First the policy makers pretend that they can be paid, then they denounce the pessimists as spreading panic, and then they say that students have been taught for four thousand years how the "magic of compound interest" keeps on doubling and redoubling debts faster than the economy can squeeze out an economic surplus to pay.
What has ended is the idea that "the magic of compound interest" can make economies rich without having to work and without industry. I hope we have seen the end of derivatives formulae seeking to make money by playing in a zero-sum game. A debt overload ends either in foreclosure or annulment to preserve the economy.
If Congress really wanted to restore confidence it could mark to market, not to model. Investors no longer believe America's Enron-style accounting, debt rating agencies or monoline risk insurers. They don't trust U.S. banks to be honest about their financial positions. They worry about the fraud charges brought by attorneys general in eleven states against predatory lenders such as Countrywide and Wachovia that Citibank, JPMorgan Chase and Bank of America were so eager to buy.
While Senators and Congressmen were debating $700 billion for the major Wall Street contributors to both parties (only for starters, Mr. Paulson explained), the Federal Reserve already had given even more, without public discussion and mention in the major media. Since Bear Stearns failed in March, the Federal Reserve has used the small print of its charter to go outside its commercial charter and give investment banks, brokerage houses and large corporations some $875 billion in "cash for trash" swaps. (see the Fed's H41 report.) The Fed has exchanged Treasury securities for junk mortgages and other securities that brokerage houses and investment banks did not have time to pawn off onto OPEC, Asian sovereign wealth funds or other investors.
The Fed Chairman is not elected democratically. He traditionally is designated by the Wall Street financial sector that the Fed is supposed to regulate, acting as its lobbyist for creditor interests the top 10 percent of the population against that of the indebted "bottom 90 percent." This "independence of the central bank" is trumpeted as a hallmark of democracy. But it is undemocratic, precisely by being isolated from public control.
The subprime mortgage problem could have been solved by writing down just $1 or $2 trillion of the face value and interest rates of predatory loans. Instead, the $10+ trillion in financial-sector damage in recent weeks reflects Wall Street's fraudulent packaging and sale of junk mortgages at unrealistically high prices, using junk mathematics to calculate junk derivatives and sell them to gullible investors who believe that the pretenses these mathematics, credit ratings and projected income have a basis in reality.
Today we can see the debt-fueled bubble of asset-price inflation that Alan Greenspan trumpeted as real wealth creation for what it really is credit creation to bid up real estate, stock market and packaged-debt prices. Tangible capital formation has been left out of account, as if postindustrial economies no longer need it.
Will voters see the asymmetry in Congress's failure to offer debt relief for homeowners as real estate prices plunge below the mortgages that are owed? Will its members be blamed for not rewriting the nation's bankruptcy laws to free families from debt peonage and free housing markets from the price declines that result from today's proliferation of foreclosure sales? Will there be no relief for Corporations having to cut back investment to service junk bonds and other debts with which Wall Street's corporate raiders and "shareholder activists" have loaded then down?
Evidently not.
Excerpted from Michael Hudson @ Counterpunch
