The Rot That Makes Things Worse

Yesterday, the Commerce Department announced the latest employment numbers, showing that the US created a paltry 80,000 jobs in June, leaving unemployment at 8.2 percent.  That makes June the third month in a row with sub-100k job creation, and it comes just after leading factory and service sector indices show a broad-based slowdown in US production and output.

In addition, the IMF recently downgraded its US economic growth forecast to 2 percent for 2012, with additional review and downgrade possible. And the IMF again warned about the significant, negative economic impact of the US “fiscal cliff” – the truly enormous tax increases and spending cuts that will be automatically triggered by law at the end of the year, absent government action.

Cumulatively, this  bad news and uncertainty has led to renewed concerns that the US economy is again close to stalling.

Overseas, the news is no better.  Multiple summits, communiques and notional commitments have failed to counter the appearance that Europe is helpless to get out in front of its sovereign debt crisis. Sovereign borrowing rates for Spain and Italy continue to hover at unsustainable levels. Unemployment in the EU region has continued to rise, recently hitting 11.1 percent. Spain and Greece are coping with national unemployment rates at nearly double that level. Growth rates have cratered.

And Europe’s alarming slide is complemented by potentially grim news that China’s economy is also slowing down. In an unexpected move that telegraphs the new urgency of Chinese leaders, China cut two key interest rates last week in the hopes of shoring up the economy. Fresh statistics on Chinese growth are due out of Beijing on July 15th that will provide a fuller picture of the challenge.

There is no way to paint a happy picture here. The global engines of growth are slowing simultaneously, without an obvious catalyst to create demand. Global economic problems,  serious on their own, are vulnerable to unexpected political or military crises that could rapidly exacerbate the structural fiscal and economic challenges, creating an even more rapid deterioration. Pick your poison here; it could be Iran, Syria or North Korea, or some as yet unknown threat, such as another, large scale, terrorist attack.

But as bad as all of this is, there is something worse. Something insidious. Something soul-wrenching and confidence bleeding, that serves to hollow out our trust in our institutions and systems that we depend on to manage this crisis. That is the apparent wide-spread corruption among those who set the rules, which has a corresponding, existentially corrosive impact on society as a whole.

The latest chapter among this long list of misdeeds is the Barclay’s LIBOR scandal.

Last week, the British bank, Barclay’s, admitted to rigging the London Inter-Bank Offered Rate (LIBOR) and paid a $450 million fine. This infraction is no small matter.

$360 trillion – yes trillion – in assets, including many US home loans, are indexed to LIBOR. By manipulating LIBOR to create profit for a select few, Barclay’s actions were affecting millions who depended on the rate as neutral, fact-based index of inter-bank lending risk.

Worse, Barclay’s apparently isn’t alone.

Barclay’s CEO, Bob Diamond, told a British parliamentary inquiry into the affair that regulators in Washington and London alike were complicit in his manipulations. Indeed, according to the Economist, “Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that LIBOR and similar rates were rigged by large numbers of banks….As many as 20 big banks have been named in various investigations or lawsuits alleging that LIBOR was rigged.”

After the 2008 financial crisis, and subsequent public bailouts, this scandal can only serve to further corrode what little remains of public trust in banks and those who run them.

But tragically, the LIBOR manipulation is but one facet of a larger problem.

JP Morgan is now under investigation by the Commodity Futures Trading Commission (CFTC) for its $2 billion in losses incurred last month through bad bets from its London office. JP Morgan has thus far been successful in presenting a picture of an isolated set of trades gone bad.  But the CFTC investigation exposes a new angle, not only on JP Morgan’s actions, but also other American financial institutions.

Gary Gensler, Chairman of the CFTC, stated that the Commission was initiating the investigation because JP Morgan, as a US bank, has direct access to the Federal Reserve’s “discount window” which provides financial institutions with near zero interest money, as well as federal deposit insurance, which protects bank deposits to a certain dollar threshold. Together, the two federal programs essentially provide a cheap pool of guaranteed capital that can be immediately arbitraged in higher risk investments to profit the bank.

Think about that.

We’re told repeatedly that historically low interest rates by the Fed are intended to spur consumer and business lending, which would, ostensibly, lead to improved growth. But has anyone tried to get a loan recently? Perversely, banks have tightened lending standards just as the quality of borrowers, through no fault of their own, has deteriorated with the economy. Those who might need the loans the most are shut off from sources of affordable capital.

It is much easier for the banks to generate profit by using their assets to invest in higher margin (and higher risk) deals – transactions that are little more than glorified gambling, not seed capital for projects contributing to sustained economic growth – that reward the banks profits if they work, and – potentially – leave the taxpayer on the hook if they go bad.

This is madness.

Does anyone wonder why Wall Street does so well – and the Dow soars back from 2008 lows  – despite the fact that middle America is bleeding? Wouldn’t it be nice if individual Americans could go up to the Fed discount window, take out a loan a .25 percent and invest it in – well, anything that pays more than a quarter point – pocket the difference and walk away richer?

If the system was working as intended, there would be no reason for the question…because the banks would be performing as hoped, pushing that money out the door in the form of loans, or at the very least, working with borrowers to modify existing loans to fit new circumstances.

But no.

By their actions, the banks are seemingly out only for themselves – their profits, their bottom lines, their bonuses – while taking aggressive action, for instance, against mortgage holders that are upside down , a situation  ironically created by the very banks that catalyzed the 2008 crisis. Thus it is fair to ask what exactly we, as taxpayers, are getting for our exceptional generosity.

Want to add insult to injury?

AIG, the insurance company that got up to its eyeballs in credit default swaps and nearly single-hadidly sank the global economy in its giddy-blind pursuit of profit, the firm that required $85 billion in bailout funds from taxpayers, is now suing the US government for $30 million for tax over-payments it made for tax year 1991.

Yes, AIG is suing us to get money back.

How can anyone in AIG be capable of such jaw-dropping chutzpah?

But it doesn’t end with banks and financial markets. Our elected leaders are complicit in this as well.

According to an investigation by the Washington Post, more than 100 members of Congress or their families traded stocks or bonds in companies lobbying on bills that passed through their committees, based on an examination of congressional stock transactions between 2007 and 2010.

Indeed, before the financial meltdown in 2008, certain Members actually made trades to benefit from the coming financial apocalypse directly after briefings with senior Treasury Department officials on the coming danger – information that was not available to average Americans.

Think about that. Our Members of Congress were working to secure their own financial futures without letting the rest of us in on the coming disaster.

But this self-dealing pre-dates 2008.

The House of Representatives’ Oversight and Government Reform Committee provided new details about a program run by now defunct mortgage giant Countrywide Financial Corp., which offered discount loans to “VIPs.”

The company, which was once the biggest U.S. mortgage lender, granted hundreds of loans between 1991 and 2008 through the VIP program, the report said. Recipients included lawmakers, their staff, top government officials and executives of government-controlled mortgage company Fannie Mae, according to the report. The program was created and used to influence lawmakers with the aim of killing legislation that could hurt the company’s profits.

 Jim Johnson is singled out here for particular infamy. The former Chairman and CEO of Fannie Mae, was also a recipient of Countrywide’s VIP program.

Johnson, who made $21 million in compensation in 1998 as head of Fannie, was one of a series of Fannie chiefs who, operating at the direction of Congress (no doubt influenced by Countrywide), grew the sub-prime mortgage market as a vehicle to  expand home ownership in low income and minority communities; loans that Countrywide was only too happy to make, and a market that ultimately set off the mortgage crisis that led to Wall Street’s meltdown.

It is as incestuous as it is infuriating.

And let me be clear, this is not an criticism of the free market. Rather, it is an indictment of the pervision of governance that rewards insiders and the well connected at the expense of the rest of us. That drains public confidence in supposedly fair and impartial laws that do not apply equally.

At a time when faith in our business and political leaders needs to be at its highest, those very officials have conducted themselves in a manner beneath the dignity and decency of their station. Their individual acts of selfish avarice have collectively stained the confidence of the American people in the very institutions upon which we must depend to navigate this crisis, making any coherent policy all the more difficult. In this manner, these officials have managed not only to fail themselves, but their offices and their country.

How can any profit be worth that price?