THE FOURTEEN TRILLION DOLLAR VALUE DRAIN™
In our first of a series of articles on the Value Drain by the banks, I had challenged fellow MIT alum Ben Bernanke, the current Federal Reserve Chairman, as to whether he had used the considerable number of Economics Ph.Ds he commanded as a resource base to sum up a simple geometric progression of financial derivatives. Well, looks like Dr. Bernanke has done his math by now. And has come up with a number. As we commented in our weekly economic update podcast for the business week ending April 17, 2009, it is really a huge number. So, how big is it --- well, it could be as big as the American GDP, which stood at $14 trillion at last count. And if you never listen to any of our podcasts, you might be wondering: how could that be, because it was only a $700 billion bailout, followed by another $747 billion which the Congress passed under President Obama. Simply put, the Federal Reserve is working simultaneously to bloat up its balance sheet with a lot of the toxic waste that has been sugar-coated as "legacy assets" by the economic brain trust of Obama.
Here, let us put the capacity of the Federal Reserve in a VALUE DRAIN™ equation format:
Equation 1: Federal Reserve Bailout = Geometric Sum of All Toxic Assets and Derivatives Thereof (GSTADT) – Treasury Bailout Capacity
In other words,
Equation 1: GSTADT = Federal Reserve Bailout + Treasury Bailout
SECTION I - $9 TRILLION BAILOUT COMPONENT OF THE $14 TRILLION DOLLAR VALUE DRAIN™
A. The multi-trillion dollar complex rescue package by Dr. Bernanke and the Federal Reserve:
BUY UP TOXIC ASSETS
1. $1.8 trillion to buy commercial paper
2. $540 billion to buy mone market funds short of cash
3. one trillion dollars in TALF-term asset backed securities loan facility
4. $1.45 trillion in housing related purchases from Freddie and Fannnie
Total: $4.8 trillion in Federal Reserve’s plan to buy up toxic assets
PROVIDE NEW LENDING
1. $620 billion in expansion of SWAP lines
2. $900 billion in Term Auction Facility (TALF)
TOTAL: $1.9 in New Loans
FEDRERAL RESERVE BAILOUT GRAND TOTAL = $4.8 trillion + $1.9 trillion = $6.7 trillion Value Drain
B. Able Support from the Treasury:
1. $700 billion bailout architected by Henry Paulson, the treasury secretary under President Bush
2. $300 billion from the $787 billion stimulus (let's assume the rest flows back into the economy as extended unemployment benefits, one time retirement benefit checks, mortgage / housing prop-up schemes, mortgage refinance incentives because of lowered interest rates by the Federal Reserve, etc.)
3. $ 1 trillion lost through the pPiP (public private investment plan) plan --- if they have their way (in light of the SIGTARP's 250 page report made public on Apreil 22nd 2009, the banks may drain more than $1 trillion, in which case we will update this amount to what is actually looted.
TREASURY BAILOUT GRAND TOTAL: $700 billion + $300 billion + $1 trillion through pPiP = $2 trillion Value Drain
Let's combine A and B above and call it the Announced Fed Bailout
So, Announced Fed Bailout = $6.7 trillion + $2 trillion = $8.7 trillion of Value Drain
This is displayed by our up to date Value Drain Framework applied to the current public looting in the name of Free Markets, Meritocracy (AKA greed of Wall-Street executives):
If you look at the above picture, you can see that we have plugged in the entire value drain of $700 billion Paulson bailout as one of the components of the Value Drain Framework. The above value drain analysis provides a clear picture of where things are today. Also, if you compare it to our previous article, you can see that is this whole financial scam is the biggest money drain in the history of American Capitalism.
SECTION II - ROOT CAUSE OF THE MELTDOWN - FRIEDMAN? FREE MARKETS? FEAR?
We podcasted a few weeks ago (April 3rd weekly podcast) the mind-set of Dr. Lawrence Summers, the head of the Obama Economic Brain Trust, and a died-in-the-wool Friedmanite (he has said so on record). Now, Milton Friedman, while having utility in terms of bringing in Glasnost and Perestroika in the erstwhile Soviet Union, corrupted the entrepreneurial mindset of Business America.
We have podcasted Dr. Krugman's critique of Friedman in the same April 17 update: "In the aftermath of the Great Depression, there were many people saying that markets can never work. Friedman had the intellectual courage to say that markets can too work, and his showman's flair combined with his ability to marshal evidence made him the best spokesman for the virtues of free markets since Adam Smith. But he slipped all too easily into claiming both that markets always work and that only markets work. It's extremely hard to find cases in which Friedman acknowledged the possibility that markets could go wrong, or that government intervention could serve a useful purpose.”However, we have to take criticisms of great economists, including Nobel Laureate Krugman, with a grain of salt. Are the Krugmans of the world really desirous of helping the man on the street, or are they there to hog some limelight, for this financial crisis has propelled a lot of them to stardom: Roubini, Krugman, even Professor Johnson. Critiquing these great economists is beyond the scope of the current article, but Dr. Krugman really doesn't critique Dr. Larry Summers, one of the architects of the Gramm-Leachy-Bliley act. We have thrown light on this deregulation of the Glass-Steagall-Act in a prior weekly podcast, under the supervision of Dr. Summers, the then treasury secretary under Bill Clinton. It seems fear and greed rule the economists too. On the one hand, they are greedy for being the Pundit who should be listened to; on the other they are afraid of stepping on the toes of powerful plutocrats lest the powerful turn too much against them. In other words, unless Dr. Krugman is vocal in his criticism of Larry Summers, people will treat his sermons in the Conscious of a Liberal as mere economic sermons, with intellectual data-processing behind the blogs, sans courage.
So, let's call a spade a spade, or tell it like it is. if you look under the hood, what Milton "Mr. Greed" Friedman peddled was pure greed. He has claimed on record that there wasn't a better component of human character which could motivate men to higher entrepreneurial, material, and social success than greed. And the proof is in the pudding. Dr. Summers, before taking his current job, was earning $5.2 million a year, for working one day a week in a hedge fund called D.E. Shaw. Even Madelin Albright started a hedge fund after she was done with the Secretary of State role under Bill Clinton. Chelsea Clinton works for a hedge fund.
Where one's success or achievement is measured only by money, no doubt greed can be a great motivator. However, by that argument, you can get extended to believe that the more you have, the greedier you must be. So by that extended token, Bill Gates and Warren Buffet must be the two greediest persons in America. But wait a minute --- if that is so, how come each one has given almost 50% of their net worth to the Bill and Melinda Gates Foundation? So, if charity is an offshoot of greed, where are the Larry Elisons of the world? They are greedy, they have wealth, but are they charitable?
This whole corporate culture of greed being synonymous with talent is causing havoc in the lives of hard-working Americans. As Goldman Sachs executives prepare for a
nice bonus payment again in 2009, their ex-employees who didn't have the political savvy to latch on to the redundant jobs are on the street. May be it is some kind of crooked justice, considering that those whose houses are being foreclosed are on the streets too. But what we on main street really want to know from the Senators and the Congressmen is this: "When will people like Lloyd Finklestein be really grilled for mis-managing their business to the point of bankruptcy, firing their own people, and pocketing nice bonus simultaneously." Again, we are not attacking a person here, but a system which has brought havoc, panic, great sorrow, failed marraiges, failed families, great psychological depression, massive unemployment, and of course, fear. Business schools are still peddling it, corporations live by it, by this stupid human talent called greed. Which is nothing but the other side of fear.
Why is "too much" greed not good? Because greed gives way to fear, and when fear strikes, people pull money out of everything: stock markets, US treasury bonds. They deposit it in bank accounts (including Swiss banks), and also take recourse to investing in safe bets like gold. The double whammy here is that in addition to mortgages deflating, the stock market is still deflated by 42% from its peak. Let's analyze the markets a little, using scientific intuition, from which a lot of technical analysis has sprouted as a science in itself.
Section III - IN SEARCH OF THE NEW MARKET EQUILIBRIUM USING THE LAW OF TECHNICAL REBOUNDS
In our podcast for the business week ending on May 1st 2009, we introduced the concept of market rebounds to get to some additional trillions added to the VALUE DRAIN™. We will analyze it more thoroughly in our third VALUE DRAIN™ article. But let's briefly explore it here.
When you bounce a ball from the height of 6 feet, and drop it normally without applying force, it rebounds back 50% to 3 feet. The law of gravity pulls the ball down, but the physical resistance of the floor intervenes, absorbs some of the impact; and obeying the law of conservation of energy, deflects the ball back up. When the ball is back up 3 feet the first time, we can say that it is momentarily in equilibrium after the bounce.
Similarly, from its all time highs (when Dow Jones went up to 14279) of 23 trillion dollars in market capitalization, the markets deflated to a low of 11 trillion dollars in market cap about seven weeks ago at the time of this writing. Now they are back up a little bit, but we are still losing 42% from the highs. 42% of 23 trillion dollars is roughly 10 trillion dollars. Suppose we gain back 50% of that, or 5 trillion dollars, and call that point to be the momentary equilibrium where everything is restored and we can start on a new footing (hopefully with less greed), we can assume that the other 5 trillion dollars got drained by Wall-Street traders.
We are at a point where the second Value Drain(tm) equation can be introduced:
Equation II: Total VALUE DRAIN™ = GSTADT + Market Deflation
Now, let's plug in the numbers - - -
GSTADT = $8.7 trillion
Market Deflation = $5 trillion
Total VALUE DRAIN™ = $8.7 trillion + $5 trillion = $13.7 trillion
$13.7 trillion is equivalent to one years's US GDP. This is where we shall stand as an economy, when the markets rebound another 20% from where we are. That will take time,
as will full implementations of programs like pPiP, TALF, Fed's buying up of all the toxic assets from the likes of Fannie and Freddie, etc. We have documented the VALUE DRAIN™ more fully in this article for the educational purposes of all Americans. It is for you to decide if we live in a equitable society, where Wall-Street looted one year's worth of U.S. GDP (Gross Domestic Product), or roughly in the name of greed, deregulated markets, capitalism, and meritocratic democracy. Wall Street bankers (and traders) are looting this from Main Street: foreclosed homes, closed down factories, bankrupt automotive manufacturing companies, unemployed / underemployed citizens, and the rest of us (hardworking people), even as you read this article. If 5 billion dollars are looted every day, it will take 2740 days to get to $14 trillion. 2740 days is a long period in human time: 7.5 years.
<< June 21 Update: We are now projecting that the total value drain is much more than the US G.D.P. If you add the 6 trillion dollars lost in home value to the 13.7 trillion dollars, you arrive at the figure of almost 20 trillion dollars looted by the toxy-morons. We will delve deeper into this, for the housing crisis actually brought this financial meltdown, in the third in our Value Drain series of articles. >>
CONCLUSION OF VALUE DRAIN™-II
This looting, which we have calculated to be equivalent to $14 trillion in DRAINED VALUE, has been going on since the liar loan (sub-prime mortgage with zero down) days, and even before that, when the Gramm-Lichey-Bliley act deregulated the financial institutions completely. Wall-Street insiders have handsomely benefited from this Value Drain by paying themselves big bonus amounts even as their mis-managed derivatives related businesses were going bankrupt, and were saved by the Fed and the US Treasury TARP. In addition to the John Thains and the Finklesteins of the world, some powerful names of people who have enjoyed form the Valye Drain include Henry Paulson got $400 million from is Goldman Sachs stock, Alan Greenspan who got $8 million from his book royalties, Larry Summers who pocketed $7 million plus from his one day a week job for $5.2 million yearly compensation plus speaking engagements, etc.
In particular, Goldman and Bank of America (which bought Merril Lynch) bankers paid themselves multi-million bonus packages in 2005, 2006, 2007, 2008, and will pay themselves fat bonus this year (2009) and also in 2010. What can you do today to stop this robbery, which we have politely introduced as the $14 trillion Value Drain? We estimate that 5 years are gone, but 2.5 years still remain. Will you rise up, and vote the law-makers, whose campaign finances are funded by Wall Street financiers, out? Will you write to your senator / congressman about this looting, so that they are forced to change the laws? Tougher sanctions are necessary against bankers; mere slaps on the wrists by the congressmen (since they depend on rich bankers and their banks for campaign finance) and senators will not suffice; changes in law are necessary. Every time robbers clothed as bankers are invited to the White House for lunch, will you follow through complain loudly to your neighbor, your congressman, your senator, your church minister? Or will you put the load on your progeny, for you are too weak?
June 21 Update: We are now projecting that the total value drain is much more than the US G.D.P. If you add the 6 trillion dollars lost in home value to the 14 trillion dollars, you arrive at the figure of 20 trillion dollars looted by the toxy-morons. We will delve deeper into this, for the housing crisis actually brought this financial meltdown, in the third of our Value Drain series of articles.
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