Page 2 of 2 The gods, too, are taxed
By Julian Delasantellis
was the fact that in December the bank took massive writeoffs of bad loans,
amounting to about $1.3 billion, but, in the process of switching from a fiscal
accounting year that ends in November to one that follows the calendar year,
Goldman did not report the losses in the last quarter of '08, as it also didn't
do for the first quarter of '09. Like a ghost ship of the accursed from Pirates
of the Caribbean, apparently, the December numbers are dammed to be
forever lost and forsaken, a legend that the firm would much rather forget and
ignore.
The US government, in pushing through the relaxation of mark-to-market rules
that were pressuring banks' earnings, is a full and active co-conspirator in
the wool being placed over the public's eyes. (For an account of the relaxation
of mark-to-market, see
This should not be all that surprising; a bank that is perceived to be healthy,
whether it is or not, will be less likely to be the victim of an electronic
bank run of the sort that last year felled Bear Stearns, Lehman Brothers and
Washington Mutual. That will make it less likely that it will be coming to the
government's doors for more budget-busting bailout rescues. The perception of
Goldman's improved health is permitting it to go to the markets for a stock
sale that will allow it to repay the $10 billion in TARP funds it took from the
government last autumn - a fine reason, what with the bailout culture driving
millions of Americans to dump tea into Nebraska cornfields and Arizona deserts
in protest on the tax-deadline of April 15, for the Geithner Treasury to keep
its lips zipped regarding any possible Goldman duplicity.
But wouldn't stock investors, in seeing the duplicitous and lubricious efforts
to pull the accounting wool over their eyes, punish the banks by selling off
the stocks? The bank stock rallies say that the stock investors are far happier
with the dishonest lies than with the honest truth. As Niccolo Machiavelli said
in The Prince, "One who wishes to deceive will always find those who
wish to be deceived."
As for the other economic reports that seemed to indicate that there is, as
simpleton Chauncey Gardiner (Peter Sellers) said in the 1979 movie Being There,
"growth in the spring", it is important to note that this recession/depression,
is, like any other economic event, a statistical phenomenon.
It is only natural to assume that some economic reports will be on the
stronger-than-expected tail of the generally weakening bell curve. The
overwhelming majority of the economic numbers and prospects continue to be
massively negative - especially the employment numbers, which are perhaps the
most important economic numbers of all. To assume a recovery from a few
isolated positive economic reports is like assuming the end of global warning
upon seeing just one snowy day.
Who says so? How about Ben Bernanke himself - in private. In the just released
minutes of the March17-18 Federal Reserve Open Market Committee, the one where
the Fed authorized the purchase of up to $700 billion in long-term US Treasury
and other government agency notes, no one seemed to be rushing out to water the
"green shoots" the chairman talked about on 60 Minutes just two days
previously.
The information reviewed at the March 17-18 meeting
indicated that economic activity had fallen sharply in recent months. The
contraction was reflected in widespread declines in payroll employment and
industrial production. Consumer spending appeared to remain at a low level
after changing little, on balance, in recent months. The housing market
weakened further, and nonresidential construction fell. Business spending on
equipment and software continued to fall across a broad range of categories.
Despite the cutbacks in production, inventory overhangs appeared to worsen in a
number of areas. ...Labor market conditions continued to deteriorate. Private
payroll employment dropped considerably over the three months ending in
February. Employment losses remained widespread across industries, with the
notable exception of health care. Meanwhile, the average workweek of production
and non-supervisory workers on private payrolls continued to be low in
February, and the number of aggregate hours worked for this group was markedly
below the fourth-quarter average. The civilian unemployment rate climbed 1/2
percentage point in February, to 8.1%. The labor force participation rate
declined in January and February, on balance, likely in response to weakened
labor demand. The four-week moving average of initial claims for unemployment
insurance continued to move up through early March, and the level of insured
unemployed rose further. Industrial production fell in January and February,
with cutbacks again widespread, and capacity utilization in manufacturing
declined to a very low level.
But I wonder. One factor that
might indicate, if not a recovery, at least a leveling off of the decline,
continues to roll around in my head.
I've written before how economic historians should get into the habit of
considering September 15, 2008, as important to their discipline as September
11, 2001 is considered by historians of international relations and strategic
studies. Monday, September 15, last year marked the end of the weekend during
which Lehman Brothers failed, Merrill Lynch was taken over by Bank of America,
and, less noticed at the time, but perhaps much more important, the American
International Group insurance company received an $85 billion loan from the
Federal Reserve.
More AIG bailouts would follow, to the total tune of about $180 billion. No one
was particularly upset that the firm announced that it was unwinding its
perhaps trillions of dollars of credit default swaps (CDOs), and ceasing the
writing of new ones.
The US economy had been in a relatively mild recession since the previous
December (former Republican senator and proponent of deregulation Phil Gramm
said the whole thing was just Americans "whining" and Senator John McCain
actually tried to push the line that the economy was "fundamentally sound" -
before he saw his pollsters sticking their heads in ovens over that remark).
But after that weekend, things got serious. The US unemployment rate, which
rose to just 6.1%, in September '08 from 5.0% in December 07, has exploded
since then to 8.5%, as almost 4 million Americans have lost their jobs
Now we know why. AIG was at the center of the CDO market; CDOs were at the core
of the off-bank balance sheet and non-bank based so-called shadow banking
system, and without CDOs the shadow banking system was just like a planet being
hit by the evil Imperial Empire's death star - virtually overnight, it just
dematerialized.
For all the tears and tribulations involved in the government's efforts to save
the traditional banking system, the fact was that the shadow banking system was
producing 50% of the capital to the economy. Take it away, and the economy had
to hurt. It has.
So are these very tentative signs of economic stabilization telling us that the
economy has finally adjusted, found a new point of stasis, in the absence of
the shadow banking system? In no way is this an argument for any type of sunny
recovery; it's just that, if the statistical central tendency of the economic
decline is now perhaps less steep, it's not all that surprising that we're
noticing more events on the upper side of the line.
Or maybe not. Plenty of very informed observers see more bad times ahead.
Nouriel Roubini, who these days seems to be more easily found on the Manhattan
dancefloor with nubile young shiny things on each arm (trust me, I'm sure
they're just his teaching assistants) than in his New York University
classroom, is perhaps, with his optimism, just following in the example of
French politician Alexandre Ledru-Rollin, who, seeing the Revolution of 1848
pass by his cafe, opined, "I must follow them, for I am their leader."
I find it amazing that those who contend a real recovery is upon us do not see
how, much like William Westmoreland, they are taunting the gods of irony to
unleash their wrath by comparing the recent stock market gains to a rally that
occurred in 1933. Yes, there was a significant 1933 rally (since most
stock-market flacks are firmly anti-Obama, this is even more ironic, since that
rally was of course attributable to optimism over the actions of another new
activist Democratic administration, that of Franklin D Roosevelt), but it would
soon falter - and the rally itself came only after the Dow had fallen 90% from
1929-1931, far more than the current declines even at their worst. After that,
it would be almost 30 years until stocks reached their pre-crash levels.
As it has been since last November, the world's only actual hope for a real
economic recovery continues to be the big fiscal stimulus package proposed by
Obama and passed by Congress (whose members, in an act of madness, actually
reduced it by $100 billion), along with a similar package being implemented in
China. These are the only initiatives that seek really to address the heart of
the problem - the need to put back into the world economy what the collapse of
the shadow banking system has taken out of it.
Today, millions of the American lumpenproletariat (and, by the looks of them on
TV, a lot are very, very lumpy) are on the streets protesting against the Obama
fiscal philosophy. They claim that they are engaging in "tea parties", after
the anti-British rebels who tossed King George III's overtaxed tea into Boston
Harbor in 1793.
The rallying cry of those early American revolutionaries was "no taxation
without representation"; today's would be more on the lines of "no taxation
without representation from someone we like, whether or not he won the election
or not".
During last year's presidential campaign, Republicans mocked Obama's worldwide
popularity by derisively calling him "the Messiah". The original personage to
carry that appellation, in his hour of desperation, cried out to the Lord to
"forgive them (his tormentors) for they know not what they do". The same holds
true for Obama's current antagonists. By opposing the very policies that give
the best hope of preventing a decade-long world depression, they sure as hell
don't know what they're doing.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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