It seems that objections coming from “Karl” (I’ll stick to using his first name since that’s all he’ll use of mine; maybe he thinks we’re best buds or something; if so, guy, please don’t make it “Facebook Official,” okay?) over at Market-Ticker.org now boil down to these:
Tom is hanked that I caught him inventing a quote. Never mind that the narrative he put forward to invent that quote is refuted at least in part by his own linked sources.
Now we’re all entitled to our opinions, including Tom, but we’re not entitled to our own invented set of facts. We all have opinions, just like we all have arseholes and most of them stink. But that which we infer we have a duty to identify as our inference when we write for public consumption and to identify the sources of our inference, paying particular attention to any contrary set of facts that may be present in those sources.
Tom didn’t do this. The core of my allegation is that he didn’t do this because he was trying to fit something he had already decided upon to the facts that were available to him, so those that were contrary to the narrative he had already decided to write were simply ignored. The evidence he cited himself supports my position as I documented in my previous article.
There is a common meme that the extreme right-wing likes to run when it comes to these bank bailouts: The banks were “extorted” into taking money by an overbearing government, and but for that extortion they would have all been just fine.
The left, for its part, likes to run other fallacious memes as well and those who have read my work for any length of time know that I’ve been relentless in pounding them as well.
But this particular meme run by the right is utter and complete rubbish. I will present my evidence beginning with the composite of the financial stocks represented in the XLF:
Stock prices aren’t opinions, they’re facts. Only price pays, as a trader will tell you. Everything else is BS. And the fact of the matter is that the so-called “TARP” — claimed to be a “fascist take-over” — not only wasn’t it did exactly nothing in terms of actually “taking over” the banks but was a monstrous gift to them by the government and from the taxpayer.
What stopped the slide, incidentally, was Kanjorski’s hearing (former D-PA-11 Rep) in which he explicitly threatened to legislate FASB out of the accounting standards business when it came to how assets were valued. He told them in that hearing that either FASB allowed banks to hold assets at other-than-market values or he would force the issue through legislation.
This is exactly identical to legislating that 2 + 2 = 6 and it had the expected and desired effect – bank stocks rallied hard on the back of that, lifting the entire stock market. (Note that Kanjorski is a Democrat, before you rant at me for being partisan and attacking only the right for their idiocies – the Democrats have engaged in just as many stupid acts in this crisis as have the Republicans.)
How’s it working out for the banks that were “not in trouble at all”, according to Tom? Terribly, because the premise was false. Let’s examine that premise in the broad daylight of retrospection where you’re never wrong as you’re not predicting or inferring things, you’re looking at factual history.
Bank of America looks great, doesn’t it? They rebounded to nearly $20/share in 2010 but now you can own a share for the low low price of just $6.24 (and likely less tomorrow.)
Citibank was so healthy that it went from a split-adjusted $570 before the crisis to $28.90 today, representing fantastic confidence that all is well.
Wells Fargo, the bank that needed no help at all, topped near $35 twice in the last two years “post-crisis.” Today, you can own a share for the low-low price of just $25.10.
The real issue, which Tom still won’t address from his original presentation was the slant put on the story – that “big bad government took over perfectly sound institutions and forced them to do their bidding lest they be shot in the head and left to rot in the gutter.”
Uh huh. This is why several years later Bank of America is selling for about 1/3rd of book value, right?
Price is irrefutable truth: There is not one entity with actual money who believes that BAC’s book value accurately represents the company, because if there were they would buy the entire company for 1/3rd of its value and recognize an immediate 200% gain.
In the case of Citibank the ratio is 0.49, which means that not one entity with actual money is willing to recognize an immediate 100% profit.
JP Morgan, another “forced” entity, sells at 0.71 to book. No entity with money is willing to recognize an immediate 40% profit.
Morgan Stanley, another “forced” entity, sells at 0.55/book. No entity with money is willing to recognize a nearly 100% immediate profit.
Note something important: All of these values represent only the book value of the company. They include nothing for forward earnings capacity, that is, the belief that these firms are in fact going concerns and might, for example, pay a (gasp!) dividend in the future. This despite the fact that they “paid back” their TARP funds, so it is said.
It is this belief (that a firm is a going concern and can earn a profit!) that typically causes them to sell above book value by the amount the market believes is the intangible value represented in that expected forward earnings stream.
Incidentally, Wells sells for just above book today. But they didn’t at the depths of the collapse.
When you take all of this together you’re left with only two possible conclusions: Either every wealthy individual and fund with money was and is stupid and is thus willingly leaving 30, 40, 100 or even 200% in immediate profits on the table or the banks were in 2008 and are today lying about asset values — in effect, balance-sheet fraud has been made legal.
This is what you must believe if you believe that these firms were in fact forced and were not both underwater then but in addition are not underwater now!
Never mind that the value of those FDIC guarantees and essentially-free funding and the very source cited by Tom contained recognition of this fact and attributed positions by the executives in question that they saw value in this capital plan – at worst they saw it as FAIR and some noted what they believed was positive value. (Heh, if you gave me free insurance coverage on my bond issues and subsidized loans I’d call that damned valuable too!)
But this is all noise-level gamesmanship, really, because Tom used this concocted “example” as a prop to try to explain why we’re in an economic malaise. He may have buried (deeply!) the lede, but it wasn’t “Capitalism died in 2008” per-se. Rather it was “Our economy isn’t growing because the government goose-stepped the banks’ necks in 2008.”
That is, Tom used his “inference” to ascribe the lack of economic growth to “government neck-stepping.”
Now he refuses to address the actual substance of the debate, instead demanding an apology for getting caught inventing alleged “facts” that are contrary to what I assert is essentially all of the now-known evidence both from the time and in 20/20 hindsight along with presenting them with an incredible degree of puffery.
This, incidentally, seems to be rather close to the sort of hypesterism and utter bullshit that Pajamas has recently displayed with another of their columnists who claimed that the hashtag symbol is effectively a Swastika! Yes, ladies and gentlemen, they really did play the Nazi card.
There’s ridiculous and then there’s that which is passed off as “journalism” that is nothing more than outright political hacksterism (or just plain fictional entertainment.) If this is what passes for journalistic integrity today I would argue that the best place for this new media rag is right next to the Weekly World News in the supermarket checkout aisle.
One might ask why, given that clear display of editorial “discretion”, I continue this debate at all. After all, arguing over the Weekly World News display of little green men is probably a waste of everyone’s time. I therefore owe my readers an explanation: The meme Tom ran is common among the right wing of journalism in the general sense, although the exact spin varies from outlet to outlet and from writer to writer. This is a meme that Americans — all Americans — must confront because whether you’re on the left or right this sort of polarization and misdirection is obscuring a critical set of facts that we can no longer ignore.
I’m all for theories and speculation, along with debate. This is healthy in any republic and we should encourage it. But all such theories and speculation must hew to mathematics, because you cannot stand up and say that “2 + 2 = 6” and then have an argument predicated on a demonstrably false premise.
In the situation currently upon the table the premise being run by Tom is that The Evil Government Regulated The Banks To Failure and this is an example of why the economy is not growing adequately.
This premise flies in the face of known facts, including the charts I presented that showed private, not public borrowing was the root of the bubble and that this borrowing goes back to 1980, thereby eliminating any possible claim that “it was all Democrats fault”; the “spread” between borrowing growth and debt growth has been approximately 3% since that time. It is a further fact that the aggregate GDP growth has fallen as the level of systemic debt has risen, buttressing the position that it was this private ponzi borrowing that led to the problem. Further we have the fact that George Bush’s administration sued states that were trying to enforce anti-predatory lending laws, claiming they had no jurisdiction to do so and that Hank Paulson did in fact go to the SEC (as head of Goldman) and convince them to remove all leverage limits from investment banks. That’s two specific removals of regulation that should have “helped” the “free market”, never mind Gramm-Leach-Bliley and Greenspan’s blatantly illegal approval of the Solomon/Citi merger while Glass-Steagall was still in effect (yet more removal, not imposition, of regulation.)
It was subsequent to these removals, not increases, in government regulation that two investment banks failed — Bear Stearns and Lehman — each while carrying more than double the previously-legal leverage. The proximate cause of both failures was the removal of that leverage limit.
In addition several other firms also blew up including Countrywide, Merrill Lynch, Washington Mutual, Wachovia, Fannie, Freddie and AIG. The latter three had 80:1 or greater leverage on — more than six times the former legal limit for an investment bank — at the time they detonated (although they were not, I note, investment banks.)
Finally, we have the fact that the crisis was ignited by people who were unable to continue to borrow more and more money to jack up the price of houses higher and higher after Paulson got the leverage limits removed.
None of the above facts are in dispute; they are a matter of public record.
All theories about “what happened”, “why it happened” and most-importantly what we have to do to fix it must hew to these facts. This is why the original article that set me off fails and is the substance (rather than the detail) of my issue with it; its premise is false.
Now let’s add another uncomfortable fact into the mix, indeed the fact that lays above all others in this debate: The nature of exponential curves.
I posted a now-pinned Ticker on this yesterday. It is in fact the underlying mathematical reality behind all of what has happened and what will inevitably occur if we do not cut the crap and stop running narratives that do not comport with fundamental mathematics.
I ran that Ticker’s narrative last evening at the local county Libertarian meeting, and asked at the point that about 12% of the pond was covered, “are you alarmed by what is happening?” A couple of the people there figured it out and were. The majority did not, yet at that point you were exactly three doubling times (in this case days) away from being dead with certainty.
More to the point there were people who thought when half the space was left thought there was still room to figure things out. In fact you were dead the very next day; there was no time to negotiate or discuss anything by that point. Your only option was to start committing mass lilicide immediately or you were doomed to expire.
Now let’s ask the uncomfortable question: How much time does the United States Government and our society generally have left?
Let’s figure it out as a process of elimination:
- Can we pay eight times as much interest as we pay now? (Today it’s ~$450 billion/year on federal debt, so this is $3.6 trillion dollars.) The obvious answer is no as the total federal revenues are somewhat over $2 trillion at the present time. This is the 12.5% “coverage point”, so we cannot withstand three more “doublings.”
- Can we pay four times as much interest as we pay now? That’s about $1.8 trillion, leaving about $400 billion for all programs ex-interest. To put this in perspective that would cover about half of the Defense Department and nothing else, meaning no Medicare, no Social Security, no Welfare in general, not even the guy to sweep the Capitol Building. That’s the 25% coverage point, so we cannot withstand two more doublings.
- Can we pay twice as much interest as we pay now? That’s about $900 billion, leaving roughly $1.5 trillion for all programs ex-interest. To put this in perspective we could fund Defense and one of Social Security, Medicare, or the combined Medicaid/Welfare/etc social programs. We could not, however, fund more than one or pay for any other programs at all. That’s the 50% coverage point, so we cannot withstand one more doubling.
Now how long do we have? That is, how much is a “doubling time”? That’s easy too. We open up The Fed Z1 spreadsheet and Look at column Z1/Z1/LA314104005.Q, which is the Federal Government quarterly. Over the last decade that went from $3.284 trillion to $9.77 trillion, or 297%. This is roughly a 12% rate of increase annually.
The Rule of 72 tells us that this means that the debt at the government level, given what we’re doing today, will double every six years. Don’t believe me — get out your calculator and check it.
This means that Paul Ryan’s plan is a public fraud as it is mathematically impossible for the republic to survive long enough for his “40 years” to pass, as just one example of many. You are challenged to run any of the so-called “Tea Party” or “Fiscal Conservative” plans against this metric: Six years to a full stop in deficits or we’re all dead and see if you can make your plan work recognizing that no Congress can bind the next one and there are elections every two years for the House.
Want to run the game for all debt? That works too. All Debt was about $27 trillion 10 years ago. Today it is $52.7 trillion. That’s 195% of the starting value (and note it understates things slightly as “social security and medicare” are not counted as debts because legally they are not.) This is roughly a seven percent annual growth rate. The Rule of 72 tells us that this means it will double in approximately every ten years, and we won’t survive in the private economy paying twice as much interest as we pay today either.
So take your pick: We stop this or we economically die in less than six years or less than ten years. In no case can we continue to add to the debt at a rate that exceeds economic growth. That was a Ponzi scheme, it is a Ponzi scheme, and we are now in the last doubling time available to us before the surface of the pond is entirely consumed by lilies and we all suffocate. If we continue to add to the debt at a rate that exceeds the change in GDP, either systemically or at the government (or both) we may extend the time before we are all screwed but the government and/or our economic and monetary system will fail with mathematical certainty.
Got it yet folks? This is the debate at hand — the only debate. Everything else is bullshit because if we do not stop this absolutely no other debate you wish to have matters.
We stop this, and we stop it right now, or we suffer a political and/or economic system failure in this country. Some people call this “a sudden stop.” I call it “this is going to really suck” and you will too. All of the left/right, government is bad:government is good, “more taxes”, “less spending that’s not really less as it’s baselined”, etc – it’s all crap.
This is not conjecture, it is not opinion, it is not subject to a debate over left, right, liberal, conservative, libertarian, marxism, socialism, occupying wall street or anything else. It is controlled by the immutable laws of mathematics which no person can change with votes, political parties, executive orders or even guns.
Tom, and everyone else that could properly be called “Pajamas Media” because their presentation of arguments is as intellectually valid as is that coming from an infant in pajamas in light of the above fact, are putting forward strawmen that may be interesting points of debate if and when we have time for them which will occur if and only if we address the above problem right now. This is the utter falsity of the underlying premise — that premise willfully and intentionally ignores that which is happening right here, right now, and has a mathematically-certain outcome.
If we do not address the underlying facts then none of these issues make any difference at all. We will be arguing over what form of government follows what we have today, and we will probably be making those arguments in a very impolite manner.
This is the danger we face as a nation, it is a clear and present danger, and unless we act the outcome is as certain as it is that the Sun will rise in the east tomorrow.
Now I’m sure there will be people who disagree with my analysis here. My challenge to you, whether it’s Tom or anyone else: Prove your claims are viable using simple mathematics. I have put the historical facts on the table. If you wish to argue assumptions that fly in the face of 30 years of unbroken trends and government acts since 1980 then lay ’em out and justify your arguments; we’ll hash it out.
I will entertain these other debates with Tom (or any else for that matter) who wishes to run the entire “left/right” paradigm if and only if the outcome of those debates will be material to our future as a nation.
Unless we address and fix the above first none of those issues are of any importance to our future whatsoever.
Should Tom wish to engage in this debate, there’s a nice dashed line (oops – a dash?! Is that like “hash”?) up above that forms the point at which the debate on the actual substance of his article that I was commenting on begins.
Should he, or anyone else, wish to entertain that debate let’s have at it.
If not I will take silence (or yet another off-topic rebuttal) as confirmation and admission that the person doing so wishes to fiddle on the deck of the Titanic while the water streams in a few decks below.