A trillion here, a trillion there.

A trillion for TARP, a trillion for TALF.

Throw in what’s in the “stimulus” package and you’re probably at close to $3 trillion.

So why not simply distribute $25,000 tax free to every U.S. taxpayer? There are 100 million of us, in round figures, so we’re talking about $2.5 trillion, give or take.

This is what two friends and I asked each other over lunch a Three Guys last week. After we got through the usual preliminaries, such as where can one buy hemlock these days, given that our actuarial matchup (two of us are over 70) with our resources leaves us as upside-down as the most strapped Corona del Mar mortgage victim, we started talking about the economy and how to rescue it.

Clearly, these institutional rescue plans are going nowhere. The pricing dichotomy – Uncle Sam either pays too little or too much – seems intractable and the recipients are surely undeserving. Even though there have been two big distress sales of toxic assets – by Merrill Lynch last fall and Legg Mason last week – at around 20 cents on the dollar, which might represent a pricing benchmark, I just don’t think the taxpayer should be put in the business of writing a “make whole” for either pigs or vultures, who in many cases may now be one ad the same. That is capitalism’s tragic paradox, unseen by Adam Smith, probably understood by Marx: the people who cause crashes frequently profit from them.

The problem is, everyone’s hanging around looking for a deal from the government that’ll yield a deal that’s better than fair to everyone except the taxpayer, and Geithner and his small and doughty band know it (the Treasury increasingly reminds me of Fort Zinderneuf in Beau Geste, with dead bodies propped up in the gun ports and Gary Cooper scuttling from post to post, firing at a superior force of Bedouins.) And the “infrastructure” solution, as I see it, is simply open-ended flapdoodle capable of inciting limitless political foolishness and private-sector thievery. Let’s not import Iraq back home.

Institutionally, what should be done immediately is to separate the good assets from the dubious. In the case of the “banks,” hive off depositary operations and wealth management from trading and arbitrage. At AIG, put a fence around the real insurance operations and let the CDS commitments go. Wipe out derivatives contracts that had no real third-party assets at risk (possibly as much as $30 trillion of “naked” puts,) that were nothing more or less than bets against the solvency and credit rating of insurers like AIG and Lehman, and let the rest negotiate settlements as best they can. All the crap can go into what I heard one English financial analyst on WNYC call “a giant international cesspit,” and let the scavengers fight over it like rats in a garbage dump. Isn’t this the kind of market solution propounded by (speaking of rats) the likes of Larry Kudlow?

The more I see what’s going on now, the better I think I grasp what really happened in the Depression. Why, by late 1940, there was so little trading and deal volume on Wall Street that people like my father, a 34-year-old partner at Lehman Brothers, enlisted in the U.S. Navy, figuring that FDR was going to get us into a war with Hitler and he might as well have a commission.

History proved Joe Thomas right in his assessment of his President’s intentions. By then, FDR probably understood that there was only one solution to the nation’s precarious economic condition: jobs, jobs, jobs. And that nothing would provide jobs – in the military, on the home front – more efficaciously than a war. And so it proved. Moreover, when the war was won, Washington grasped that millions of disemployed service people and defense workers might represent a brand new social and economic crisis and came up with the G.I.Bill. As opposed to the U.K., which sent its newly-demobbed Tommies back down the pits and got a Labor Government for its pains. I know of no more powerful example of the difference between the way a capitalist democracy is supposed to work and the way it isn’t . I should add my opinion that Ms. Pelosi (surely there can never have been a worse Speaker!) and other Capitol Hill idiots would never have devised a G.I. Bill, not in a millennium!

So let’s go back to the “Three Guys” scheme, as history will doubtless christen it. At $2.5 trillion, the money’s about the same as Washington plans to spend. Any way you cut it, relief is going to be funded in the people’s money, so why not let the people decide how to spend it? To some taxpayers, $25,000 will be a lot of money and will be spent on life’s necessities or to ease household financial crises: to pay off debts, to pay tuition, to catch up on mortgages. Others may use a sum like this as a down payment on a house. Businesses can be launched on $25K. To some, $25K won’t be that big a deal, so they’ll invest it or put it into a bank. Along the way, as it passes from hand to hand, as one person’s expenditure becomes another’s revenue and profit, it will become taxable, and Uncle will start to recapture his investment.

It really doesn’t matter how and where it gets spent and saved, because never forget, children, that every dollar spent is somewhere saved. The key is to keep that money hopping. To keep breaking it up into pieces, and moving those pieces along. If it coagulates in financial companies anxious to build up capital to support their CDO/CDS garbage, the main if not the entire purpose of the exercise is defeated. And this is exactly what is happening now.

It has got to stop. Parents of my generation were raised to understand that children are not to be rewarded for bad behaviors. Sadly, that view has faded. It’s time to turn back the clock and give the money to the 99,000,000 of us that had nothing to do with this mess!

…many investors have been hesitant about entering the market because of the slow recovery of the economy. Now, a number of recent data points suggests that the recovery may be gaining traction. This week, new claims for unemployment benefits fell to the lowest level in five years.

Even many optimistic strategists say that a short-term break from the market rally is likely until there are more indications that the economy is growing. And given that January is historically a strong month for stocks, more bearish analysts have said the recent rally is likely to fade. One drag on growth could come from the recent increase in payroll taxes.

There is also a sizable contingent of investors who think that the European debt crisis and United States fiscal position still represent significant threats.

But Russ Koesterich, the chief investment strategist at BlackRock, said that the current threats were “mundane” in comparison to what investors faced the last few years. “We’re not talking about big crises anymore,” he said.

Uh-Oh: Small Investors Propel Stocks

Team Obama is fast out of the box with its plan to redeploy its campaign ops to sell Americans on why they should lie back and think of England why they should embrace a future with more income disparity and more catfood for old people. The media got wind of the plan the evening before the messaging barrage started. Joe Firestone does a able job of taking it apart.
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It’s fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when, as now, both a trade deficit and an output gap between the economy’s potential and its actual results exist. Such a plan is one that must remove more net financial assets, specifically reserves, from the private sector than would otherwise be the case, every year the plan is pursued. Banks can compensate for these reserves by creating new ones when they make loans. But, loans create both assets and liabilities in equal measure and no new net financial assets.

So eventually, if deficit reduction is pursued for long enough, a declining rate of addition to private net financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate. This will eventually dig the US’s economic grave by reducing the productive capacity of the economy, and the Government’s ability to sustain greater levels of deficit spending, producing outputs of real social value, without triggering inflation. Oh, well, President Obama, Timothy Geithner, Jack Lew, Erksine Bowles, Alan Simpson, Alice Rivlin, Pete Peterson, and the rest of us will be able to find consolation by reminding ourselves that our collective trip to the poorhouse was in the service of the neoliberal notion that fiscal responsibility is all about containing the rise of the debt-to-GDP ratio.

– REAL fiscal responsibility is a pattern of fiscal policy intended to achieve public purposes (such as full employment, price stability, a first class educational system, Medicare for All, etc.), while also maintaining or increasing fiscal sustainability, viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve our public purposes.

– REAL fiscally responsible policy, if it works generally as expected, creates greater real benefits than real costs for people! It has nothing to do with conforming to some standard simple measure like an acceptable debt-to-GDP ratio that has only a questionable theoretical connection to the actual well-being of people. It is political malpractice to give, as the President is now doing with his drive towards a “Grand Bargain,” greater priority to that kind of abstraction, and to the opinions in the bond markets, than to full employment, price stability, a strong social safety net, and Government programs that will help us solve the many outstanding problems of our nation. Who would have predicted that this “pragmatic,” “realistic” president would have such a strong belief in “the confidence fairy”?

It was Bill Moyers who used the expression “incestuous orgy” in this interview with former head of SIGTARP Neil Barofsky to describe the relationship between major financial firms and the Federal government. That beats the anodyne “revolving door” all day and I hope becomes part of the lexicon for describing the capture of Washington by Wall Street.
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I thought that Clinton’s speech at the Democratic Convention was disgustingly dishonest, even for him. The simple fact is that both Parties are owned by the Oligarchs and nothing is going to change until the system is reformed. If Romney is so concerned about the “47%” eating and getting medical care, why isn’t he equally worried that government intrusion into private capitalism, orchestrated by a former CEO of Goldman’s, pretending simultaneously to represent the interests of all the Republic was bailing out banksters who weren’t allowed to lose. Hypocrites all.

When it collapsed, due in part to bank-friendly policies that Rubin advocated, he made more than $100 million while others lost everything. “You have to view people in a fair light,” says Phil Angelides, co-chair of the Financial Crisis Inquiry Commission, who credits Rubin for much of the Clinton-era prosperity. “But on the other side of the ledger are key acts, such as the deregulation of derivatives, or stopping the Commodities Futures Trading Commission from regulating derivatives, that in the end weakened our financial system and exposed us to the risk of financial disaster.”

“Nobody on this planet represents more vividly the scam of the banking industry,” says Nassim Nicholas Taleb, author of The Black Swan. “He made $120 million from Citibank, which was technically insolvent. And now we, the taxpayers, are paying for it.”

Rethinking Robert Ruben

The argument advanced by the historian Philip Bobbitt that a transition is occurring in world politics from the nation state to the market state has long appealed as a snapshot of what is occurring in world politics. It is, as with any thesis about a large subject, far too simple to reflect accurately all that is happening, but it is nevertheless a fine starting point. As we witness the political travails plaguing southern Europe, it gives us a useful analytic to trace the outline of what is happening.

That, at least, is what I used to think. I am starting to wonder if something very different is happening. Several tensions seem to be occurring that suggest that the transition to a “market state” is problematic at best. The first, and most obvious, is the resilience of nationalism, or at least approximations of it. Max Walsh commented in the AFR that the Europe experiment was designed to mitigate the effects of nationalism:

The EC is about buying time. This was the strategy originally favoured by Jean Monnet, the “founding father” of “modern” Europe. Monnet judged that unification between the previously hostile nations of Europe would never be delivered through the ballot box. Instead, he advocated, it could be achieved by incrementally transferring more and more government functions from national to European administrations.

The EC has been successful in increasing its writ by stealth.

The delaying is just papering over the absurdity of enforcing a union that does not have underlying cultural support, yet purports to be “democratic”. As the historian Anthony Beevor points out the rise of nationalism in Greece – anti Nazi slogans against Merckel, for example — is a gloomy portent. Europe is already falling apart and likely to revert to nationalism of some sort:

“The great European dream was to diminish militant nationalism,” he says. “We would all be happy Europeans together. But we are going to see the old monster of militant nationalism being awoken when people realise how little control their politicians have. We are already seeing political disintegration in Europe.

Finance and the Mafia State

For almost a year now, the Obama Administration has been extremely concerned about the goings on in Europe. The official line from the White House is that the US is in a moderate but sustainable recovery which risks being derailed because of the European sovereign debt crisis. Last year, I noted eerie parallels between Obama’s view and the view of Herbert Hoover in 1930 before the bank runs began after the failure of Credit Anstalt in 1931.

Recently, the Obama Administration has been pushing forcefully both to get Europe to change tack toward growth and in getting out the message that the slowdown in the US is due to what’s happening in Europe. And while I agree that Europe’s policy responses have made things considerably worse, I don’t believe what is happening in Europe actually is the reason the US recovery has stalled. Michael Hudson makes some good points as to why, pointing to the continuing overindebtedness of US households due to the Obama Administration’s prioritisation of bank bailouts over the real economy in 2009 and 2010. I’d probably be a little less critical of Obama rhetorically on this score than Hudson, but only a little.

And let’s be clear, it’s not just the US and Europe that are seeing a deceleration in growth. It is global. I call it a global or synchronised global growth slowdown. In December I warned:

We are in a second synchronised global growth slowdown. Moreover, the policy response must be more muted this go round as the public sector is more indebted and has less policy space than in 2008 or 2009. Expect policy inaction followed by fits of volatility due to inaction, followed by vigorous policy responses to keep the muddle through from collapsing into Depression. Overall, all of the risk is to the downside, not just in the euro zone but globally.

And just today, Economist Nouriel Roubini echoed these sentiments in a post at Project Syndicate, writing:

Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats). Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies America’s slowdown is not about Europe, it’s about the debthave severely limited the scope for further fiscal stimulus.

I would submit then that the problem is the debt. This is true right across the developed economies. Until the debt is reduced, global growth will be slow and that makes economies susceptible to recession. As much as the President wants to deflect attention toward the disaster building in Europe, he should admit to himself that more needs to be done on household debts, incomes and jobs. A banking-centric policy response has caught up with us and we’ll just have to see if we can ride this one out.

America’s slowdown is not about Europe, it’s about the debt

I see three main problems in Krugman’s approach: how much of today’s unemployment is structural, whether countries’ long-term debt matters and Keynesian economics track record.

Krugman believes the financial crisis and Great Recession created an output gap — the difference between the economy’s potential and what it’s currently producing — through a huge shortfall in demand.

Consumers are saving or paying off debt rather than spending. Since consumption represents 70% of the economy, that depresses aggregate demand. Keynes called it a liquidity trap.

With consumption and business investment hobbled, Keynes and Krugman say there’s only one way to fill the gap: The government has to step in with stimulus spending and the Federal Reserve needs an inflationary monetary policy to kick start the economy.

Read Howard Gold’s take on how the Great Recession has derailed Friedman and Keynes in MoneyShow.com.

But what if the problem isn’t only a dearth of demand?

DEBATING KEYNESIAN THEORY