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The Grandest Bargain Ever, explained

Jay's picture

The Grand Bargain Fiscal Cliff deficit hysteria is the end game in a sophisticated, multi-year version of three-card monte.

For this illustration, we’ll use the shell game version where the slicks hide a ball under a nutshell. Under one shell you've got bank money. Under another shell you have the national budget money. Under the third shell you have social program money, let's call it Social Security.

The object of the game is to take all three balls without anyone noticing, and if the institutional legitimacy of the shells get destroyed, well . . . .

So Wall Street and the bankers take the money under the first shell, and turn it into an investment vehicle. Using deregulation and leveraging—that is, investment money from pensions, mutual funds, private investment—they stuff the shell with 200 other balls, depending on the leverage ratio, and then lend the whole kit and caboodle out in real estate. They create a market bubble, which they then bet against with hedges. They still only own that one ball, and whatever they make in fees, but when the market bubble bursts, and all the balls go up in smoke, they’ve already taken several balls out in the form of fees, and payouts from the hedges they made on the investment vehicles they specifically designed to fail. All those balls go into their pockets, the investors in the vehicle can go pound sand, and the bank shell is left empty.

The central bank and the federal government says "oh noes, without the bankers we won't have loans, business will stop and we'll have a depression!" So they backstop the bankers by tying the budget to the bankers' losses with TARP. The money under the second shell gets transferred into the first shell. The losses are borne by the taxpayer, and the Federal Reserve prints all sorts of crazy money to “save liquidity.”

Well whaddya know, the bankers stop making loans and we get a depression anyway. Furthermore, they take some of the money from the second shell and take it to the horse races, inflating commodity and stock prices. And they pay themselves bonuses. Of course. If they lose that money, hell, there’s more where that came from.

But now the second government government shell is empty. It’s running budget deficits, the economy is in the tank so they're not taking in enough in taxes, so where are we going to get the money? Ahhh! There's still money in the third shell! $2.7 Trillion, as a matter of fact. And although Social Security is a creditor to Uncle Sam, just like anyone who holds a U.S. Bond backed by the full faith and credit of the government of the United States of America, and although the Social Security trust fund does not contribute one red cent to the deficit or the national debt, Pete Peterson hires a bunch of deficit peacocks like Barack Obama to run around and say the sky is falling and the only solution is tax breaks for the wealthy and the dismantling of Social Security, or . . . or . . . or else we'll turn into Greece!

They conflate Social Security as the source of the deficit and if we just get rid of it to balance the budget, we can avert catastrophe. So when they make the Grandest Bargain Ever, they'll take the money from Social Security, and put it in the second shell. Now none of these deficit hysterics are serious about the debt. They went into hibernation when George W. Bush’s tax cuts for the wealthy went into place. They didn’t say anything about George W. Bush’s Medicare Jubilee for big Pharma. And they were playing croquet when Congress appropriated $Trillions in perfectly predictable “emergency appropriations” year after year after year for the wars in Iraq and Afghanistan. No. The deficit hysteria peacocks are in service to the people in charge of the first shell. In fact, they need a large structural deficit to stay in place so they can siphon off the money from the third shell. How do they do this? The Federal Reserve prints money into existence, lends it to the people running the first shell, who turn around and lend it to . . . who? Uncle Sam! At a substantially higher interest rate! Free money for as far as the eye can see! So all the balls are transferred to the first nut, creating a roundabout pipeline siphoning money from one set of Uncle Sam’s creditors—Social Security—to another Set of Uncle Sam’s creditors: the people who run the banks.

But remember! “If we don’t fix the deficit, we’ll turn into Greece!” However, our policy makers are making all the same mistakes to assure just that. Look what happened there. Their banks made bad loans, the government backstopped the Greek banks and hired Goldman Sachs to hide the government debt, and now the Troika is making rules about minimum wage and pensions. They’re using the Greek government as a conduit to feed money from the populace into German banks. A fully-functioning Greek economy doesn’t facilitate their acquisition of all the balls; destroying the other balls is just as useful since it makes the ball under your shell so much more valuable. It's a pretty neat trick to put a bomb under the economy, and warn there's a bomb, and then blow it up. Misdirection. Projection. Three-card monte.

Soon, the deficit hysteria peacocks will make their Grand Bargain to bring the misery here. Barack Obama and the lame duck congress will follow all their prescriptions. The economy will tank, the debt will grow. They don’t want the problem solved. That’s your problem. They want all the money in the shells. And if they can't have it, no one can.

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tom allen's picture
Submitted by tom allen on

From the "shell game" wiki: "The operator and the shills will try to get the mark into a heightened state of anger or greed. Once this is accomplished, one shill will pretend to disclose a winning strategy to the mark. It is all a ruse to get the mark to place a large bet."

Now if you'll excuse me, I have a mailbox full of Democratic fundraising letters to sort through. Can you believe that awful thing Romney just said? I read it on Daily Kos -- or was it something TBogg wrote? Fortunately, the DNC has figured out the best way to win the swing states. All they need is $5. But $25 will get the message out even louder!

Alexa's picture
Submitted by Alexa on

to explain the Grand Bargain in terms that even an economic dunce like myself can easily understand.

I hope this is "stickied" (or promoted, front-paged, whatever).

Just tweeted it, will also share via email. And bookmarked for future reference.

Thanks again.

tarheel-leftist85's picture
Submitted by tarheel-leftist85 on

We need simple metaphors like this to combat debt terrorism. I'll definitely be adding this to the arsenal, so a hearty thanks. Thus far, in discussions with family, friends/coworkers, and acquaintances, I've toyed with the stadium:points::US govt:US $ analogy I first encountered via Warren Mosler's book. My usual spiel is something like this:

(1) Teams don't bring the points they want to score in game (much less the season) to the stadium beforehand;
(2) Points aren't stored in a lock-box or points closet, so stadiums as sovereign point-issuers don't have to worry about point insolvency in 2013/2033/2053/etc.;
(3) Points don't lose value if they aren't "backed" by gold or if team(s) score a lot of points;
(4) Stadiums don't have to borrow points from fans, teams, or other stadiums;
(5) Stadiums don't have to tax the teams or fans to award the points scored (just like taxes don't "pay" for spending);
(6) Teams can score and be awarded points indefinitely within four quarters, nine innings, etc.;
(7) Teams don't have to sacrifice the points they score to balance a stadium's point spreadsheet;
(8) The amount of points scored during a particular game doesn't lessen the value of a point or make it meaningless, but the misallocation of points towards non-scoring plays does (e.g., if the stadium started awarding points for random foul balls); and
(9) Stadiums can't "go broke" with points.

Points, like money, are units of account* and stores of value** - an accounting of debits and credits - [up to this point non-normative, empirical reality of money] where the numbers themselves are of less concern than the best [now is the normative, judgement call phase] way to allocate. The amount of money spent (into creation) and taxed (into destruction) is secondary to making sure credits and debits are properly accounted/documented and how these credits and debits are allocated.

* Unit of account means that we have a convenient common form of exchange (avoids double coincidence dilemma where people have to find one another to exchange the exact goods/services each desires).
** Store of value doesn't mean the currency is/should be/must be inherently valuable; rather, it means retrievable or tenderable for a transaction. Some argue that inflation*** encroaches upon this function of money.
*** Inflation, specifically arising from full employment (wages grow faster), just erodes the value of accumulated wealth - pools of money. Pooled money, like pooled water, breeds disease - it sucks the lifeblood of the ecosystem's hosts; likewise, pooled wealth allows the elite to leverage, or suck the lifeblood, of the real economy, denying pent-up supply/demand. Removing some water in a pooled water body only concentrates this leveraging. Instead, if there's a steady infusion of money - particularly to achieve full-employment - like a steady infusion of water into a once-pooled body of water, the parasitic properties of the water/economy diminish. Taxes, like evaporation, can remove excess money/demand. So, the money-sovereign, should [normative territory] not only provide the fresh infusion of money, but also ensure or install a system where the money flows, this system being guaranteed full employment where public sector job creation remedies the market failure of unemployment (like a fountain system or the natural water cycle for a body of water).

Again, excellent post!

mtngun's picture
Submitted by mtngun on

Jay repeats some old wives tales about the Fed "printing money" and giving money to banks.

The Fed did make not-necessarily-legal low interest loans to the banks during the crisis. The loans were repaid, but still, it wasn't the right way to handle the bank solvency issue.

QE merely swaps assets for cash, there is no direct gift. There is an indirect gift to the banks in the form of propping up housing prices -- but ultimately the Federal government is on the hook for all Federally insured mortgages, one way or the other.

The key to stopping the "grand bargain" is educating the public on the deficit. That the deficit is nothing to fear. That there is no SS crisis. That the Federal government can pay any bill it choses to pay, with spending limited only by inflation.

Jay's picture
Submitted by Jay on

That's $26,000 for every man, woman, and child in the United States.

Read all about it here.

QE isn't a gift if it swaps assets for cash. But it is a gift if it swaps what everyone in the banks called "worthless" assets for cash, and frankly the SIVs the banks created for the sole purpose of burning to the ground so they could collect the insurance, are the assets now held as collateral by the Fed. The Fed paid face value, no questions asked.

Now think about it. If the Fed had distributed that $7.7 Trillion to the population at large, with the stipulation that it only be used to pay off mortgage, credit card, and student loan debt, what effects would it have had?

The Fed would have been taking the exact same collateral. The "assets" underlying the banks' balance sheets, i.e., debt obligations by consumers, is the functionally the same thing as . . . debts owed by consumers that the Fed would be backstopping directly.

The banks would have had $7.7 trillion of dubious loans wiped from their balance sheets.

Many homeowners would have had windfalls with major, beneficial implications to their mortgages.

Most consumers would have gone from owing tens of thousands in credit card, auto, and student loan debt, some with usurious interest rates, to having disposable income.

What about bad debts that would never be repaid to the Fed? Under the current program, that's going to happen anyway as some of the banks' "assets," which the Fed holds as collateral, will go up in smoke.

But dropping money like that from helicopters to people who actually need it would never have happened. It solves too many problems, and as the OP speculates, the powers that be aren't interested in solving problems, only creating problems that derive profits. The Rules state that you can only accept the housing market as collateral for $7.7 Trillion of loans from banksters, but not from the people who live in that housing market. Because, you know, "moral hazard."