August 11, 2011
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Update 1 | This week in The Institutional Risk Analyst, we take a look at the latest week of inaction and indecision on the part of the leaders of the G-20 nations. Never has doing absolutely nothing taken so much time and garnered so much market and media attention. If the nothing doing dance by Barack Obama, Nicholas Sarkozy and Angela Merkel reaches a much higher frequency, life as we know if is definitely going to change big time. And that change may include altering the international role of the dollar, a change regarding which neither Congress nor the American people have been consulted.
The reason for the inaction in Washington, needless to say, has to do with the vacuum surrounding President Obama, a lack of political substance which stems from the continuing influence, nay hegemony, of former Citigroup Chairmen Robert Rubin and his minions. Older more experienced Rubin operatives such as Larry Summers have already abandoned the sinking ship, but Treasury Secretary Timothy Geithner remains, we are told, until Rubin gives him permission to leave the table.
It says a great deal about the state of the intellectual debate inside the White House that the President finds the counsel of Secretary Geithner so indispensable. In fact, terrifying is the word the comes to mind. Obviously Geithner, who is sufficiently obsequious not to threaten the broadly recognized incompetence of the POTUS, is not going to suggest any action that will threaten the large banks.
This tendency to take the path of least resistance may imply vast changes for the US economy and the dollar. The suggestion that Bank of America need be restructured in order to fix the housing sector, for example, assumes that a replacement for Geithner will be in office first. But the other assumption is that a new financial and economic crisis is going to so badly shake Washington, that constituencies from Congress to the national security community are going to demand change inside the Obama White House. Indeed, the re-election candidacy of Obama may be compromised as well. This is why we worry that a "big plan" may be in the works.
Back in June of 2010, "Country Risk: The World According to Robert Rubin (Updated)," we described how the tentacles of the Rubin political organization had spread throughout the Obama White House, reducing the former Senator from IL to little more than a finger-puppet:
"One of the most powerful and least known Rubin proteges is Michael Froman. Michael has an unusual "dual brief" which is he reports to Summers on the National Economic Council and reports to Gen. Jones on the National Security Council. He sits at the nexus of global finance and geopolitics. He is the main "Sherpa" on G-20 and point person on reflating the world through the intermediation of the new global central bank (IMF) and the new global currency (SDR's) under the auspices of the new global board of directors (G20); all unelected and perfectly unaccountable, of course. The fact that Froman reportedly blew up the alternative investing division at Citi before he left seems not to have slowed down his career in government. And the fact that no one has ever heard of him (versus Summers, Geithner, Orzsag, others) is just the way he and Rubin like it, says an NSC insider. Froman's end-game scenario for the dollar collapse is to kick the problem upstairs and flood the world with SDR's. Notice that the IMF has leveraged its balance sheet for the first time in history using the euphemistically named "New Arrangements to Borrow" or NAB. Stay tuned for high velocity NABs."
When the POTUS travels to Europe in November to meet with the other leaders of the G-20 to talk about the global currency system, Bob Rubin, speaking through his operatives like Froman and Geithner, and his puppet Barack Obama, will be setting US policy with respect to the dollar. We understand that the Rubin group is indeed planning to kick the neo-Keynesian madness of Paul Krugman et al up a notch by expanding the use of SDRs and embracing global hyper-inflation via the IMF.
Froman is Mr. Big Picture and Timmy is Mr. Day-to-Day. Obama is a big picture guy. "Froman is Mr. Behind the Scenes, but much closer to Obama that Timmy," notes one national security official. "His focus right now is preparing for (a) IMF-World Bank meetings in DC in Sept, (b) G-20 finance ministers, central bankers in October, and (c) the G-20 leaders in France in November. That is the 3-step sequence toward the new world monetary order, based upon SDR's and not gold, that is evolving."
Even the mighty Rubin, the co-architect of the disaster at Citigroup along with Sanford Weil and Richard Parsons, may not be able to window dress the latest market implosion. But Americans ought be on their guard for the latest good idea that comes from the White House bearing the imprimatur of that selfless public servant.
Of interest, the losses reported by Bank of America in Q2 2011 relating to the settlement of put-back claims related to Countrywide Financial apparently did not flow through the balance sheet of the lead bank. The preliminary Bank Stress Index score for the lead unit of BAC was 1.6 or "B," unchanged from the previous quarter. This is good news because the lead bank at BAC did not take a capital hit with the loss reported for the last quarter. Bad news, though, because the parent company does not have any capital or assets to absorb such losses.
Just as the parent company of Bank of America, N.A., is accumulating losses that are rendering it insolvent, so too the US is wallowing in debt that cannot be paid, at least in real terms. Eventually regulators are going to have to face up to the fact that BAC is a threat to its subsidiary banks and follow our proposal for a Dodd Frank restructuring. But what of the US?
As one member of the Herbert Gold Society said in an email today: "If you look at the 'chronology of selected events related to Lehman Brothers and the possibility of government assistance' in the FCIC docs, which is available via Google thru Stanford, there is an attachment of Tab 17 that has emails from Bill Dudley re: a Lehman good bank-bad bank . Seems like that is what they ought to be considering for BAC now." Ditto.
But it certainly looks like the Rubin political organization that has guided US economic policy for the past two decades is getting ready to double down on inflation and debt yet again to protect the major Wall Street houses from further harm. The major banks and their allies in Washington cannot imagine a true restructuring, because all their positions and privileged would be exposed to the public and result in their personal as well as professional demise.
The political battle over the direction of the US economy in the 21st Century is being fought today. Whether to break up the largest banks led by BAC and restructure the US economy is the core issue. We cannot fix housing or the US economy without breaking up the largest banks, either via government action or market forces, but the forces of inflation and debt so ably represented by Bob Rubin have other ideas in mind.
Think of the political battle over the Second Bank of the United States and its abolition by Andrew Jackson as the first battle for national leverage. The hard money limited government tendency won and rejected public debt.
The second battle was between President Abraham Lincoln and the state-chartered banks, who largely opposed the Civil War and would not buy Lincoln's debt to fund it. Thus Washington created national banks to buy government debt and back the new paper money we today call the dollar. Even as he fought to save the Union, Lincoln set the stage for the enlargement of government debt and control over money.
"And later comes Wilson, who creates Federal Reserve Banks which take on the model of the national banks as defined in 1863-4," notes our friend Alex Pollock at American Enterprise Institute. "[The Fed banks] buy government debt and issue paper currency against it. Later still, they move to John Law's theory: issue money against real estate using Fannie and Freddie as further intermediaries."
The prospective deal by Barack Obama and his counterparts in the fascist states of Europe to float the western economies on a sea of new monopoly money issued by the IMF is the final betrayal of American values. In place of the fiat dollar, Washington will instead worship the golden calf of the SDR and declare the jubilee. But no such expedients will change the basic fact that the problem facing BAC, EU banks and the G-20 nations is the same, namely debt deflation and a lack of demand that stems from it. Irving Fisher was right in 1933 and he is only reaffirmed by today's events. Until we restructure insolvent banks and markets, and thereby create the conditions for credit expansion, there will be no economic growth in the US or EU. That is why Bob Rubin's big idea for a new global currency is a non-starter.
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