Kill a Flock of Vultures With One Stone: Stop Feeding the Global Banks

[leveymg]

There’s three things that have been lost in the clamor over AIG bonuses and GM executives. ONE: The U.S. financial industry is now largely foreign-owned - Wall Street is not American, anymore. TWO: trade imbalances are making eventual recovery of the U.S. economy less, not more, likely; and, THREE: 1 and 2 have driven unprecedent budget deficits, which are a further source of wealth transfer abroad.

Under the Bush Administration, the United States became a financial colony. The Wall Street bailout, in its present form, is completing that takeover.

In recent weeks, we've learned that TARP funds given to AIG, Citi and other large global institutions are being transferred to foreign counter-party banks that bought high risk derivatives.

Should the U.S. taxpayer be guaranteeing returns for foreign investment banks and sovereign investment funds? Is that really the most appropriate use for limited taxpayer bailouts?



Here’s the root of all our fears that’s driving the bailout of the huge global banks on Wall Street and their counterparties: the foreign investors who hold title to most of their toxic assets. If we don’t pay off their bad casino bets, they’ll pull their funds out of American banks and Treasuries.

That would be a disaster, wouldn’t it? Messrs. Bernanke and Geithner clearly think so. But, let’s look at this again. Actually, that might be the very thing that reverses the process of deindustrialization and decapitalization of America that led to this crisis.

***

Since 2000, there’s been a wholesale transfer of ownership of US assets abroad. That's what it really boils down to. That fact is clearly explained in this short article by economist Michael Mandel in Businessweek: http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/a_simple_guide.html

A Simple Guide to the Banking Crisis
Posted by: Michael Mandel on March 12

I don’t know why I called this a “simple guide to the banking crisis.” Really, it’s the longest post I’ve written here. But here it is:

Why is the banking crisis so hard to solve? We stood and watched while Hank Paulson and Ben Bernanke fumbled with their response in the fall. Now we are being treated to the distressing spectacle of Tim Geithner struggling as well to articulate a clear policy for dealing with zombie banks. How come these smart and powerful men can’t get a handle on the problem?

I want to lay out 5 simple propositions which will help you undstand why the banking crisis is so intractable. Then I will explain what happens next.

Proposition 1: The boom in the U.S. was funded almost totally by foreign money.
This is absolutely the key point for understanding the current banking crisis. Historically, households have been the major source of capital for the U.S. economy. That’s certainly what I was taught in economics graduate school.
But that quietly changed in 1999, when American households flipped from being net lenders to being net borrowers. Foreign money became basically the only source of capital for the U.S.

Take a look at the chart below, which charts net financial investment (adjusted for inflation). Net financial investment for households (the blue line) includes additions to savings and checking accounts, purchases of stocks and mutual funds, and additions to corporate and government pension funds, while subtracting the growth in household mortgages and consumer credit.

SNIP

Where is that "foreign investment" coming from? Ultimately, the source of those funds were U.S. consumers, themselves, who have been increasingly forced to rely on imports, as middle-class job growth and incomes have declined due to export of jobs and manufacturing by multinational banks that are now being bailed-out by taxpayers. The particulars of this relationship of dependency is reflected in the US trade imbalance:

TABLE 1 US-GLOBAL TRADE IMBALANCE

In recent weeks, we've learned that TARP funds given to AIG, Citi and other large global institutions are being transferred to foreign counter-party banks that bought high risk derivatives. See, Report: AIG bailout money behind banks' recent profitability , http://nalert.blogspot.com/2009/03/report-aig-bailout-money-behind-banks.html; AIG: $90 Billion Bailout Funds Went To Foreign, Domestic Banks http://www.huffingtonpost.com/2009/03/16/aig-90-billion-bailout-fu_n_175190.html ;McCain & Bush Had Close Ties to Chairman of AIG. Fed Bailout a Concession to China?, http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x7095505

And, finally, if anyone doubts that the massive shift of assets became acute and unsustainable during the Bush policy era, take a look at the US-China trade figures. Much of that funds surplus realized by China was kicked-back into the U.S. Treasury market, which allowed the Bush Administration to run up huge federal revenues deficit.

Table 2. U.S. Merchandise Trade with China: 1980-2008($ in billions)
Year U.S. Exports U.S. Imports U.S. TradeBalance
1980 3.8 1.1 2.7
1985 3.9 3.9 0
1990 4.81 5.2 -10.4
1995 11.74 5.6 -33.8
2000 16.3 100.1 -83.8
2001 19.2 102.3 -83.1
2002 22.1 125.2 -103.1
2003 28.4 152.4 -124.0
2004 34.7 196.7 -162.0
2005 41.8 243.5 -201.6
2006 55.2 287.8 -232.5
2007 65.2 321.5 -256.3
2008 *79.6 337.6 -258.0

Source: USITC DataWeb. *Note: Data for 2008 are projections, on the basis of actual data for January-July 2008.
http://www.fas.org/sgp/crs/row/RL33536.pdf

TABLE 3. MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
http://www.treas.gov/tic/mfh.txt
(in billions of dollars)
HOLDINGS 1/ AT END OF PERIOD


Jan Jan
Country 2009 2008
------ ------

China, Mainland 739.6 492.6
Japan 634.8 585.6
Oil Exporters 3/ 186.3 140.8
Carib Bnkng Ctrs 4/ 176.6 109.2
Brazil 133.5 141.7
United Kingdom 2/ 124.2 161.8
Russia 119.6 35.2
Luxembourg 87.2 66.1
Taiwan 73.3 38.9
Hong Kong 71.7 54.4
Switzerland 62.1 39.2

TABLE 4. THE MOUNTING US BUDGET DEFICIT

_____________________

Here’s our last, best chance to kill a flock of vultures with one stone. Just stop feeding them.