Nomi Prins: Hillary Clinton Will Continue the Big Bank Protection Racket

Yves here. It’s hardly a secret that the Clintons are deeply loyal to Wall Street. Bob Rubin and his numerous well-heeled followers are a powerful, arguably dominant, faction in the Democratic party, and they are tightly aligned with the Clintons.

Nomi Prins gives a useful overview of how Hillary has attempted to blame the financial crisis on everything but the deregulation that her husband supported and the reckless behavior that resulted and how her anti-bank noises, like her criticism of Wells Fargo, is tepid and late in coming.

However, I quibble with some of her article. It’s surprising to see her single out Gary Gensler, former head of the CFTC, as a bank crony. Gensler is widely seen as pushing for much tougher oversight and enforcement despite being in the disadvantaged position of being at a secondary regulator. Recall that he was up against Bernanke and Geithner, a weak Mary Shapiro at the SEC, and an indifferent-to-captured Obama at the helm.

It’s also surprising to see Prins fail to mention the cronies rumored to be Clinton’s top picks for Treasury Secretary: Larry Fink of BlackRock and Tony James of Blackstone. Both firms would profit ginormously if the Wall Street looting plan that Hillary supports and James is promoting, that of having all workers pay 3% of their pay into mandatory retirement accounts, were to become law.

As we’ve indicated, the cost of this “fix” is greater than any of the ideas proposed to shore up Social Security (as opposed to cut it by stealth). I hate to say it, but I believe Prins’ failure to flag this risk is due to her still hewing to orthodox financial views and thus believing that Federal deficits are a problem, as opposed to desirable, most of the time, and regarding senior members of the asset management heavyweights as less dangerous than executives of TBTF banks. Since even the modest re-regulation that has taken place since the crisis has increased shadow banking, and firms like Blackrock and Blackstone are major players, it would be naive to depict them as problem-free and disinterested.

By Nomi Prins, a former Wall Street executive and the author of six books of which the most recent is All the Presidents’ Bankers: The Hidden Alliances That Drive American Power (Nation Books). Originally published at TomDispatch

As this endless election limps toward its last days, while spiraling into a bizarre duel over vote-rigging accusations, a deep sigh is undoubtedly in order. The entire process has been an emotionally draining, frustration-inducing, rage-inflaming spectacle of repellent form over shallow substance. For many, the third debate evoked fatigue. More worrying, there was again no discussion of how to prevent another financial crisis, an ominous possibility in the next presidency, whether Donald Trump or Hillary Clinton enters the Oval Office — given that nothing fundamental has been altered when it comes to Wall Street’s practices and predation.

At the heart of American political consciousness right now lies a soul-crushing reality for millions of distraught Americans: the choices for president couldn’t be feebler or more disappointing. On the one hand, we have a petulant, vocabulary-challenged man-boar of a billionaire, who hasn’t paid his taxes, has regularly left those supporting him holding the bag, and seems like a ludicrous composite of every bad trait in every bad date any woman has ever had. On the other hand, we’re offered a walking photo-op for and well-paid speechmaker to Wall-Street CEOs, a one-woman money-raising machine from the 1% of the 1%, who, despite a folksiness that couldn’t look more rehearsed, has methodically outplayed her opponent.

With less than two weeks to go before E-day — despite the Trumptilian upheaval of the last year — the high probability of a Clinton win means the establishment remains intact. When we awaken on November 9th, it will undoubtedly be dawn in Hillary Clinton’s America and that potentially means four years of an economic dystopia that will (as would Donald Trump’s version of the same) leave many Americans rightfully anxious about their economic futures.

None of the three presidential debates suggested that either candidate would have the ability (or desire) to confront Wall Street from the Oval Office. In the second and third debates, in case you missed them, Hillary didn’t even mention the Glass-Steagall Act, too big to fail, or Wall Street. While in the first debate, the subject of Wall Street only came up after she disparaged the tax policies of “Trumped-up, trickle down economics” (or, as I like to call it, the Trumpledown economics of giving tax and financial benefits to the rich and to corporations).

In this election, Hillary has crafted her talking points regarding the causes of the last financial crisis as weapons against Trump, but they hardly begin to tell the real story of what happened to the American economy. The meltdown of 2007-2008 was not mainly due to “tax policies that slashed taxes on the wealthy” or a “failure to invest in the middle class,” two subjects she has repeatedly highlighted to slam the Republicans and their candidate. It was a byproduct of the destruction of the regulations that opened the way for a too-big-to-fail framework to thrive. Under the presidency of Bill Clinton, Glass-Steagall, the Depression-era act that once separated people’s bank deposits and loans from any kind of risky bets or other similar actions in which banks might engage, was repealed under the Financial Modernization Act of 1999. In addition, the Commodity Futures Modernization Act was passed, which allowed Wall Street to concoct devastating unregulated side bets on what became the subprime crisis.

Given that the people involved with those choices are still around and some are still advising (or in the case of one former president living with) Hillary Clinton, it’s reasonable to imagine that, in January 2017, she’ll launch the third term of Bill Clinton when it comes to financial policy, banks, and the economy. Only now, the stakes are even higher, the banks larger, and their impunity still remarkably unchallenged.

Consider President Obama’s current treasury secretary, Jack Lew. It was Hillary who hit the Clinton Rolodex to bring him back to Washington. Lew first entered Bill Clinton’s White House in 1993 as special assistant to the president.  Between his stints working for Clinton and Obama, he made his way into the private sector and eventually to Wall Street — as so many of his predecessors had done and successors would do.  He scored a leadership role with Citigroup during the time that Bill Clinton’s former Treasury Secretary (and former Goldman Sachs co-Chairman) Robert Rubin was on its board of directors.  In 2009, Hillary selected him to be her deputy secretary of state.

Lew is hardly the only example of the busy revolving door to power that led from the Clinton administration to the Obama administration via Wall Street (or activities connected to it). Bill Clinton’s Treasury Under Secretary for International Affairs, Timothy Geithner worked with Robert Rubin, later championed Wall Street as president and CEO of the New York Federal Reserve while Hillary was senator from New York (representing Wall Street), and then became Obama’s first treasury secretary while Hillary was secretary of state.

One possible contender for treasury secretary in a new Clinton administration would be Bill Clinton’s Under Secretary of Domestic Finance and Obama’s Commodity Futures Trading Commission chairman, Gary Gensler (who was — I’m sure you won’t be shocked — a Goldman Sachs partner before entering public service). These, then, are typical inhabitants of the Clinton inner circle and of the political-financial corridors of power. Their thinking, like Hillary’s, meshes well with support for the status quo in the banking system, even if, like her, they are willing on occasion to admonish it for its “mistakes.”

This thru-line of personnel in and out of Clinton World is dangerous for most of the rest of us, because behind all the “talking heads” and genuinely amusing Saturday Night Live skits about this bizarre election lie certain crucial issues that will have to be dealt with: decisions about climate change, foreign wars, student-loan unaffordability, rising income inequality, declining social mobility, and, yes, the threat of another financial crisis. And keep in mind that such a future economic meltdown isn’t an absurdly long-shot possibility. Earlier this year, the Federal Reserve, the nation’s main bank regulator, and the Federal Deposit Insurance Corporation, the government entity that insures our bank deposits, collectively noted that seven of our biggest eight banks — Citigroup was the exception — still have inadequate emergency plans in the event of another financial crisis.

Exploring a Two-Faced World

Politicians regularly act one way publicly and another privately, as Hillary was “outed” for doing by WikiLeaks via its document dump from Clinton campaign manager John Podesta’s hacked email account. Such realities should be treated as neither shockers nor smoking guns. Everybody postures. Everybody lies. Everybody’s two-faced in certain aspects of their lives. Politicians just make a career out of it.

What’s problematic about Hillary’s public and private positions in the economic sphere, at least, isn’t their two-facedness but how of a piece they are. Yes, she warned the bankers to “cut it out! Quit foreclosing on homes! Quit engaging in these kinds of speculative behaviors!” — but that was no demonstration of strength in relation to the big banks. Her comments revealed no real understanding of their precise role in exacerbating a fixable subprime loan calamity and global financial crisis, nor did her finger-wagging mean anything to Wall Street.

Keep in mind that, during the build-up to that crisis, as banks took advantage of looser regulations, she collected more than $7 million from the securities and investment industry for her New York Senate runs ($18 million during her career). In her first Senate campaign, Citigroup was her top contributor.  The four Wall-Street-based banks (JPMorgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley) all feature among her top 10 career contributors. As a senator, she didn’t introduce any bills aimed at reforming or regulating Wall Street. During the lead-up to the financial crisis of 2007-2008, she did introduce five (out of 140) bills relating to the housing crisis, but they all died before making it through a Senate committee. So did a bill she sponsored to curtail corporate executive compensation. Though she has publicly called for a reduction in hedge-fund tax breaks (known as “closing the carried interest loophole”), including at the second debate, she never signed on to the bill that would have done so (one that Obama co-sponsored in 2007). Perhaps her most important gesture of support for Wall Street was her vote in favor of the $700 billion 2008 bank bailout bill. (Bernie Sanders opposed it.)

After her secretary of state stint, she returned to the scene of banking crimes. Many times. As we know, she was also paid exceedingly well for it. Friendship with the Clintons doesn’t come cheap. As she said in October 2013, while speaking at a Goldman Sachs AIMS Alternative Investments’ Symposium, “running for office in our country takes a lot of money, and candidates have to go out and raise it. New York is probably the leading site for contributions for fundraising for candidates on both sides of the aisle.”

Between 2013 and 2015, she gave 12 speeches to Wall Street banks, private equity firms, and other financial corporations, reaping a whopping $2,935,000 for them. In her 2016 presidential run, the securities and investment sector (aka Wall Street) has contributed the most of any industry to PACs supporting Hillary: $56.4 million.

Yes, everybody needs to make a buck or a few million of them. This is America after all, but Hillary was a political figure paid by the same banks routinely getting slapped with criminal settlements by the Department of Justice. In addition, the Clinton Foundation counted as generous donors all four of the major Wall Street-based mega-banks. She was voracious when it came to such money and tone-deaf when it came to the irony of it all.

Glass-Steagall and Bernie Sanders

One of the more illuminating aspects of the Podesta emails was a series of communications that took place in the fall of 2015. That’s when Bernie Sanders was gaining traction for, among other things, his calls to break up the big banks and resurrect the Glass-Steagall Act of 1933.  The Clinton administration’s dismantling of that act in 1999 had freed the big banks to use their depositors’ money as collateral for risky bets in the real estate market and elsewhere, and so allowed them to become ever more engorged with questionable securities.

On December 7, 2015, with her campaign well underway and worried about the Sanders challenge, the Clinton camp debuted a key Hillary op-ed, “How I’d Rein in Wall Street,” in the New York Times. This followed two months of emails and internal debate within her campaign over whether supporting the return of Glass-Steagall was politically palatable for her and whether not supporting it would antagonize Senator Elizabeth Warren. In the end, though Glass-Steagall was mentioned in passing in her op-ed, she chose not to endorse its return.

She explained her decision not to do so this way (and her advisers and media apostles have stuck with this explanation ever since):

“Some have urged the return of a Depression-era rule called Glass-Steagall, which separated traditional banking from investment banking. But many of the firms that contributed to the crash in 2008, like A.I.G. and Lehman Brothers, weren’t traditional banks, so Glass-Steagall wouldn’t have limited their reckless behavior. Nor would restoring Glass-Steagall help contain other parts of the ‘shadow banking’ sector, including certain activities of hedge funds, investment banks, and other non-bank institutions.”

Her entire characterization of how the 2007-2008 banking crisis unfolded was — well — wrong.  Here’s how traditional banks (like JPMorgan Chase) operated: they lent money to investment banks like Lehman Brothers so that they could buy more financial waste products stuffed with subprime mortgages that these traditional banks were, in turn, trying to sell. They then backed up those toxic financial products through insurance companies like AIG, which came close to collapse when what it was insuring became too toxically overwhelming to afford.  AIG then got a $182 billion government bailout that also had the effect of bailing out those traditional banks (including Goldman Sachs and Morgan Stanley, which became “traditional” during the crisis). In this way, the whole vicious cycle started with the traditional banks that hold your deposits and at the same time could produce and sell those waste products thanks to the repeal of Glass-Steagall. So yes, the loss of that act caused the crisis and, in its wake, every big traditional bank was fined for crisis-related crimes.

Hillary won’t push to bring back Glass-Steagall. Doing so would dismantle her husband’s legacy and that of the men he and she appointed to public office. Whatever cosmetic alterations may be in store, count on that act remaining an artifact of the past, since its resurrection would dismay the bankers who, over the past three decades, made the Clintons what they are.

No wonder many diehard Sanders supporters remain disillusioned and skeptical — not to speak of the fact that their candidate featured dead last (39th) on a list of recommended vice presidential candidates in the Podesta emails. That’s unfortunately how much his agenda is likely to matter to her in the Oval Office.

Go Regulate Yourselves!

Before he resigned with his nine-figure golden parachute, Wells Fargo CEO and Chairman John Stumpf addressed Congress over disclosures that 5,300 of his employees had created two million fake accounts, scamming $2.4 million from existing customers. The bank was fined $185 million for that (out of a total $10 billion in fines for a range of other crimes committed before and during the financial crisis).

In response, Hillary wrote a letter to Wells Fargo’s customers. In it, she didn’t actually mention Stumpf by name, as she has not mentioned any Wall Street CEO by name in the context of criminal activity. Instead, she simply spoke of “he.”  As she put it, “He owes all of you a clear explanation as to how this happened under his watch.” She added, “Executives should be held individually accountable when rampant illegal activity happens on their watch.”

She does have a plan to fine banks for being too big, but they’ve already been fined repeatedly for being crooked and it hasn’t made them any smaller or less threatening.  As their top officials evidently view the matter, paying up for breaking the law is just another cost of doing business.

Hillary also wrote, “If any bank can’t be managed effectively, it should be broken up.” But the question is: Why doesn’t ongoing criminal activity that threatens the rest of us correlate with ineffective management — or put another way, when was the last time you saw a major bank broken up? And don’t hold your breath for that to happen in a new Clinton administration either.

In her public letter, she added, “I’ll appoint regulators who will stand with taxpayers and consumers, not with big banks and their friends in Congress.”  On the other hand, at that same Goldman Sachs symposium, while in fundraising mode, she gave bankers a pass relative to regulators and commented: “Well, I represented all of you for eight years. I had great relations and worked so close together after 9/11 to rebuild downtown, and [I have] a lot of respect for the work you do and the people who do it.”

She has steadfastly worked to craft explanations for the financial crisis and the Great Recession that don’t endanger the banks as we presently know them. In addition, she has supported the idea of appointing insider regulators, insisting that “the people that know the industry better than anybody are the people who work in the industry.” (Let’s not forget that former Goldman Sachs CEO and Chairman Hank Paulson ran the Treasury Department while the crisis brewed.) 

Among the emails sent to John Podesta that were posted by WikiLeaks is an article I wrote for TomDispatch on the Clintons’ relationships with bankers.  “She will not point fingers at her friends,” I said in that piece in May 2015. She will not chastise the people who pay her hundreds of thousands of dollars a pop to speak or the ones who have long shared the social circles in which she and her husband move.” I also suggested that she wouldn’t call out any CEO by name. To this day she hasn’t. I said that she would never be an advocate for Glass-Steagall. And she hasn’t been. What was true then will be no less true once she’s in the White House and no longer has to make gestures toward the platform on which Bernie ran and so can once again more openly embrace the bankers’ way of conducting business.

There’s a reason Wall Street has a crush on her and its monarchs like Goldman Sachs CEO and Chairman Lloyd Blankfein pay her such stunning sums to offer anodyne remarks to their employees and others. Blankfein has been coy about an official Clinton endorsement simply because he doesn’t want to rock her campaign boat, but make no mistake, this Wall Street kingpin’s silence is tantamount to an endorsement.

To date, $10 trillion worth of assets sits on the books of the Big Six banks. Since 2008, these same banks have copped to more than $150 billion in fines for pre-crisis behavior that ranged on the spectrum of criminality from manipulating multiple public markets to outright fraud. Hillary Clinton has arguably taken money that would not have been so available if it weren’t for the ill-gotten gains those banks secured. In her usual measured way, albeit with some light admonishments, she has told them what they want to hear: that if they behave — something that in her dictionary of definitions involves little in the way of personalized pain or punishment — so will she.

So let’s recap Hillary’s America, past, present, and future. It’s a land lacking in meaningful structural reform of the financial system, a place where the big banks have been, and will continue to be, coddled by the government. No CEO will be jailed, no matter how large the fines his bank is saddled with or how widespread the crimes it committed.  Instead, he’s likely to be invited to the inaugural ball in January. Because its practices have not been adequately controlled or curtailed, the inherent risk that Wall Street poses for Main Street will only grow as bankers continue to use our money to make their bets. (The 2010 Dodd-Frank Act was supposed to help on this score, but has yet to make the big banks any smaller.)

And here’s an obvious corollary to all this: the next bank-instigated economic catastrophe will not be dealt with until it has once again crushed the financial stability of millions of Americans.

The banks have voted with their dollars on all of this in multiple ways. Hillary won’t do anything to upset that applecart. We should have no illusions about what her presidency would mean from a Wall Street vs. Main Street perspective. Certainly, JPMorgan Chase CEO Jamie Dimon doesn’t. He effectively endorsed Hillary before a crowd of financial industry players, saying, “I hope the next president, she reaches across the aisle.”

For Wall Street, of course, that aisle is essentially illusory, since its players operate so easily and effectively on both sides of it. In Hillary’s America, Wall Street will still own Main Street.

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  1. EndOfTheWorld

    Very good description of Hill’s speaking style: “a folksiness that couldn’t look more rehearsed.”

  2. EndOfTheWorld

    She says HRC won’t re-instate Glass-Steagall, which is true, but fails to mention Trump has at least SAID he wants to bring it back.

    Back when I was a Bernie supporter (and contributor!) I hoped he would give Nomi a key job in his administration. Maybe now if the “petulant, vocabulary-challenged man-boar” is elected, he’ll appoint Secretary of the Treasury Nomi Prins!

  3. Northeaster

    “thus believing that Federal deficits are a problem”

    But it’s not just Federal deficits, all debt/deficits matter; Government, corporate, and household. The world is drowing in it, and the pulling forward of demand is now having dimishing returns. Or, maybe folks think a 90% interest rate decline since the Eighties is an anomaly. The curve of which can be overlapped identically to purchasing power being stolen. Even though the spigot has supposedly been turned off, velocity continues its fall into the abyss.

    While government and corporations can use all sorts of financial engineering to keep the party going, households can’t. This is no longer a politcal or theoretical (Fed anyone?) issue, it’s a middle school algebraic function.

    Wall Street et al. will continue with their destruction, meanwhile, as somone who lives a relatively poor area of The Northeast, surrounded by pockets of extreme wealth, what I see (abet ancedotal) is nothing short of dystopian.

    1. Yves Smith Post author

      *Sigh* You are a victim of propaganda.

      Federal government deficits are not in the same category since the US is a fiat currency issuer and can never go bankrupt. And as MMT scholars have described in considerable length, since the household sector is pretty much always a net saver, some other sector (business or government) needs to net spend, otherwise the economy will contract. In general, the Federal government needs to net spend, but it’s even more important since the business sector in aggregate has been net saving since the early 2000s.

      The shrinking of the household saving rate to near zero was the direct result of the Clinton surpluses of the 1990s. You can see household debt go parabolic.

      In the US, bond issuance is a holdover from the gold standard era. The government can directly spend save we have a political machinery that requires the US to appear to do otherwise, as in issue bonds. But operationally, the US spends first and collects taxes later. And investors do find it useful to have a risk free asset.

      I should spend more time and unpack this more but I desperately need to turn in. I hope other readers will chime in.

      1. EEngineer

        This is a constant problem. 99% of the population does not understand the mechanics of money creation. There are many good books on the subject but most assume a working knowledge of the subject and drill into some specific facet. What is needed is a good primer text on the subject that is (factually) actually correct, unlike most current economics texts, which seem designed to obscure and program more than enlighten.

        Chris Martinsen’s Crash Course series over at Peak Prosperity is a pretty good start though.

      2. Northeaster

        I never stated anything about going bankrupt, I agree, we can’t.

        However, the consequences of such, issuing more debt, while revenue/GDP/income (whatever your measure), while all nominally grow, they are growing away from each other at different RATES. We see this locally in our budgets and our state CAFR’s – debt servicing is growing YoY (27% in the past five years in my municipaility, 19% for the state). So yes, more bonds can be issued, and they are (deficit spending in my city), but over the years, the city has to take away little by little to service those debts, even in the era of cheap money. The power to tax (legislatively limited to 2.5%) is simply not enough to offset the growth in debt/servicing. The city suffers, which is already poor to begin with, by cutting in other areas of the budget.Even if the cap on taxation were lifted, residents are simply too poor to begin with to make the difference up.

        This isn’t propoganda, this is basic math.

        1. djrichard

          Basic math: the wealthy don’t want balanced trade with labor (and non-labor). They want the surplus/profit: more revenue that they take in from labor (and non-labor) then they pay out to labor.

          It doesn’t take too much of this before the wealthy have hoarded up all the surplus. After that, there’s no more surplus that labor and non-labor can cough up. To see what that looks like, look at what Greece is like in its relationship to Germany. The problem there is Germany doesn’t have a fiscal apparatus for recycling the surplus back to Greece. [BTW, one can argue that Greece has effectively reached balanced trade now with Germany – yay, lol!]

          In contrast, US does have a fiscal apparatus for recycling surplus to labor and non-labor. That fiscal apparatus is our Fed Gov. And the Fed Gov has two mechanisms to collect the surplus: taxes and selling them debt. Now the Fed Gov can choose to simply use one vs the other. However, it’s easy to see that the wealthy don’t want to give up all of their hoard to taxes – otherwise why bother? Really the Fed Gov’s best option is to let the wealthy keep at least some of their hoard, in the form of bonds.

          So we have a choice: let the wealthy hoard the surplus in the form of currency. Or let them hoard it in the form of Fed Gov bonds. It’s a no brainer – get them to swap their currency for bonds. To worry about the wealthy wanting to convert the other way around (their Fed Gov bonds back to currency) is ludicrous. You know what they do with the interest they get on Fed Gov bonds? They buy more Fed Gov bonds with it. If they had something better to do with the money they wouldn’t be buying US Fed bonds in the first place. And that’s true regardless of the rate of interest on Fed Gov bonds; the wealthy will keep flipping interest earned back into US Fed Gov bonds.

          Simply put, the size of our national debt is the size of the surplus hoarded by the wealthy (surplus that for one reason or another the Fed Gov decided not to tax). To put a ceiling on that is to put a ceiling on how much surplus can be hoarded by the wealthy.

        2. John Zelnicker

          @Northeaster – 10/28/16 – 11:00 am – All of your examples relate to state and local taxes. Yves is only referring to federal taxation. States and cities need taxes as they are not the sovereign issuer of our currency. They are like households and businesses, they need to receive revenue before they can spend, the opposite of the federal government.

      3. yet another steve

        Very much looking forward to that unpacking. Are there really no limits to, or no seriously negative consequences arising from, unlimited US government spending?

        1. Plenue

          The only limits are inflation and real resources. Hyper-inflation is actually extremely hard to induce in a healthy economy, just look at Japan running 200% deficits for decades in an attempt to create high inflation and failing. Real resources would mean is there actually enough people to do the work, are their enough raw materials, etc. Take, for instance the decaying infrastructure of the United States. It would take some 3 or 4 trillion dollars to fully repair all of it, much less modernize it. MMTer Stephanie Kelton says she doesn’t know if it would be safe to just create all that money at once. But it would be perfectly safe to summon up a couple hundred billion from the ether to get things going.

      4. polecat

        If the US can never go bankrupt, due to the power of being a fiat currency issuer …. why then are income taxes levied upon it’s citizens ?? …… and why are the plebes forced to pay a mandated TAX for not buying shitty death care ?

          1. polecat

            Right …… and while our federal taxes continue to rise, with less and less real, tangible benefit, the pigs at the top of the federal pyramid do just fine .. thank you very much !!

            I, for one, am fucking sick of it …..

            and it’s not like the head of the IRS, or say, a Fed.Reserve Chairperson, has to worry about how to pay for ObamaDeath T.M. …. vs, for example, trying to come up with enough tubmans to replace an old roof ….

            Taxes … It’s ALL GOOD if you’re the pig eating the slops !

            1. polecat

              Meanwhile …….. there are literally BILLIONS of black-hole $$ that have been squandered & sucked into where ?? ………….. but I, and millions of my fellow citizens ( NOT consumers ! ) continue to get squeezed and asset stripped a buck, or a hundred at a time, until we’re at destitution’s doorstep !!

    2. Marshall Auerback

      NO, Federal deficits are very different from other forms of debt. Budget deficits represent private sector savings. Or another way of putting it: every time the government runs a deficit and issues a bond, adding to the financial wealth of the private sector. (Technically, the sum of the private sector surpluses equal the sum of the government sector deficits, which equals the outstanding government debt—so long as the foreign sector is balanced.)
       Of course, the opposite would also be true. Assume we have a balanced foreign sector and that the government runs a surplus—meaning its tax revenues are greater than government spending. By identity this means the private sector is spending more than its income, in other words, it is deficit spending. The deficit spending means it is going into debt, and at the aggregate level it is reducing its net financial wealth.
       At the same time, the government budget surplus means the government is reducing its debt. Effectively when that happens it means that the private sector returns government bonds to the government for retirement—the reduction of private sector wealth equals the government reduction of debt.
       Now let us return to the Clinton years when the federal government was running the biggest budget surpluses the government has ever run. Hillary thinks that was fantastic and, to be fair, she’s not alone. At the time, virtually all of “the experts” thought this was great because it meant that the government’s outstanding debt was being reduced. Clinton even went on TV and predicted that the budget surpluses would last for at least 15 years and that every dollar of government debt would be retired.
       Everyone celebrated this accomplishment, and claimed the budget surplus was great for the economy.
       Well, those who understand the interrelationship between federal deficits and private debt, such as Randy Wray, Stephanie Kelton, Bill Mitchell, Warren Mosler, and many others recognized the fallacy in that argument. They all pointed out that the budget surplus meant by identity that the private sector was running a deficit. Households and firms were going ever farther into debt, and they were losing their net wealth of government bonds, which is exactly what happened and laid the foundations for the subsequent problems we had in 2008. As the stock of government debt disappeared, it was replaced with ever more toxic and less stable forms of private sector debt (remember all of those lovely CMOs and CLOs, etc)?
       We had multiple recessions in the 2000s because the private sector became too indebted and thus had to cut back spending. In fact, the economy went into recession within half a year of the glorious Clinton budget surpluses. I don’t want to give the impression that government deficits are always good, or that the bigger the deficit, the better. The point I am making is that we have to recognize the macro relations among the sectors and recognise the context in which these deficits occur (look at effect, as the founder of “functional finance”, Abba Lerner, argued)
      If we say that a government deficit is burdening our future children with debt, we are ignoring the fact that this is offset by their saving and accumulation of financial wealth in the form of government debt. It is hard to see why households would be better off if they did not have that wealth.
       If we say that the government can run budget surpluses for 15 years, what we are ignoring is that this means the private sector will have to run deficits for 15 years—going into debt that totals trillions of dollars in order to allow the government to retire its debt. Again it is hard to see why households would be better off if they owed more debt, just so that the government would owe them less. That in fact is what gives you that dystopia that you describe

      1. RMO

        I must have had very unusual Economics professors and textbooks: while not mentioning MMT they were pretty clear about how national government debt denominated it the government’s own sovereign fiat currency was unlike household or corporate debt. They all pointed out much of what is brought up on this site frequently. Of course they also made the point that economics can’t account for what it considers non-rational behavior and has nothing to say about what is right in terms of ethics or society too.

        We can see just how seriously the elites really take the debt/deficit hype they are so fond of by the way the issue disappears when it’s something they want: trillions in instant money for the banks, trillions for a war (or two or five…), a trillion for new nuclear weapons, billions for the F-35, money to funnel to the insurance companies that seem to be not profiting with their ACA plans…

  4. EndOfTheWorld

    I don’t understand this idea that the US can never go bankrupt. Trump said the same thing, I believe. According to WaPo, at least 16 sovereign bond issuers have defaulted since 1998, five of them twice.

    Granted the US is not the same as Jamaica or Greece, but we’re losing power by the minute, or so it seems.

    1. diptherio

      Jamaica issues bonds in US dollars, which it does not create. Greece issues bonds in euros, which it does not create.

      Please find a country who issues debt in a currency they create that has defaulted on that debt rather than simply create the currency to cover the debt (i.e. “monetize the debt.”) I am unaware of any.

      1. EndOfTheWorld

        OK, I understand that the US has the ability to print money out of thin air, and Jamaica doesn’t. But to keep the whole con game going it’s necessary for US bonds to be sold when they have auctions, is it not? And at present some of the bonds are being bought by the US itself, which to me doesn’t seem entirely above-board.

        I’m not saying the US will go bankrupt any time soon, but to say it’s absolutely, beyond the shadow of any doubt, impossible that this will ever happen doesn’t ring true with me. What if we really lose a major war, for example?

        Or take the ever-increasing, never-decreasing national debt. Is there no limit beyond which the whole world loses faith in the full faith and credit of the US government?

        1. BecauseTradition

          But to keep the whole con game going it’s necessary for US bonds to be sold when they have auctions, is it not

          1) It’s not a con game since inexpensive fiat is the ONLY ethical money form for government use.
          2) It’s the taxation authority and power of government that give value to fiat, expensive or no.
          3) Positive interest paying sovereign debt, being risk-free, is welfare proportional to wealth, not need.
          4) The sale of even negative yeilding sovereign debt proves that positive interest paying sovereign debt is welfare.

          Therefore, not only can positive interest paying sovereign debt be abolished, it should be abolished.

          1. EndOfTheWar

            OK, what if we lose a war, or similar catastrophe? We can still print to infinity?

            I mean it used to be said the US dollar was formerly backed by Au; now it’s backed by Pu (i.e. plutonium.) But IMHO our military is looking less and less undefeatable by the minute.

            1. Elasmo Branch

              The good news is if we’re printing to “infinity”, than two times infinity still equals infinity. 100 times infinity still equals infinity. All math jokes aside, fundamental to the notion of national currency is that, one, the national government must first spend the money for it to enter into circulation. And two, the currency can be used to satisfy tax debts. As long as people still feel a need to pay US taxes i.e. the US Gov’t puts people in jail [or deports them, closes their business, etc] for not paying taxes, than everything is groovy.

              The debt level discussion boils down to the amount of power bondholders [banks, Paterfamilias Dynasties] exercise and how quickly Old Money dries up because of inflation and general feelings of well-being among the populace. When things are going great, the rich aren’t nearly as indispensable as they would be if Gov’t spending is all trussed up by an Boston Brahmin Dominatrix.

            2. shinola

              The US has not won any of the little wars (Korea, Vietnam or any of the ongoing crap in the ME) since WWII. (Also,I believe the costs of these skirmishes may have contributed to the deficit.)

              Now if you’re talking Major War (i.e. flinging nukes) I don’t think monetary policy is going to be much of a consideration for those “lucky” enough to be left alive

          2. Whine Country

            Negative interest rates exist only because bankers have struck a bargain with the sovereign. Banks are allowed to continue in existence and thus their pillaging of the 99% solely because of the franchise granted and maintained by the sovereign, with includes the ability of shareholders and management to prosper grandly. When you see something which should be impossible happen (negative interest rates) there must be more than meets the eye. There is a point where no one will agree to hold the other side of the transaction (if you create money, it has to physically placed somewhere – even if it is just an electronic notation), and no one in his right mind will do that for free or certainly not at a loss. It’s not that I disagree with you that MMT could function if designed properly. It’s just that your oversimplification ignores some significant practical problems. (Many of which are beyond this comment) IMHO, the wheels must first come off the bus and MMT is one real depression away from serious consideration (which might not be as long as we think.)

            1. BecauseTradition

              When you see something which should be impossible happen (negative interest rates) there must be more than meets the eye.

              In a poor economy, return OF principal becomes more important than return ON principal, is all that’s going on.

              Moreover, negative interest on risk-free deposits is perfectly natural since:
              a) the most a risk-free financial asset should yield is 0% – otherwise we have welfare proportional to wealth, not need.
              b) shorter maturity assets should naturally cost more – hence negative interest on those.
              c) though small, there are costs associated with risk-free assets – hence negative interest in general for risk-free assets.

    2. lb

      There are many answers to the claim that the U.S. can “go bankrupt” in explanation of MMT. The most literal is a reading of the fourteenth amendment to the constitution: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” We could delve into the ability to print more dollars, why dollar hegemony is maintained world-wide and what backs it, and so on. The debt of the U.S. is a popular safe haven (albeit low-return) investment, widely held and denominated in a currency under the U.S. control. Bankruptcy of the U.S. isn’t possible (except as a political canard) and faith in the debt and currency of the U.S. is high. (Do we need to knock down some cousins to the Confidence Fairy?)

        1. Whine Country

          If we get nuked, the problem won’t be a world currency, it will be whether or not there’s a world.

            1. UserFriendly

              There are some limits on on printing money.

              1. Natural resources / Industrial capacity. – If those run low you get supply side shocks (Zimbabwe) (oil shock that created stagflation)

              2. Only taking on debt in the currency you issue. (Weimar Republic)

              3. If you already had full employment and decided to print and spend money on something big and useless then there would be inflation. Taxation is required to cool that down.

              Here is a good intro:

            2. Plenue

              The idea that tactical nukes can be ‘safely’ used is one of the crazier concepts floating around the US Halls of Power. What’s been declassified of Soviet Cold War doctrine makes it clear their philosophy was that ANY military use of nuclear weapons by the West would be answered with a full spectrum thermonuclear response. I have no idea if that doctrine has changed, or what China’s doctrine was, then or now. I suspect that they still have very different ideas on what is the ‘acceptable’ degree of nuclear weapons usage than the US.

    3. John Morrison

      > I don’t understand this idea that the US can never go bankrupt.

      Here’s a quick answer. The US Government can no more run out of dollars to pay out than a Football stadium can run out of points to award for touchdowns, field goals, etc.

      There are two reasons to tax: 1. To give the fiat currency value. 2. To pull currency out of the economy, to avoid excessive inflation.

      In the latter case, one can use a tax cut to pull less currency out of the economy, to increase spending. Unfortunately, when tax cuts are targeted at the top 1% or higher, it doesn’t do that. It has to target those who would spend it.

  5. pascal

    In my opinion and I don’t live in the states is that every country can go bankrupt even the united states.If you take a look at how much money has been printed sins the start of the start of Obama president you can understand how close it was to been bankrupt. Let’s hope trump will do a better job.

  6. John Wright

    Prins dissing of Gary Gensler is surprising,

    Even I remember that Gensler was removed from his position in the Obama administration, apparently, because the financial industry pushed Obama to do replace Gensler.

    Gensler was pushing for more regulation of banks at the time.

    Gensler could be a financial insider who actually wants to regulate the financial industry for its own good and the country’s benefit.

    1. Arizona Slim

      My take on Gensler: He heard the call to public service and took it seriously. The Obamatroids didn’t like that. I gather that they still don’t.

  7. BecauseTradition

    Here’s how traditional banks (like JPMorgan Chase) operated: they lent money to investment banks … Nomi Prins

    Impossible unless they used physical fiat (e.g. $100 bills) since investment banks may not have accounts at the central bank. Instead, when it comes to other members of the private sector, depository institutions create new liabilities (“loans create deposits”) for fiat when they “lend.”

    Merely a quibble? No, because by virtue of their exclusive access to accounts at the central bank and other privileges for depository institutions, the liabilities of banks are largely a sham wrt to depositors and thus are largely a sham PERIOD.

    So it’s not just big banks that are the problem…

    1. Yves Smith Post author

      Huh? Go look at how JP Morgan operates. Repo is a form of collateralized lending. JP Morgan was the biggest player in the tri-party repo business.

      JP Morgan seizing about $7 billion of Lehman collateral and refusing to roll Lehman’s overnight repo was the proximate cause of its bankruptcy.

      1. BecauseTradition

        Repo is a form of collateralized lending.

        Yes, but banks can’t transact (buy, sell, lend) with fiat except among themselves and with others with accounts at the central bank – it’s physically impossible unless physical fiat is used, i.e. “banks can’t lend out their reserves.”

        Instead, banks create new liabilities for fiat when they “lend” to the non-bank private sector.

        At issue is the definition of “lend”; banks don’t lend to the non-bank private sector anymore than I can lend a hammer to someone on Mars or lend a hammer to two or more individuals at the same time – it’s physically impossible*.

        *Unless unsafe, inconvenient physical fiat is is used.

  8. Lars

    sorry I’m not very knowleage able about retirement accounts so wondering why paying into them would be bad for Americans apart fr enriching wall street? What are the other better alternatives?

    As for laṛry fink, Adam Curtis of the bbc has covered him on jis blog and latest documentary. Apparently he’s a major reason why society is what it is at present.

      1. EndOfTheWorld

        Of course you can already pay money into a retirement account of your choosing. You can do whatever you want with your money. But what they are trying to do is steal all the money out of Social Security, and tell you that’s good for you. (i.e. they’re trying to give you a cow manure sandwich and tell you it’s apple pie.)

        1. RMO

          And when the (privately run) retirement account you were mandated to pay into goes up in smoke because of control fraud and corruption, sorry, I mean “financial innovation” the pundits will say it’s all your fault for not being a smart consumer. The financial industry doesn’t want to have the money that currently flows into social security diverted to them because they’re good hearted people who just know they can do better for pensioners. They want to churn, skim and defraud the money out of the pension into their own pockets. The amount of money involved in social security must drive them crazy, wanting it so bad they can taste it.

  9. Marshall Auerback

    PS It would be wonderful if Gary Gensler were appointed at Treasury Secretary, as I think he truly did undergo a serious “road to Damascus” conversion over the past decade. As Yves argues, he was a strong force for good when he ran the CFTC. I spoke to both Michael Greenberger and Brooksley Born about this on several occasion and both professed themselves to be very happy with Gary Gensler 2.0

  10. BecauseTradition

    It’s a land lacking in meaningful structural reform of the financial system, a place where the big banks have been, and will continue to be, coddled by the government. Nomi Prins

    Little banks and credit unions are coddled too in that the poor are forced to lend to them (a deposit is legally a loan) to lower their borrowing costs and, by extension, the borrowing costs of the so-called creditworthy – that or be limited to unsafe, inconvenient physical fiat, a.k.a. “currency.”

  11. TheCatSaid

    In addition to the question that Yves noted up front, Prins’ opening remark is also troubling:

    . . . spiraling into a bizarre duel over vote-rigging accusations, a deep sigh is undoubtedly in order

    Do you catch what she’s done? She’s signaled that concern about election integrity is “bizarre”, the issue is reduced to a “duel”, she calls them “accusations” (oblivious to the many proven instances of election fraud), and says the appropriate response is “a deep sigh”.

    This–more than anything else she said or didn’t say–tells you something of the way election system integrity issues have been captured and framed, including by people I hoped would do better. There is by now a deeply internalized understanding that comments about our elections must be framed a certain way (e.g., just as a rebuttal to Trump’s misdirection)–or else.

    Having watched the Fraction Magic Short Version (video just released on YouTube), which shows how software has been hidden in the vote counting software used by up to 99% of US vote counting computers–and demonstrates the impact and a small amount of what this software is capable of (e.g., multiple states, multiple races, only requires 19 seconds of insider access). . . . a “deep sigh” is not the right response. Fortunately there are tips on things that concerned voters can actually do at the end of the video.

    As for Nomi Prins . . . I hope she wakes up.

  12. gary hern

    Hillary Clinton may have put aside money for retirement but has not paid into Social Security. Congress and
    the Senate are exempt same as most unions. AFL-CIO teachers unions and retirements are paid by tax
    payers money, they them selves rarely put money into these accounts. None pay into Social Security.
    This breech is what drives down the dollar amount into Social Security. More than 40% of government employees pay in social security the rest do not, yet regular citizens are forced to pay into social security.
    This scam is why we are in debt Twenty-Six Trillion dollars most democrats don’t think it applies to them.
    Creating a dual system for American Tax payers is unjust and we need to balance SS and our Debt before
    this election. Obama, Hillary, Reid and Pelosi along with Biden are responsible for this debt not the US.

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