How Is A National Economy Not Like A Household Budget?

Krugman is especially good today. He makes some crucial points, one in particular, that most Americans don't understand, and that the conservative power structure, the banks, the 1%, are determined Americans never understand:

"Let’s start with what may be the most crucial thing to understand: the economy is not like an individual family. Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too."

The Austerity mantra tells us that nobody should spend more than they have in their pocket right now. No homeowners, no car owners, no college for you.

Unless you are a member of the 1% who have accumulated all of America's earning power over the past 30 years.

What income and savings ordinary working and formerly middle class consumers used to spend now belongs to the very rich and adds to the leverage that the 1% has to manipulate the economy.

The 1% also uses this leverage to manipulate Congress to ease their taxes and increase ours, to get our tax dollars to bail out the big banks but not help the homeowners who were wrongfully foreclosed, to get government to protect corporate earnings and CEO pay from taxes but cover any losses they might suffer through their own risky behavior.

The concentration of wealth also buys a lot of media, a lot of punditry, a lot of "expert opinion", a lot of public relations that can be used to persuade the mass of Americans that they don't deserve what they used to deserve, that austerity is good for them, that Americans should settle for less and quit grumbling.

Austerity policies take trillions out of the middle class consumer economy and put them into the well-stuffed mattresses of the 1%.

To what purpose? The rich can afford to play a long game. (Call it a long con if you like.) Their goal is to suppress working incomes to their lowest possible degree. They own for a living; they see working incomes as an evil. They have been suppressing working incomes for the past 30 years. What will eventually happen is the U.S. economy will begin to resemble a third world country, with large slums full of workers desperate enough to work for pennies and small gated enclaves of very wealthy people and their bodyguards.

Interestingly, the Austerity preachers give us Greece as an example of what happens if a country doesn't act according to the wishes of the very rich. But Greece is an example of the opposite. The Greek economy fell apart because its extremely wealthy stopped paying taxes and the consequences (unwise austerity policies) were forced upon the working population. But economies are made up of people who work and spend money, not just people who own for a living, who are rich for a living and do nothing productive. Why are the latter group made immune to taxes? What happens when trillions are taken out of a nation's economy and put tax-free in offshore banks? What happens is a Greek style collapse.

Between $20 and $30 TRILLION are hidden offshore by the Super Rich

"The very existence of the global offshore industry, and the tax-free status of the enormous sums invested by their wealthy clients, is predicated on secrecy," according to James Henry, former chief economist for the global business consulting firm McKinsey.

This is the financial club Mitt Romney belongs to.

This story broke on the front pages of the British newspapers The Guardian and The Observer over the weekend. The articles discuss the burden wealthy tax evaders place on everyone else, not just by evading taxes but by removing their massive cash hoards from the economies where they earned them (and evaded taxes). The amount of hoarded cash is greater than the GDPs of Japan and the US combined. Need a reason for the global recession? This is it.

The summary in the Guardian

The details, in the Guardian

The world of private banks where our economy is being held hostage

Analysis of the problem

The white paper with all the numbers

Mitt Romney is the poster child for this elite group of super rich. They may have homes in this country, but their wealth is safely offshore where what they earn can't be touched to build roads or schools or hospitals. Or, for that matter, to pay the lifetime of healthcare for wounded veterans. They are above obligation to any country, especially the United States. We all try to minimize our tax bill, but for people like Romney it is a major effort of evasion that employs many banks and very complex schemes.

The article about Romney's tax havens in this month's Vanity Fair

The question then is: should Mitt Romney be running instead for the presidency of Bermuda?

Or the Cayman Islands? Or the Bahamas? Or Switzerland? It doesn't really matter what it says on his birth certificate. What matters is what it says on his tax returns. Where is he invested? Whose economy does he care about? Does he fulfill the basic duty of citizenship, the duty we all fulfill? Does he pay the taxes that pave the roads and educate our kids? Or does he evade them?

This matters.

The collusion of the big banks to rig global interest rates matters.

The involvement of major banks in money laundering for international terrorists and drug cartels matters too.

What's disturbing is they are laundering billions for ordinary American billionaires as well, helping them hide what they earn from the tax obligations that are a vital part of citizenship.

Why LIBOR Matters

“Fraud is a crime in ordinary business — why shouldn’t it be so in banking?” ~George Osborne, British Chancellor of the Exchequer

An enormous fraud has come to light in London, affecting trillions of dollars quietly stolen from bank accounts and loan accounts worldwide. Money stolen from you. It involves a rate formula called LIBOR. The L stands for London, but the London rate sets bank to bank lending worldwide, and bankers have been rigging that rate, fiddling it, manipulating it to earn themselves trillions of illegal gains over the past decade. It helped trigger the financial collapse of 2007-2008 by phonying the numbers and hiding the weaknesses in large banks. This is the kind of corruption enabled by the relaxing of financial regulation ushered in by George W. Bush and by Republican power brokers like Senator Phil Gramm.

From The Economist:

"[Referring to LIBOR, the rating system that establishes interest rates for everyone who uses credit] "In reality, the system is rotten. First, it is based on banks’ estimates, rather than the actual prices at which banks have lent to or borrowed from one another. “There is no reporting of transactions, no one really knows what’s going on in the market,” says a former senior trader closely involved in setting LIBOR at a large bank. “You have this vast overhang of financial instruments that hang their own fixes off a rate that doesn’t actually exist.”

"A second problem is that those involved in setting the rates have often had every incentive to lie, since their banks stood to profit or lose money depending on the level at which LIBOR was set each day. Worse still, transparency in the mechanism of setting rates may well have exacerbated the tendency to lie, rather than suppressed it. Banks that were weak would not have wanted to signal that fact widely in markets by submitting honest estimates of the high price they would have to pay to borrow, if they could borrow at all."

In other words, only oversight and regulation (which Wall Street and the banks say they don't need) will keep them from stealing trillions from us.

Gretchen Morgensen of the New York Times: "Manipulating the Libor is a big deal because it affects the cost of money for almost everyone. The Libor is used to set rates on mortgages, credit cards and all manner of loans, personal and commercial. The amount of money affected by the phony rates is at least $500 trillion, British regulators have estimated."

Five hundred TRILLION.

"“We’re clean but we’re dirty-clean, rather than clean-clean,” an executive said in a phone conversation. Talk about defining deviancy down.

“Dirty clean” versus “clean clean” pretty much sums up Wall Street’s view of cheating. If everybody does it, nobody should be held accountable if caught. Alas, many United States regulators and prosecutors seem to have bought into this argument."

Interviewed in The Independent, Nobel Prize economist Joseph Stiglitz puts the scandal in its proper context. Isn't this what bankers do? Aren't bankers supposed to try to make money and profits? Yes, but... Corruption destroys the strength of an economy by diverting investments and activity away from producing goods and services and infrastructure to theft, to gaming weaknesses, to rigged gambling on rigged numbers.

"It's a textbook illustration," Stiglitz said. "Where there are these asymmetries a lot of these activities are directed at rent seeking [appropriating resources from someone else rather than creating new wealth]. That was one of my original points. It wasn't about productivity, it was taking advantage."

Elliot Spitzer knows this territory well. He used to investigate and prosecute these guys.

The Financial Times is by no means a leftist newspaper, but it is reporting this scandal very aggressively.

Gary Gensler, one of Obama's regulators, is one of the Good Guys trying to clean up the financial sector: “I don’t think the public should be left at risk of a trade association, with the most sophisticated, largest banks, setting a rate that’s so critical to our credit cards, our student loans, our mortgages... These benchmarks matter; we all lose if the markets aren’t reporting accurate information.”

One Financial Times columnist calls for getting rid of the current generation of leaders in the financial industry. He also calls for breaking up the big banks, because "Too Big To Fail" is also "Too Big To Jail."

Robert Reich does a good job of explaining why this should matter to average Americans, in The Guardian (a reliably good source of information on the corruption in markets. They also broke the story about how Rupert Murdoch's papers hacked into thousands of phones and corrupted Scotland Yard and the British government.)

"The typical saver or borrower on both sides of the Atlantic trusts that the banking system is setting today's rate based on its best guess about the future worth of the money. And we assume that the banks' guess is based, in turn, on the cumulative market predictions of countless lenders and borrowers all over the world about the future supply and demand for money.

"But if that assumption is wrong – if the bankers are manipulating the interest rate so they can place bets with the money we lend or repay them, bets that will pay off big for them because they have inside information on what the market is really predicting which they're not sharing with the rest of us – it's a different story altogether.

"It would amount to a rip-off of almost cosmic proportions – trillions of dollars that average people would otherwise have received or saved on their lending and borrowing that have been going to the bankers instead."

"It would make the other abuses of trust Americans have witnessed in recent years – predatory lending, fraud, excessively risky derivative trading with commercial deposits, and cozy relationships with credit-rating agencies – look like child's play by comparison."

Every honest economist, every honest banker, every honest politician, every honest journalist and reporter is taking this rigging of the financial markets, this enormous fraud, very seriously. The ones who are brushing it off or minimizing it or defending it or ignoring it are probably owned by the corrupt financiers themselves.

This fraud isn't confined to the London market. It affected trillions of transactions and resulted in many trillions of dollars defrauded from average households worldwide. It helped cause the financial collapse of 2007-2008, and has continued after that. The wizards of Wall Street continue to use this fraud to pay themselves billions in bonuses to this day.

“It is clear that what happened in Barclays and potentially other banks was completely unacceptable, was symptomatic of a financial system that elevated greed above all other concerns and brought our economy to its knees. Punish wrongdoing. Right the wrong of the age of irresponsibility.” ~George Osborne, British Chancellor of the Exchequer

It's an age of irresponsibility Obama is trying to end, and which the Republicans are determined to protect and extend.

European Dead Enders

Krugman has some things to say about the dead end economic policies of the Europeans. And you can read it in the Sacramento Bee without using up one of your ten monthly free NYTimes visits.

At least with Europeans you don't get the feeling they are trying to destroy the world so Jesus will come.

AUSTERITY IS HOW THE RICH TEACH WORKING PEOPLE TO BE POOR

Krugman is right again. Today's column is about the stupidity of austerity measures during a recession.

What is it about Big Men (and it's usually men)? When they screw up, they screw up Big, and after they screw up they spend the post screw-up period arranging ways to blame everyone else.

The big money people, the hedge funds, the investment banks, bet long on dubious items and they leveraged themselves to do so. When their bets failed, they couldn't pay up so they were bailed out by us.

But that wasn't enough. They couldn't bear taking any blame for what they'd done, so they blamed the people who were victimized by their greed and overreaching. They blamed the people whose jobs were axed because of the downturn they, the bankers and hedge fund gamblers, had caused. They blamed homeowners whose home values dropped because bankers had wagered those home values too high. They blamed the homeowners' children and the homeowners' dogs. Once they'd blamed everyone but themselves they arranged to punish them. The punishment is called Austerity.

But austerity doesn't work. Let me rephrase that: it works badly. It has a very powerful effect, but the effect is negative. It is like surgeons bleeding a patient who is suffering from loss of blood. It is like an airline pilot whose plane is in a stall deciding it's a good time to conserve fuel.

Austerity is like starving one's children to protect their inheritance. Who does it benefit? The bankers who manage the funds.

Austerity is a financial form of anorexia nervosa, and just as dangerous. It's been proven dangerous, ineffective, wrongheaded and stupid over long years of painful experience. The problem is most people don't have long memories or good understanding of these things and bankers have the money (provided by the taxpayer bailout) to buy advertising and network air time and political influence. They are able to sell anything they'd like, and austerity is what they'd like now––for us, not for them.

Austerity forces everyone to sacrifice to make sure the bankers don't need to. They caused a problem, and we are fixing it––but we are only fixing it for them. We are paying for the damage they did and this payment period is prolonging and deepening the harm done. Austerity causes broad harm to avoid inconveniencing a small group of bankers.

AUSTERITY IS HOW THE RICH TEACH WORKING PEOPLE TO BE POOR. This is a phrase that should be heard more, but without the kind of money bankers have it's not likely to be heard very much on radio or television.

Too Big To Arrest?

From the Atlantic comes a timely discussion of the stupid rule that reads (I'm paraphrasing) "if you steal billions of dollars in a complicated way without getting sweaty it's not a crime". Why do really big thieves always get away with it? Answer? Magic. What a victim doesn't understand can't be a crime. Amounts so big a policeman, a hundred policemen, can't count them can be stolen with impunity.

And from Business Insider, this list of the most egregious severance packages. CEOs who screw up aren't fired exactly. They are given so much money they have to leave their jobs to count it. Ordinary employees are lucky to leave fully clothed.

If a they can hire an 8 year-old cheaper your employer will fire you, but they will let a CEO lose them billions and keep him around. If they don't keep him around they will pay him millions to ease his embarrassment and theirs. Why is it if you protest without a permit you are beaten up, if you steal $100 you end up in prison, but if you steal a billion you are rewarded? There is very little proportionate justice. Very little justice at all. Nobody gets what they deserve especially those con artists who steal billions. It makes you want to punch someone or sue someone or see someone perp walked but the ones you want to see perp walked are immune. You've heard of Too Big to Fail. They're also Too Big to Arrest. So the victims are left to take out their frustrations on each other.

As J. D. Hackensacker III said “That's one of the tragedies of this life: that the men most in need of a beating are always enormous.”

(Those of you who don't know who J. D. Hackensacker III was should get acquainted with the films of Preston Sturges.)