Forum Post: Noted Economist Suggests Talking Points for OWS
Posted 13 years ago on Oct. 11, 2011, 12:28 p.m. EST by Isiah
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Talking Points for the "Occupy Wall Street" Protesters (excerpts)http://www.hussman.net/wmc/wmc111010.htm by John Hussman
We're all for a good peaceful protest. As long-time readers know, I've been an adamant critic of the bailouts of mismanaged financial institutions, as well as various illegal policy actions that have been pursued by the Fed since the financial crisis began in 2008. Unfortunately, over the past 15 years or so, the basic function of the financial markets has been corrupted into what I've grown to view as a self-serving carnival of speculation, where many participants are interested in nothing except getting the next rally going at public expense, regardless of how badly market signals are distorted, how recklessly capital is misallocated, or even whether what they do has any positive effect on the economy or the country (some of the sleazier ones even have their own shows on basic cable). Another part of this transformation is due to the activist policies of Federal Reserve, which has continually attempted to short-circuit every instance of short-term economic discomfort by distorting the menu of investment returns (e.g. zero interest rate policies) in an effort to provoke investors to accept fresh speculative risk. Undoubtedly, one of the greatest rhetorical victories of Wall Street has been to successfully plant in the minds of the public the idea that some financial institutions are simply "too big to fail," and that the "failure" of "systemically important" institutions will result in global financial meltdown and Depression. The reality is much different. So, with the hope of providing the Occupy Wall Street protesters with some talking points, what follows are some perspectives that might be useful in framing the issues that we are facing as an economy. 1) "Failure" only means that corporate bondholders don't get every penny Background: When Wall Street talks about the "failure" of a bank or other financial institution it means the failure of the company to pay off its own bondholders. It does not mean that depositors, counterparties or other bank customers lose money (See Recession, Recovery, and the Ring-Fence ). A bank is essentially a big portfolio of assets, about 70% which are typically financed by depositors, customers and other liabilities, about 20% by the bank's own bondholders, and about 10% with the capital of the bank's stockholders. In a typical bank "failure" depositors and customers typically don't lose a penny (See the section on "How to Restructure A Major Bank" in Not Over By A Longshot ). If public funds are provided during a financial crisis, and it cannot be clearly demonstrated that the institution is solvent...those are the choices - let bad debt "fail" or force depression on innocent citizens. When policy makers behave as if every institution, solvent or not, is within the ring-fence, or that some institutions are simply "too big to fail," saving these institutions comes at enormous costs, because true economic losses that should properly be taken by private investors are instead forced upon the public. 2) The Federal Reserve's purchases of Fannie Mae's and Freddie Mac's debt obligations were illegal. Background: Beginning in 2009, the Federal Reserve began buying nearly $1.5 trillion in obligations of Fannie Mae and Freddie Mac, both which were insolvent and in government receivership. At best, the obligations of these GSEs have implicit and informal backing, as any member of Congres will tell you. Very simply, the Fed broke the law by buying Fannie and Freddie's debt. 3) Creating shell companies to buy Wall Street's bad assets is not "discounting," and was therefore also illegal Background: In 2008, the Federal Reserve created a set of off-balance sheet shell companies called "Maiden Lane" to buy undesirable long-term assets of Bear Stearns and other financial companies. The Fed's creation of the Maiden Lane companies to purchase bad assets was, and remains, illegal under the language and intent of the Federal Reserve Act. 4) The skewed distribution of wealth in the U.S. is worsened by policies that misallocate capital and divert public funds to bail out investments that have already gone bad. Please see link at top of thread for Hussman's article in its entirety.
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