Cui Bono: To Whose Benefit?   (October 23, 2008)

As we survey the wreckage of the global financial system and the seemingly endless bailouts and stopgaps patched together by governments everywhere we should stop and ask: cui bono: who benefits?

We are told, endlessly and even mindlessly, that "we" benefit, somehow and somewhere down the line when everything's better. Meanwhile, back in reality, the benefits to a few are easy to measure: in cold hard cash--$239 billion.

Frequent contributor Albert T. sent in this Bloomberg story which reveals that investment bankers paid out $239 billion in employee compensation even as their stockholders lost $83 billion: Morgan Stanley's Bonuses Get Saved By You and Me:

Here's all you really need to know to see who lost and who benefited most at the Five Families of Wall Street, otherwise known as Goldman, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. From the start of their 2004 fiscal years through yesterday, the big standalone investment banks lost about $83 billion of stock-market value. During the same period, they reported about $239 billion of employee-compensation expense.

The Five Families -- now down to just Goldman and Morgan Stanley -- weren't alone. Citigroup Inc., which is getting a $25 billion injection from Treasury, has reported $139.3 billion of compensation expense since the start of 2004, more than double its $62.8 billion of pretax earnings. Its market cap, by comparison, has declined by about $168 billion, to $82 billion.

For all the complaints about outrageous executive pay and how little Paulson is doing to curb it, a big reason why these firms have been scrounging for capital is they keep blowing huge wads of it on their rank-and-file, too. The Paulson plan will do nothing to change that.

As for the supposed benefits of the TARP/Paulson bailout, frequent contributor U. Doran recommended this piece by Jesse over at Jesse's Cafe Americain titled The Safety and Immediacy of Liquid Assets in a Deleveraging Panic. Jesse succinctly captures the essence of the Paulson Plan: by bailing out the bankers, money is supposed to "trickle down" via new lending to the real economy.

But what if the real economy has no need or appetite for more debt? Wouldn't it have been wiser to spend the entire $850 billion (recall Congress added $150 billion in goodies and giveaways) in the real economy, via no-interest student loans, bridge reconstruction, new electrical power lines, etc.?

The Fed and Treasury approach seems to be to fill the Banks' reserves until they overflow and being to trickle down to the real economy. They believe that they will receive more benefit by placing their capital here because of the power of the fractional reserve money multiplier.

In the short term this may not be fruitful. The engine is seized. Pouring more gasoline in it may not be productive.

Banks need a kick start by a component of the economy that is still functioning normally, if in an impaired manner. That is in the real economy. Rather than reaching the real economy through the banks, the Fed and Treasury might well be more effective in focusing on stimulating real economic activity by stimulating consumption and production directly. Trickle up if you will.

One has to wonder what Keynes would have said about these different approaches to applying stimulus: provide stimulus to the broader public through increases in wages and economic activity, or to provide stimulus to the banks and hope that they will lend to the broader public at rates low enough to stimulate projects that would not otherwise be feasible.

This is a critical point, and little debated or understood as it is emotionally charged with words like 'socialism.' Most do not understand the fractional reserve banking system, but it seems more official, more palatable, to give them billions, enormous sums, and to give the public as little as possible for fear of debasing the value of work and the currency.

Paulson and Bernanke both view the economy as an adjunct to the financial system so from their perspective the choice is obvious.

The Fed and Treasury may succeed eventually in their approach of filling all banks, solvent and insolvent, stable and unstable, until they burst with liquidity and overflow into the broader economy.

In doing so they risk a significant bout of inflation and financial instability that may surprise them.

Cui bono? certainly not the taxpayers or the real economy.

And let's also ask who's benefitting by the dramatic drop in oil prices. Certainly every consumer benefits--or is it more importantly, every potential voter? U. Doran also sent over this intriguing analysis by Gary Dorsch (Sir Charts Alot) entitled Mixing of US Election Politics with Crude Oil which supports the theory that the Saudis and other Gulf oil states have engineered an oversupply of oil to aid McCain's chances for winning the presidency.

As a side-benefit, this oversupply also struck a massive fiscal blow to potential adversaries of the Gulf Oil states: Iran and its allies Venezuela and Russia.

I have previously called attention to the amazing tendency of oil to plummet just before elections; nothing says "go ahead and vote Republican" like a stunning decline in oil and an equally stunning rise in the stock market.

Thus I predict a huge stock market rally between now and election day, and a massive effort by the U.S. and its Gulf Oil allies to suppress the price of gasoline and oil. After the election, then oil will suddenly begin climbing due to "supply and demand issues." Funny how supply ramped up hugely prior to the election and suddenly "shortfalls" will occur after the election.

Do you really reckon The Plunge Protection Team wants Mr. Obama to win the Presidency? Just how hard will they pull the levers to crank down gasoline prices and goose the stock market? As hard as they can, I am sure: cui bono.

We all know who benefitted from the sale of trillions of dollars in CDS and CDO derivatives--investment banks. Now we need to ask who will pay the price. Frequent contributor Craig M. sent along this Bloomberg report: CDO Cuts Show $1 Trillion Corporate-Debt Bets Toxic.

Speaking of derivatives, essayist Zeus Y. has graciously answered reader's followup questions regarding his series of essays on credit default swaps, and provided yet more answers to "to whose benefit?"

Toxic Liabilities Are Not Assets:

Sooner or later we have to recognize a massive fraud has been perpetrated. It needs to be revealed that major companies have trillions of dollars of junk on their books and are likely not solvent according to traditional notions of solvency. So we have a Catch-22, but not one that will be solved by hiding: expose the fraud and risk likely short-term collapse and re-scaling of economic confidence and systems, or cover the symptoms, hide the toxins, and allow them to fester and rot out the economy in a prolonged sickness that may spread and gain momentum beyond attempts to assuage the problems.
I highly recommend reading the entire essay, as Zeus lists seven excellent propositions for fixing the fundamental issues.

And for your listening pleasure/amusement: Patriot Express (in disguise) sings Sarah Palin, Queen of the Red party. The lyrics helpfully pop up for your reading pleasure.

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--An anonymous comment about CHS posted on another blog.

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