Ben and Hank’s Digital Diversion: Economic Make-Believe.

(8:00PM EST – promoted by Nightprowlkitty)

As this greatest economic crisis of the past century unfolds, it appears that Bernard Madoff’s $50 billiion Ponzi scam is not so much an aberration as it is a microcosm, a reality nicely captured in Toles’ savage cartoon in today’s WaPo.

Madoff’s $50 billion scam really has only one major difference with the astronomical leverage ratios and Wild West CDO and CDS trading strategies engaged in by “legitimate” hedge funds, insurance companies, investment banks, and regular commercial banks: Bernie Madoff will get to go to jail someday, while the “legitimate” players will have their devastated balance sheets replenished by bailout dollars created out of thin air. AIG, CitiGroup, and other malefactors will have their uncovered obligations propped up by hundeds of billions of federal dollars, and their criminally negligent executives will end up keeping their jobs, salaries, bonuses, multiple homes, corporate executive jets, and fleets of luxury cars.

Why does it seem that the hundreds of billions (or even trillions) of digital dollars that U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are pumping into the economy–especially the finance industry–do not seem to be having any effect on real economic activity?

Let’s ponder the question below the break.

Yesterday Daily Kos diarist “bonddad” posted some very interesting charts of economic activity. “New Deal democrat” posted some interesting charts on deflationary trends. Note also the rapidly plunging indices for commodity prices.

The charts all reflect that there is substantial downward momentum for economic activity and prices. While no one can predict when the U.S. economy will hit bottom, the trendlines suggest that we will not sharply pivot on a dime–or on a trillion dollars (or two, or three).

Thus far the bailout funds for the financial sector appear to be having little or no positive effect on the real economy, for the funds seem merely to be shoring up red ink balance sheets of failing financial corporations or even making possible their purchase of attractive takeover targets, rather than serving the intended purpose of unfreezing credit for businesses and consumers.

We may have reached a digital monetary divide in which monetary and even fiscal policies have become divorced from the real economy of the producing, buying and selling of goods and services. “Money” is now a digital representation of value sitting somewhere on a hard drive. My money is on my bank’s hard drive and on my brokerage firm’s hard drive. My obligations are on my credit card company’s hard drive and my mortgage company’s hard drive. My financial transactions are the instantaneous transfer of a few electronic bits from one hard drive to another to settle accounts.

These days the Federal Reserve and the U.S. Treasury do not even need to print money. Someone at the Fed or Treasury simply decrees that “X” billions or trillions of dollars are hereby created out of nothing, and the resulting digital expressions of value are then disbursed through the banking system or as direct digital subsidies to corporate entities. So here is my basic question: numbers serve as essential abstractions for counting things in the real world, such as employment figures, unemployment claims, housing prices, commodity prices, shipping volumes, trade balances, votes, etc. But can mere invented, abstract numbers (in this case, digital expressions of value created out of thin air and then placed on federal government hard drives) have much effect on the real economy?

No serious economist doubts that now is the time for massive federal deficit spending in order to provide economic stimulus. What seems unclear so far is whether the bailout funds or the Federal Reserve’s monetary legerdemain are stimulating any economic activity at all, for these digital creations seem to be rewarding and propping up the balance sheets of insolvent bad actors in the finance industry rather than reaching the accounts of Main Street businesses and employees, whose spending, investing, and continued working can halt and reverse this economic collapse.

It would make more sense to bundle $100 bills into packs of a hundred and pass out $10,000 to every adult at the supermarket checkout counter. At least that money would get spent and start circulating.

Are Henry Paulson and Ben Bernanke simply inattentive and inept? Or are they displaying devious malice in trying to keep the finance industry’s Ponzi-style looting going for as long as possible?


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    • Edger on December 17, 2008 at 17:09

    It would make more sense to bundle $100 bills into packs of a hundred and pass out $10,000 to every adult at the supermarket checkout counter. At least that money would get spent and start circulating.

    This is pretty close to what I suggest for the auto industry bailout as well.


       Even if the automakers get loans to continue operations, the economy is going to take a hit. All three companies have promised to cut workers and close plants as a condition of receiving aid. General Motors said Dec. 12 that it will close 30 plants for at least part of next quarter, cutting production by 250,000 vehicles.

       That means “suppliers are going to go under in the next few months, even if a bridge loan comes in,” Gillette says. “The only solution is to sell more cars.”

    Giving money to the automakers management with nothing in return won’t help the union members keep the jobs.

    IMO, any bailout might be wise to be an outright purchase of 34 billion dollars worth of cars, rather than simply handing them 34 billion and hoping.

    Then give them away to the taxpayers whose money they will be taking for the bailout.

    Increase the automakers sales, provide them with revenue and cashflow, and get something in return that they will need the employees to produce.

    Bailout the taxpayers, the homeless, and anyone the auto industry lays off by purchasing 34 billion (or whatever the figure being tossed around now is) worth of cars from the big three and giving them away (or equivalent market value depending on the recipients choice) instead of handing them money and getting nothing in return.

    IOW give the big three the sales revenue and cashflow they are losing through dropping sales lately, if they are going to be given anything at all, and stimulate consumer spending at the same time.

  1. but at the federal level, they’ve run out of ammunition to ward off what will be the worst attack of Depression we’ve ever seen.

    The Fed is scared.  The bankers are scared.  And Goddess knows, we the people are terrified.  We’re in uncharted waters here, the boat has a gaping hole in it, and although we’re bailing as fast as we can, we’re sinking.


    Ronnie Reagan and his determination to eliminate what was the backbone of this nation’s economy: its manufacturing sector.

    I read recently, don’t quite remember where, that even during the Great Depression the U.S. was exporting more manufactured goods [presumably relative to GDP] than it is today.  Today, we are exporting the raw materials & importing the finished goods. This is, apparently, the very definition of a Third World Country.

    Paul Krugman has been warning of this since Bush’s first term, and I might even have a couple of relevant op-eds of his bookmarked; am not sure.

    But although I try to remain optimistic, even I can see nothing but doom & gloom in the immediate future: and that’s probably Obama’s entire first term, because the ARMs are due for another reset in (I think) 2010-11.  I’d feel better if he were getting advice directly from Roubini, in addition to his other picks.

  2. 10 minutes before my pony party had to go up, so I’ve been hanging here & not at Big Orange.

    Guess what I just found?

    Chrysler is closing all its plants until January 19.

    The timing is obvious…but this can’t be good.  For one thing, it takes almost a month from when you apply for unemployment until you actually receive it.

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