About Me 0076: Making Money Program

Fortune's Allan Sloan, a longtime journalistic master of tax and accounting, does what he does best and tries to take apart the "bailouts." His conclusion: The government looks like it's going to make money on its interventions in 2008 and 2009, a story best told by Sloan himself. The piece has stirred up some heat. Sloan has to make a number of assumptions -- many of which he admits to -- and definitions to arrive at an approximate figure. One of the biggest surprises is the fact that the Federal Reserve is actually making money on the $1.25 trillion in mortgage-backed securities it bought in 2008-2009 and the $600 billion in Treasuries it acquired in 2010-2011, both of which were part of Quantitative Easing I and II. Although Sloan admits they're popularly known as "stimulus," he considers them part of the bailout because the purchases were designed to stabilize credit markets. The result: The Fed's bigger balance sheet has produced what Sloan calls "profit" of $102 billion, which the central banks sends to Treasury at year's end.

Some of this was known. The Financial Times' Gillian Tett ran through the numbers on the Troubled Asset Relief Program a few months ago and concluded that it was both successful and profitable. But as Sloan points out, based on his assumptions, TARP amounted to only about 3% of the "bailouts."

Sloan admits these numbers are rough. "Our accounting is unconventional because in some places we count what has happened, in some places we project what's likely to happen, and in some places we've done our own numbers because no others exist," he writes. "If things break right, taxpayers could come out $100 billion ahead: our $42 billion profit estimate, plus a $25 billion reduction in the Fannie/Freddie cost, $25 billion more in Fed profits, and a reduction in the $19 billion expense we're showing for TARP." But while he recounts bailout negatives -- moral hazard and the sense the government was picking winners and losers (saving creditors, letting taxpayers suffer) -- he still concludes it was necessary. "But something needed to be done when the financial world was on the brink of the abyss, and the government did something. No matter what your views are, you should be happy that taxpayers, almost miraculously, are coming out ahead rather than hundreds of billions of dollars behind."

Sloan's piece comes off as smart and sensible, if admittedly open to argument on the details. He clearly meant it as a corrective to one of the great idée fixes of the age: That not only were the bailouts a colossal waste of taxpayer funds but that they were actually the problem; without the bailouts, which are popularly thought to have ballooned the deficit and sucked life from the economy, everything would have been fine, except some shady banks and plutocrats would have had to suffer. The bailouts were expressly designed to save rich people.

And herein lies the real lesson of this solid piece of financial journalism: the reaction. On Monday morning, Sloan's piece had attracted 24 pages of comments and counting. A few of them either accepted Sloan's argument or praised Fortune for attempting the analysis in the first place. The rest of them were, in the usual fashion of Web comments, fiercely negative, ad hominem, prone to digression or brutally dismissive. In general, politics trumps any kind of rational argument. Bailouts are viewed as a kind of political sellout, and thus anyone who offers support -- even to suggest they were necessary to avoid a deeper cataclysm -- is shouted down. Many of the commenters can't seem to believe that anyone, certainly not Sloan, can separate their political selves from their analysis. Although it's murky, Sloan is depicted as a lover of Wall Street, a "Rightwing zealot," a member of the "power elite." They argue that Sloan doesn't care about taxpayers or homeowners or, for that matters, the dangers of too-big-to-fail. Or they don't argue at all. "I'm not going to spend time deliberating this story," wrote one commenter. "I'll just say it's laughable at best. Cheers!"

Now, of course, complaining about the incivility of Internet comments is a very old story. But what does emerge from so many of the commenters is (a) a deepening of anger to anything that conflicts with a deeply conspiratorial worldview bordering on the apocalyptic (fed presumably by the game of chicken taking place in Washington and by a lagging economy) and (b) a view of the world on both left and right that simply ignores even the basics of economic analysis. Last week, The Atlantic tackled Frank Rich's attack on President Obama in New York magazine, "Obama's Original Sin," by questioning the thesis that the president's failure to rein in Wall Street somehow hurt job creation. Thompson was civil, calm and, at least in part, complimentary to Rich's talents; and in fact Rich's long and impassioned essay made a number of sweeping assertions that were belied by basic economics. In the comments, Thompson was ridiculed, criticized and belittled. At best, he was characterized as naïve; at worst, he was told that "this article reek [sic] of brown-nosing to the financial plutocracy and plain dishonesty. When it comes to econ and finance, The Atlantic appears to be willing to sink lower than CNBC ..."

Such is the world we live in. If you operate on the Internet, you deal with the comments. A few things should be noted, however. It has grown increasingly difficult to separate out the extreme right-wing Tea Party type from the left-wing Progressive zealot. Often, the only way to discriminate is when they launch an attack on "communists" (right) or Fox (left). In particular, notably after Rich's essay, the insults against Obama from the left were nearly as virulent as from the right; many of them also featured a striking racial subtext. Second, there seems to be an increasing disengagement from any kind of economic reality that I recognize -- a rejection of any complexity or nuance that alters the picture or that smacks of elitism. The real enemy increasingly seems to be anyone occupying a position in the middle, which is viewed as the black heart of corruption and self-deception. Thus Sloan and Thompson are easily characterized as tools of the plutocracy. This is a sad state to find ourselves.

A version of this column is scheduled to be published in The Washington Times, Monday, July 11, 2011.

Follow the Money No. 74: Charlie Chaplin’s suit?

The geopolitical question of the hour: is there a tripwire that will tie together a series of regional crises bringing on another 2007-08 worldwide economic disaster?

Lehman Brothers’ collapse dramatized how enhanced interconnections can tumble through the new world economy with domino effect. But if the world finance mavim know a seminal interrelation of our several bubbling crises, they are not telling us. Meanwhile, the minitheaters percolate:

Europe –There’s growing consensus Greece’s economic collapse is leading to a restructuring of the European Union’s finances with more than 20% of the world’s gross product. Shooting the messenger – the growing attacks on rating agencies which, indeed, are feeding debilitating increases in the cost of debt – doesn’t solve the problem nor do complicated if band-aid solutions. Nor, does it seem likely to this observer, creation of a Eurobond market to absorb growing debt would automatically bring about inspired, problem-solving central European fiscal and monetary direction. [It didn’t with creation of the Euro “common currency”.]

The U.S. – However much the Obama Administration’s stimulus program staved off an even worse crisis – to be argued until the end of the economists’ time, not soon contrary to John Maynard Keynes hopeful prediction the profession would die out – it has run out its string. Public opinion demands curbing deficit spending. But how against pressures of “special interests” [yours’ always are, mine are heaven blessed] is a conundrum taxing the American political system. It‘s a time when parliamentary government – with its ability to bring down a cabinet’s failed strategy instantaneously – is envied. Instead, more than a year’s political mudslinging appears inevitably producing near paralysis. Meanwhile despite widespread denials – including fudging with inventions like “core inflation” – higher prices could couple with stubborn underdemployment/unemployment and an unresolved housing bubble for increasing misery.

China – The cracks, long seen by the few who questioned sustainability of the miracle of “the world’s factory”, are widening. Beijing central planners – despite their rationale only rapid growth could legitimate “Communism with Chinese characteristics” by providing jobs and stability -- have curbed unlimited infrastructure expansion which with now slowing exports was the engine of growth. “Creative accounting” takes on new meaning for government banks hiding “non-performing loans” in new set-aside organs now making their own bad loans. Beijing’s inability to “feed” local Party hacks leads them to “squeeze” workers and farmers in turn leading to growing violence. Inflation, especially food where most Chinese live, grows despite monetary devices borrowed from Western systems largely ineffective on what still is a Soviet skeleton.

Japan – The world’s third largest economic power drifts, mysteriously bereft of political leadership, caricatured in its inability to address the destruction of the earthquake-tsunami with characteristic “Yamato Damishi” [fortitude]. In Japan’s hot, muggy summer, only 19 of 54 reactors are operating in the face of anti-nuclear sentiment. With more to shut down, cutbacks of 15% already haunt large electricity customers and boosts expensive fossil fuel imports. Consumer confidence falls to record lows, ominous for Japan’s rapidly ageing population. Government debt, already the world's highest ratio at 200% of GDP, will rise as Tokyo borrows $100 billion to rebuild and GDP shrinks. Luckily, Tokyo borrows at home at floor-scraping 1.5%. But, Japan, too, has its echo of the American argument: Economy Minister Kaoru Yosano opposes Tokyo selling itself bonds as the Fed and Treasury have done, warning resulting higher finance charges would hit Japanese banks.

But how does it all connect? We saw how Japan’s disaster put a crimp in the manufacturing supply chain from Shanghai to Detroit. But, for example, what call have German and other European banks on their U.S. colleagues if Greece defaults? Japan, which has been lending the world $175 billion annually in investment capital, is out of that business. Nobody wants to talk about the impact on Spain [20% of the EU GDP] if Greece [3% of the EU GDP], followed by Portugal and perhaps Ireland, “goes”. What will that do to Latin America where Spanish banks have invested heavily as the Brazilian boom simultaneously now threatens to go “bust”? Australia’s roaring dollar is already feeling Chinese cutbacks as will all commodities producers, perhaps even the Mideast petrosheikhs.

In one of his serio-comic sequences, Charlie Chaplin’s little tramp starts pulling a thread from his crumpled suit. Before long, his whole miserable costume dissolves. Is there that kind of loose thread here?

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Friday, July 29, 2011

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