarding and propping up the balance sheets of insolvent bad actors in the finance industry rather than reaching the accounts of Main Street businesses and employees, whose spending, investing, and continued working can halt and reverse this economic collapse.

It would make more sense to bundle $100 bills into packs of a hundred and pass out $10,000 to every adult at the supermarket checkout counter. At least that money would get spent and start circulating.

Are Henry Paulson and Ben Bernanke simply inattentive and inept? Or are they displaying devious malice in trying to keep the finance industry's Ponzi-style looting going for as long as possible?



Complacency and trust (Teddy - 12/17/2008 12:18:05 PM)
in the effectiveness of the response of various governments to the ongoing real economy disaster is what I see. Far too many are content with trillions of dollars being pumped out, sure that, once the economy recovers, we can not only pay off the loans but do so without hyperinflation (or, for that matter, stagflation) taking over. I posted this on Bluecommonwealth.com and got that sort of response--- take a look if you would, please. Another case of two people seeing different pictures when looking at the same data.

Your point that all this fiat money lurking on hard drives does not seem to be making it out into the real economy is interesting, and may account for the observation that so far it has no observable effect on the real economy. We do indeed have a two-tier economy.  



There are some ominous signs (Rebecca - 12/18/2008 12:44:35 PM)
First, the Ponzi schemes are not the first stage of this dishonestly. The financial system has been living off hot air for a long time because we don't actually seem to have a real economy anymore. Just because companies are making money doesn't mean it is coming to the American economy. Most are making money off foreign labor, collecting money from Americans to pay small wages to foreigners and taking a huge cut for the company management. Tell me how this money in any way cycles back into the American economy. This is not economic growth. It's vampire capitalism. So the real money has been flowing out of the country for a long time.

Now that the economy has been sucked dry by vampire companies and dishonest financiers, they are ready to consolidate their gains. They got a huge corporate welfare package with the bailout and they are using it to buy up companies, creating huge financial monopolies.

The IRS has changed tax laws (bypassing Congress) in the last year which will allow these companies to assume the tax write-offs of the companies they purchase while at the same time putting the companies' assets on their books. In other words, if you buy enough failing companies you may end up paying no taxes at all. Seems like they were getting ready to do this for at least a year. They are using the bailout money to make these purchases.

The lack of transparency is very troubling. Most would call it throwing good money after bad. Truth is we have given the crooks all the cards and we're crossing our fingers hoping for the best.



Loading up debt (Teddy - 12/19/2008 4:47:39 PM)
on the acquired companies, then sucking their assets out and leaving behind a shell which soon goes belly up is the modus operandi. This is supposed to be "natural," and the "market" is supposed to make it all work out to the benefit of society. Baloney. It works out to the benefit of the overpaid CEOs and sticks the stockholers. We have an international elite class developing which is deliberately crushing middle classes. There must still be a little juice left in the United States for them to be after us for bailouts, wringing the last juice out of the Americans, leaving us overloaded with, yes, the same debt they left companies saddled with.


Cross-posted on Bluecommonwealth (Teddy - 12/19/2008 4:53:11 PM)
and I'll transfer Rebecca's comment to that site, as I did much of FMArouet21's. Thank you, and I hope to see you all over at BlueCommonwelath.com after RK shuts down if not before.