Congress's $700 Billion TARP Bailout Was a Sideshow

Bloomberg recently won a lawsuit against Wall Street and the Federal Reserve to force the Fed to reveal how many trillions of dollars they handed out to banks and on what terms. All of Bloomberg's giant new article about what they found out is worth reading. But I was particularly struck by this section:

TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says.

“Even though the Treasury was in the headlines, the Fed was really behind the scenes engineering it,” Shaffer says.

Since this is what I wrote in June, 2009, I've reposted it below. The Federal Reserve's bailout of Wall Street is what mattered; TARP was a sideshow created to distract everyone from what the Fed was up to.

Note that the media fell for the scam I describe completely. Even This American Life, which has done great journalism about the financial meltdown, produced an episode called "Another Frightening Show About the Economy" on October 3, 2008 that might as well have been dictated by the Federal Reserve (except no one at the Fed has the talent to present it that well). Moreover, to this day essentially no one in the media (except perhaps reporters at Bloomberg) understands what happened.

Why Did the TARP Bailout Happen the Way It Did?

Here's my answer. It's partly conjecture, but the circumstantial evidence is very strong, and there should be more available with just a little digging.

After the bankruptcy of Lehman and the bailout of AIG in mid-September, Ben Bernanke and Hank Paulson were genuinely worried -- it was now obvious it would require gargantuan amounts of money, starting immediately, to bail out the banking system. Some of the money spent would eventually come back to the government, but inevitably the final losses would be in the hundreds of billions.

BUT -- what worried them was not finding the money. The weird truth is the Fed can literally create money from nothing. That's the way they expand the money supply.

In normal times, the Fed does this by purchasing government bonds. If they want to buy a bond for $100, they just electronically credit the seller, who then has $100 more in their bank account. And the Fed then has the bond in its portfolio. In the past, the total Fed portfolio (almost all government bonds) had been just under $1 trillion.

But in emergencies, the Fed has the legal authority to buy almost anything. As it had demonstrated up to last September, it can buy Citigroup bonds. It can buy $30 billion in crappy mortgage-backed securities from Bear Stearns. It can pay $85 billion for AIG.

So the money wasn't the problem. The problem was that they were going to spend over a trillion dollars, more than doubling the Fed portfolio. Now, if had been possible, the financial industry would have loved it if the Fed could have just taken care of it on its own. That would have been the best possible solution, with no meddling congress members asking questions about executive bonuses.

But $1-2 trillion is so much that even congress and the media would notice. Nancy Pelosi was already complaining about the AIG bailout. And Bernanke and Paulson were well aware that every person in America who didn't work for Goldman Sachs was going to loathe what was coming.

So what did Bernanke, Paulson, and the financial industry need at this point, if not the money?

THEY NEEDED SOMEONE TO SHARE THE BLAME.

That's the first rule of political catastrophes: if everyone's guilty, no one can be punished.

This was an opportunity to get everyone else on the hook with them: both parties in congress, and both presidential candidates, each of whom would be under enormous pressure not to look "irresponsible." Even better, getting some TARP money from congress would create a huge distraction from the gigantic amounts of non-TARP money the Fed was shoveling out the door.

So all they had to do now was make congress terrified the economy was about to collapse. And to do this, they needed a plausible story.

This part was tough. After all, if a few banks failed here or there, so what? Depositors were protected, and we were headed into a recession anyway, with a lower need for medium-term credit.

But there was one excellent candidate to be the WMD of the TARP bailout: the commercial paper market.

That's what the Fed, Paulson, and White House were selling to congress and the media. If you go back and look at all the cable news about the bailout, it's obvious "commercial paper" was the talking point. It comes up over and over again. Tom Brokaw, CNN's money reporter, Sen. John Kyl, Mitt Romney -- they all repeated the story like robots. Just like the scary WMD.

It goes like this: big corporations are like rich people with lots of assets and money coming in at irregular intervals but not much cash in the bank. In the same way a rich person like that would use a credit card to buy groceries and gas, big corporations borrow money in the commercial paper market to make payroll, pay vendors, etc. They're continually borrowing money and paying it back the next day or next week.

In normal times, the commercial paper market is extremely boring and extremely safe. But in the same week Lehman went bankrupt and AIG was bailed out, the commercial paper market was collapsing. The pension funds and university endowments that supply the money were spooked, pulling it out, and putting it in government bonds.

This WAS a real, frightening problem. No commercial paper market, and Wal-Mart can't pay for everything being delivered to its stores. Big grocery chains can't pay for food. And no one is paying their workers. The entire economy could grind to a halt, and no one knew how hard it would be to start it again.

But there's one thing Bernanke and Paulson left out, and that all the people talking about on TV didn't know: there was no need for congress to pass a bill to save the commercial paper market, because the Fed could buy it directly. We know this because the Fed DID buy giant amounts of it, over $300 billion -- but not until October, well after TARP had passed.

So in September, Bernanke was saying: "Help! We need $700 billion or else the commercial paper market will destroy the world!"

Then a month later in October, Bernanke quietly went ahead and saved the commercial paper market, using non-TARP money -- something he could have easily done the month before.

This can all be seen in the above graph that I made. The Fed balance sheet exploded starting in mid-September. They spent $500 billion by October 1st, two days before TARP passed. They spent $1 trillion by the time the first trickles of TARP money were allocated in late October. (This in itself is damning -- we had to give them the money or else Planet Earth would explode, and yet it took Paulson three weeks to dole out the first TARP sliver.) All along, the Fed side of the bailout had dwarfed TARP.

Yet it's been completely invisible. While we were all screaming about that little pink line, the Fed was carrying out the real bailout via the blue line and we never noticed.

And most of amazing of all, to this day the Fed refuses to say exactly what they've bought for $1.3 trillion. Seriously -- congress has asked, and the Fed has basically said: screw you. (NOTE: Since I wrote this, the Fed was forced, over its loud objections, to disclose what it purchased.)

Now, for the final proof this was a scam: several months after TARP passed, the New Yorker profiled Ben Bernanke. In the article, Bernanke claims he said this to Paulson on September 17th, after the AIG bailout: "We can’t keep doing this. Both because we at the Fed don’t have the necessary resources and for reasons of democratic legitimacy, it’s important that the Congress come in and take control of the situation."

Sounds good, doesn't it? But if you think about it for two seconds, it's obvious crap. #1, look at the graph --the Fed had the resources and wasn't shy about using them. #2, the high-pressure way they sold TARP and the Fed's ongoing secrecy demonstrates how much Bernanke cares about "democratic legitimacy."

—Jonathan Schwarz

This One Goes Out to John Caruso

Lots and lots of people have made lots and lots of excuses for Barack Obama. But as far as I know, former Honduran president Manuel Zelaya is the only one making these excuses who was ousted during Obama's presidency in a coup designed by the United States.

This is from an interview with Zelaya from last May. Zelaya explains the evidence is clear that "This [June, 2009] coup d’état was made by the right wing of the United States," but then goes on to emphasize Obama has no responsibility for what happened:

AMY GOODMAN: ...the coup d’état took place under President Obama, not before.

MANUEL ZELAYA: [translated] We’re talking about the United States, so it’s an empire. The United States is an empire, and so Obama is the president of the United States, but he is not the chief of the empire. Even though Obama would be against the coup, the process toward the coup was already moving forward. The most that they tell a president like President Obama, that there’s a political crisis going on. But they do not talk about the details that they were involved in in terms of the conspiracy.

AMY GOODMAN: President Obama early on called it a coup. But then the administration seemed to back off, both he and Hillary Clinton.

MANUEL ZELAYA: [translated] They gave themselves up before the coup itself. That is the proof, in fact, that the coup came from the north, from the U.S. So they are even able to bend the arm of the President of the United States, President Obama, and the State Department, and they impeded my restitution as president of the country.

I guess it's possible Zelaya doesn't actually believe this, and is just trying to keep whatever teeny-tiny amount of access he has to the Obama administration. But in a way that would be even sadder.

UP NEXT: Obama strangles Jonathan Chait's children with his bare hands, after which Chait explains that Obama was "doing the best he could under extremely difficult historical circumstances."

—Jonathan Schwarz

I'm Thankful We Have Such a Cohesive International Oligarchy

That's what I'm thankful for today. Sure, everybody knows that Gamal Mubarak, Hosni's son and heir apparent, started his career as an investment banker for Bank of America and then set up his own private equity fund. And it's old news that UC Davis Chancellor Linda Katehi takes time out from pepper-spraying American students to assist in the crackdown on Greek students. But did you know that Asma al-Assad, first lady of Syria, was a mergers and acquisitions investment banker at JP Morgan, and about to start on an MBA at Harvard, before she married her husband Bashar?

You really can't run a coordinated international attack on 99% of humanity without having all the attackers be buddies from way back.

—Jonathan Schwarz

All Reporters on Earth Must Have an NYPD Press Pass or Face Immediate Arrest

Here's something I've been unsuccessfully trying to get people in the media to point out:

Josh Stearns has been making a list of all the reporters arrested while covering various Occupy events across the country. There are currently 26 people on it.

A few days ago Michael Bloomberg's spokesman Stu Loeser came across the list and sent out email saying this:

Not being familiar with many of the media outlets for which The Awl says these reporters work, I had the list of “26 arrested reporters” checked against the roster of reporters who hold valid NYPD press passes.

You can imagine my surprise when we found that only five of the 26 arrested reporters actually have valid NYPD-issued press credentials.

Now, this is bogus for a bunch of reasons, such as a) it's nearly impossible to get an NYPD press pass; b) police specifically prevented reporters who did have NYPD passes from getting anywhere near the Zuccotti Park eviction; c) as Loeser himself admits, even reporters with the magic credentials were arrested; and most importantly d) when exactly did America become a place where the government decides who gets to report the news?

But here's the funny thing that no one seems to have noticed: of the 26 reporters on the list, about ten of them (the list is unclear) were not in New York when they were arrested. That is, 40% of them were arrested in Boston, Oakland, and Nashville, etc. It seems a little much to require journalists in other cities to have NYPD press passes.

I don't know whether Stu Loeser was being slippery or just incredibly lazy. But either way, according to him, ALL REPORTERS EVERYWHERE ON EARTH must have NYPD press credentials or be subject to arrest at any time.

—Jonathan Schwarz

A Glitch in the Matrix

Something malfunctioned this weekend and the Washington Post helped its readers learn something from history by recommending the November 17, 1947 memo written for Harry Truman by his adviser Clark Clifford about the upcoming presidential election. The Clifford memo contains one of the most straightforward statements I've ever seen that U.S. politicians like conflict with other countries:

There is considerable political advantage to the administration in its battle with the Kremlin. The best guess today is that our poor relations with Russia will intensify. The nation is already united behind the President on this issue. The worse matters get, up to a fairly certain point -- real danger of imminent war -- the more is there a sense of crisis. In times of crisis the American citizen tends to back up his President.

Too bad about this validating and strengthening the crazy right-wing in both countries and how it led to 40 years of nuclear terror. That's small potatoes compared to a slightly increased chance of Harry Truman getting elected! (Immediately afterward the memo explains how Truman's new "Government employee loyalty investigation procedure"—the beginning of the Red Scare—was also undertaken for political advantage.)

Of course, the Washington Post just recommends this memo generally; they don't point out this part specifically. You wouldn't want this incredibly obvious fact about politics to be mentioned directly in the main newspaper in the nation's capital.

I assume there's a memo like this floating around somewhere right now in Mike Bloomberg's City Hall.

—Jonathan Schwarz

The Lighter Side of Incitement to Genocide

1. Rachel Abrams of William Kristol's Emergency Committee for Israel was recently seen calling for the slaughter of some (most? all?) Palestinians. It has the same flavor of murky, roiling psychosis of every call for genocide in history. After being questioned about it, she clarified that she'd also like to murder a bunch of other people, including Ali Gharib, a writer for the website Think Progress.

2. The Washington Post got roped into this because Jennifer Rubin, a Post blogger, endorsed Abrams' yawping. While the Post ombudsman wouldn't say this in public, he privately acknowledged that if Rubin had endorsed the equivalent views about Israelis, it's "quite possible" she would have been fired. Meanwhile, Fred Hiatt, Rubin's boss at the Post, said this didn't bother him at all, Rubin's awesome and she brings "enormous value" to the Post.

3. But here's the funny part!

Rachel Abrams is the half-sister of John Podhoretz, who was recently seen wistfully asking:

What if the tactical mistake we made in Iraq was that we didn't kill enough Sunnis in the early going...Wasn't the survival of Sunni men between the ages of 15 and 35 the reason there was an insurgency...?

Also, Abrams is married to Elliot Abrams. During the Reagan administration, he was Assistant Secretary of State for Human Rights and Humanitarian Affairs. In his role promoting human rights and humanitarianism, Abrams helped cover up the El Mozote massacre of 500 Salvadoran peasants, as well as Manuel Noriega's torture and decapitation of his political opponent Hugo Spadafora. Then during George W. Bush's administration, Abrams was Deputy National Security Advisor for Global Democracy Strategy, where he provided "oversight to the NSC's directorate of Democracy, Human Rights, and International Organization Affairs."

So clearly, non-stop ultra-violence is just a part of their family gestalt. It really must be something to see them hack into that turkey at Thanksgiving.

It also goes to show the U.S. foreign policy elite is indistinguishable from the foreign policy elite of Gaddafi's Libya, who saw nothing weird about their country sitting on the United Nations Human Rights Commission. (Predictably enough, Elliot Abrams himself was outraged that Libya was given that slot the UN. I guess he didn't want them stealing his shtick.)

BONUS: Rachel Abrams wants Palestinians to be, among other things, thrown into the sea to be devoured by sharks. Elliot Abrams scored his job in 1981 as Assistant Secretary of State for Human Rights because the original nominee, Ernest W. Lefever, was forced to withdraw—mostly due to his support for Argentina's right-wing military junta. One of the junta's favorite things to do was "death flights" where they would drug political prisoners, fly them out over the ocean in helicopters, and push them out. I guess lunatics have a hard time coming up with original ideas about how to inflict suffering.

—Jonathan Schwarz

In Shocking Twist No One Could Have Foreseen, Kochs' Family Empire Founded on Government Handouts

Yasha Levine has written a great short history of the life of Harry Koch, grandfather of Charles and David Koch and founder of the family's economic empire.

Guess what?

In the second half of the 19th century, America was in the grip of a massive railroad boom. Boosted by eager investors, lucrative subsidies and free land, railroads sprung up connecting every corner of the United States without much thought for demand or necessity...

Dutch investors were heavily involved in several railroad lines in the North Texas area, including the Fort Worth and Denver Railway Company, which had spawned Quanah in 1887 and owned just about all the land in town. County records show Harry provided advertising services and worked directly for the Fort Worth and Denver for nearly 20 years, sometimes receiving payment in the form of land transferred directly from the legendary railroad builder Grenville M. Dodge, who helped lay the Union Pacific and more than a dozen other lines across the country.

So, first the government kills the Indians. (In fact, before Grenville Dodge was a railroad magnate he was a general in the U.S. Army, and Wikipedia tells me that he ordered the punitive Powder River Expedition against the Sioux, Cheyenne and Arapaho in 1865.)

Then the government hands over the land for free to the railroads, along with giant subsidies of other kinds.

Then the railroad owned by one of the guys who killed the Indians hands over some of the free land he got from the government to Harry Koch. And he uses his government handouts to make himself and his family incredibly wealthy.

Man, that's the invisible hand IN ACTION...just the free market making us all richer with no government meddling. No wonder Harry's grandsons talk about that stuff so much.

P.S. Dean Baker is pleading with you to read The End of Loser Liberalism: Making Markets Progressive.

—Jonathan Schwarz

Uh Oh

This is from Noam Chomsky's acceptance speech for the 2011 Sydney Peace Prize:

There were a few criticisms of Operation Geronimo – the name, the manner of its execution, and the implications. These elicited the usual furious condemnations, most unworthy of comment, though some were instructive. The most interesting was by the respected left-liberal commentator Matthew Yglesias. He patiently explained that “one of the main functions of the international institutional order is precisely to legitimate the use of deadly military force by western powers,” so it is “amazingly naïve” to suggest that the US should obey international law or other conditions that we impose on the powerless. The words are not criticism, but applause; hence one can raise only tactical objections if the US invades other countries, murders and destroys with abandon, assassinates suspects at will, and otherwise fulfills its obligations in the service of mankind. If the traditional victims see matters somewhat differently, that merely reveals their moral and intellectual backwardness

This is incorrect. What Yglesias said was not that the killing of bin Laden violated international law and that it was naive to expect the U.S. would ever obey it. Instead, he wrote that the killing of bin Laden was legal under international law; that you should expect this because international law is created by powerful states like the U.S. in their own interests; and that smaller countries and "political radicals" could legitimately look at this as "bogus." In other words, several of the same points that Chomsky himself often makes.

Here are Yglesias' exact words:

UNSCR 1373 [from September, 2001] is full of international legal authorization for killing people, specifically deeming the 9/11 attacks events that, “like any act of international terrorism, constitute a threat to international peace and security... Long story short, neither Osama bin Laden nor the government of Pakistan has any standing in international law to complain...the whole point of the Security Council is that it overrides national sovereignty.

That’s not to say one can raise no objections to this...if you’re Pakistani you might look at this series of events and say that international law looks kind of bogus. They didn’t even get a vote on the Security Council! What kind of sense does it make for the US, China, and Russia to get together and tell the world which countries may and may not be subject to SEAL raids? This would also be a very valid point for a political radical like Chomsky to raise. But it is what it is. International law is made by states, powerful states have a disproportionate role in shaping it...one of the main functions of the international institutional order is precisely to legitimate the use of deadly military force by western powers.

You can disagree with Yglesias that America's killing of bin Laden was legal under international law. (I certainly would, since he's wrong.) But Chomsky did not characterize his perspective accurately.

AND: This is how I keep #winning, even when my victories are very painful.

—Jonathan Schwarz

Occupy DC Protestor Seemingly Hit by Car Feet Away from Stop Sign

Last night Occupy DC protestors surrounded the Washington, D.C. convention center where the Koch brothers' organization Americans for Prosperity was holding some kind of gala. Toward the end of the night, a car hit several protestors, causing injuries severe enough to send them to the hospital. However, police haven't charged the driver, because the protestors "either ran toward or jumped in front of the moving vehicle."

I have no idea what actually happened, but the police report, available here and here, is incorrect or incomplete. According to the report, the protestors were hit at 7th St. and Mt. Vernon Pl. NW in Washington (A, below)—but this video clearly shows a protestor lying injured on the ground on L St. between 7th and 9th St. NW (B, below), about a block and a half away.

It's possible that the protestor hit on L St. was hit by the same driver before he hit the others at 7th St. and Mt. Vernon Pl. NW. Or maybe there were two different cars involved. Or maybe something else.

In any case, it's notable that the protestor seen in the video is lying just a few feet away from a stop sign, as you can see below. Click to enlarge:

—Jonathan Schwarz

Let's All Chip in and Buy the Washington Post Ombudsman a Subscription to the Washington Post

Part of the horrible article the Washington Post ran about Social Security this week said this:

...in 2010, under the strain of a recession that caused tax revenue to plummet, the cost of benefits outstripped tax collections for the first time since the early 1980s.

Now, Social Security is sucking money out of the Treasury. This year, it will add a projected $46 billion to the nation’s budget problems, according to projections by system trustees. Replacing cash lost to a one-year payroll tax holiday will require an additional $105 billion.

And now the Washington Post ombudsman, in a defense of the article, said this:

[T]he trust fund is in balance and does not contribute to annual deficits...

However, with the payroll tax holiday enacted by Congress and signed by President Obama last year to boost the economy, less money is coming in. That law required this new gap to be covered not from the trust fund, but from the government’s general fund. That’s why Montgomery wrote that Social Security is now sucking money out of the Treasury. It is.

And, because more people are out of work and for longer periods in this financial crisis, payroll taxes are lower than planned. That puts more pressure on the trust fund to make up the gap in payments to current retirees by using the interests and proceeds from the bonds earlier and faster than anticipated in 1983.

So the article said that "Social Security is sucking money out of the Treasury" because of the shortfall in payroll taxes due to the recession, AND because of the payroll tax holiday.

The Washington Post ombudsman claims the article said "Social Security is sucking money out of the Treasury" not because of the shortfall in payroll taxes but purely due to the payroll tax holiday.

I realize this isn't the biggest thing in the world. (For more important aspects of the Post's gross attack on Social Security, see Dean Baker here and here.) But when people are angry about an article in the Washington Post, and the ombudsman writes about it, I don't think it's too much to ask the ombudsman to actually read it.

—Jonathan Schwarz

A Massive Bluggy Failure

Does no one on earth read books anymore? I've been going through Confidence Men by Ron Suskind, and it's full of amazing things that have barely been discussed anywhere—not just in reviews but even on blugs.

For instance, there's this description of Obama's March 27, 2009 meeting with the heads of thirteen major banks:

The discussion moved swiftly across topics, such as the general soundness of the overall system and how to jump-start lending, before it came around to what was on everyone's mind: compensation.

The CEOs went into their traditional stance: "It's almost impossible to set caps; it's never worked, and you lose your best people," said one. "We're competing for talent on an international market," said another. Obama cut them off.

"Be careful how you make those statements, gentlemen. The public isn't buying that," he said. "My administration is the only thing between you and the pitchforks."

It was an attention grabber, no doubt, especially that carefully chosen last word.

But then Obama's flat tone turned to one of support, even sympathy. "You guys have an acute public relations problem that's turning into a political problem," he said. "And I want to help. But you need to show that you get that this is a crisis and that everyone has to make some sacrifices."

According to one of the participants, he then said, "I'm not out there to go after you. I'm protecting you. But if I'm going to shield you from public and congressional anger, you have to give me something to work with on these issues of compensation."

No suggestions were forthcoming from the bankers on what they might offer, and the president didn't seem to be championing any specific proposals. He had none; neither Geithner nor Summers believed compensation controls had any merit.

After a moment, the tension in the room seemed to lift: the bankers realized he was talking about voluntary limits on compensation until the storm of public anger passed. It would be for show.

This has appeared almost nowhere online, and I'm personally responsible for most of the places where it shows up.

Blugs could actually serve a useful purpose just by reading through books and picking out the things that matter. There's apparently no better place to hide things in 2011 America than in a book.

—Jonathan Schwarz

Real Gangsters

Man, I love this from Jasiri X. Keep your eye on this guy, just as I'm sure Homeland Security is doing already.

yrs,
Jon 34X

—Jonathan Schwarz