WASHINGTON (AP) - The Obama administration's latest attempt to tackle the banking crisis and get loans flowing to families and businesses rely on a new government entity, the Public Investment Corp. to help purchase as much as $1 trillion in toxic assets on banks' books.
This proves that the whole bailout tax money spent so far did not do... much.
The root of the problem was always, and still is, the so called toxic assets which remain on the accounting ledgers of the banking sector.
I keep explaining this fiscal crisis in almost every article I write now, and try to simplify it with each iteration.
This is yet another attempt.
In chronological order
1) America loses its industrial/manufacturing sector of the economy, and its economy becomes 70% service based (service = big time banking, big time finance and big time insurance - with the finance sector, "Wall Street", being the most important).
2) American politicians, of both parties, recognize this fact and set out to help out as much as they can to make the American economy bigger.
3) American politicians, of both parties ('w' bush and b. clinton, democrats and republicans) have the same economic policy - international trade agreements for cheap goods to come into USofA and making policies to promote home ownership.
Quick explanation on Service Economy:
Service economy is banking, finance and insurance.
Think about it in very simple terms - when a house is built and then bought/sold, the service economy benefits tremendously. The banking sector makes loans, the insurance sector insures.
Most importantly, the finance sector gets an injection of money into it, allowing it to do its own thing - i.e. to make money from money.
Quick explanation on Big Time Finance:
Big Time Finance is all about walking a tight line between what is legal and illegal - in effect, in being a crook, albeit within the laws of the land... or at least not being caught.
Big Time Finance makes its money from investing on a sure thing - managers of billion dollar hedge fund alliances create conditions for a particular stock or a commodity to go up or down and bet before that happens that it will occur just so.
Two scenarios on the "Sure Thing":
Scenario 1: The Rumor
Hedge fund and big time investors bet on a company stock going down. A rumor is started and spreads like wildfire that a company is in trouble, the stock goes down and the shorting managers make money, in the process destroying yet another American company.
Scenario 2: The Future Commodity
A future commodity is when a piece of paper is written which claims that a buyer will buy a commodity - lets say oil - at a future date for such and such a price.
The scam is that when the future date hits, the commodity - lets stick with oil - is never physically transferred to the buyer, instead the future commodity is held and renewed, to the next future date.
Hedge funds and 401K fund managers did a lot of this oil future commodity buying, in effect making it seem that there was a shortage of oil - the actual commodity - whereas in reality all it was was just pieces of paper claiming future oil production, which... never were claimed once that future date hit.
This explains the oil bubble, when gasoline in America hit over $4; that bubble has since burst.
Continuing with the timeline:
4) There is a finite number of people in America who can both afford a new house and want to buy it. The government forces banks to lend to people who really cannot afford a new house. Banks have to oblige - not that they did not do it willingly, for their own reasons (bear with me - explanation on that soon, in point 6).
5) Banks lend to more and more people, many of whom will never be able to really make repayments on the loans. Price of housing goes up, since everybody is buying them since everybody is getting loans.
This is the housing bubble, now defunct.
6) Banks leverage 30, 40, some even 60 dollars in loans with $1 kept in the bank vaults. Think on that - banks, to make money, loan money, but they keep something in reserve - in the bank safe - in case people come in and want their money back. But in reality. banks keep money in reserve because they are obligated to - by the law. Also, realize that the bigger the leverage, the more loans a bank can make, and the more money it makes.
Quick explanation on banking leverage and rating:
Banking sector companies are graded by rating agencies on how viable, on how safe they are. The crucial effect of this rating is that less safe banks/financial institutions have to keep more money in the reserve on the safe.
7) First whispered conversations occur in the banking sector about the bad loans - the so called toxic assets.
Quick explanation on Toxic Assets:
A bank's loan is an asset, a credit on an accounting ledger, because the loan principal and the interest will come back to the bank - making the bank a profit.
A bank's loan which is expected to not be repaid, is a debit on an accounting ledger - it is a loss.
A toxic asset is nothing less than a loan that a bank gave that it expects to not be repaid - the bank is, in effect, losing that money.
8) Limited panic in the banking sector ensues, as the shitty loans are recognized for what they are - shitty loans. The fund managers from the finance sector and the banking sector look for a way out.
9) The way is found! Insurance sector - (the biggest player in the sector, AIG) is brought in to insure the shitty loans. What happens is that the bad loans are bundled together with decent loans and good loans (i.e. the ones that are expected to be repaid) and then insured by a very reputable insurance company.
Quick explanation on insuring loans:
Why was it important for banks to insure the bad loans?
A bad loan is a blight on an accounting ledger, a debit, a loss.
A bundle of loans (some good, some bad, some unknown) insured by an insurance company is no longer a bunch of bad loans which add up to a loss.
Now, by the magic of creative accounting (i.e. cheating, but legally, which is all big time finance is all about), the bad loans which will not be repaid are a credit on the general ledger.
10) Due to the creative accounting described in point 9, banks keep their ledgers looking great, even though in reality they should be showing a lot of losses due to the shitty loans.
This allows the rating agencies (quasi government organizations) to keep the banking sector ratings high, which allows banks to keep their extremely high leverage of 30, 40 or 60 dollars to $1 in reserve, allowing them to make more loans to people who cannot pay it back.
The finance sector gets a new toy to play with - the bundles of loans insured by AIG are now sold to suckers worldwide as "investment".
First, business sees no reason to continue to manufacture goods in America because workers in the 3rd world nations work the same amount at a wage of a few cents per hour.
As a bonus, 3rd world nations have few, if any, environmental protection laws, nor have they very strong (if any) worker protection laws, allowing the business sector to exploit people, pay them a few cents per hour, while poisoning the land around them.
Also, what needs to be recognized is that the healhcare insurance cost is crushing big business (but also small business) here in America.
Other countries businesses do not have to insure their employees for their health needs. So in effect, business in America cannot even compete with business in the 1st world nations (Germany, for example) because even if their wages and costs of doing business are the same, American business has to add a crushing cost of healthcare insurance.
This explains why Obama is trying very hard to change the insurance rules for the American business - he is not doing it for us, the idiots who populate this land, but to save the business sector in America.
As you can see from the above 10 points, this crisis was a long time in the making and there are no innocents, because every guilty party acted as it should - with the principles of self preservation.
Both the democrats and the republicans have had the same economic policies - NAFTA, the housing loans' laws promoting poor/minority home ownership - all designed to promote the real American economy - the service economy.
Which is composed of three sectors: Banking, Finance, Insurance.
The housing bubble was probably the best and most effective way to promote the American economy in those sectors.
The government made anti-discrimination lending laws, which forced banks to loan money to people who increasingly could not afford repayments.
But as long as the housing bubble was going strong, the banks, being the greedy fucks that they are, really needed no encouragement from 'w' bush to lend money to everybody, including illegal immigrants. After all, that is how they make money.
The banking sector allowed the finance sector to flourish, as people were allowed to (incredibly) take out loans on their unpaid housing loan and buy stuff - plasma TV's, furniture, and of course, invest in the (going up and up) stock market.
The finance sector loved the housing bubble.
It allowed the whole stock market to go up indefinitely, which allowed really stupid people, like the hedge fund managers, to make easy money because no matter what one invested in it made money.
And finally, the insurance sector was brought in for some easy money - all they had to do was to sign off on some "investments" (the bundles of shitty loans) and say that they insure them.
So, everybody made money - banks were allowed to leverage at a ratio of 30, 40 or 60 dollars to $1, finance was ejaculating at all the money going into 401K's, the loans, the deregulation to keep the housing bubble going, and even the insurance sector was making money by "insuring" the bad loans.
The whole economy was doing great as people were "buying" (with money they didn't have) stuff.
It all came crashing down, in the end.
Which leads to the beginning of this article, which quoted the Associated Press depressing headline...
No one knows exactly what is the worth of these "toxic assets".
Because bad loans were bundled together with some so-so and good loans, and then insured by the insurance sector, then sold, unbundled, bundled again, re-sold... at this point, nobody fucking knows what is reality and what is false in a bank's statement.
Team Obama tried to stall and hope that this mess will be fixed by really small infusions of cash into the service economy - a few billion here, a 30 billion there... meanwhile hoping that a private party or a foreign government will come in and buy the toxic assets.
No luck - no one wants to buy these so called assets, because everybody realizes that the value of them is very close to $0 in this economy (as the economy crashed, even the good and so-so loans became worthless).
And so, my dear taxpayer, we need a $1 trillion from you (... for now).