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Saturday, April 4, 2009

"Public Private Partnership" Fnord

I noticed another new fnord phrase circulating. It's "Public Private Partnership".

According to a pro-State troll, a "Public Private Partnership" means "Financial industry executives and politicians are cooperating to solve the economic crisis."

The reality is "Financial industry executives and politicians are cooperating to loot and pillage the American people."

When you say "Public Private Partnership", it sounds sophisticated and noble. If you say "The government is paying to buy up these dodgy mortgage bonds, with banks also putting up some money. If the assets increase in value, the banksters get the profit. If the assets decrease in value, the government and non-insiders take the loss." When you describe it that way, it's an obvious scam.

New fnord phrases give noble-sounding names to new ways to loot and pillage.

Via the latest bailout proposal, the Federal government is giving financial industry insiders a free put option to stick the losses with the government/taxpayers.

Bailouts are not free. Non-insiders pay the cost via higher income taxes or an increase in the inflation tax. The current bailouts are funded primarily via inflation.

Another important aspect of bailouts is that there's no obligation to treat each bank equally. Some banks may get a really lucrative deal while others get a not-as-favorable deal. Naturally, the banksters are spending a lot of money on lobbyists. When you have the power to print new money out of thin air, then there's always room in your budget for lobbyists!

In this manner, the banksters can always profitably block reform. Insiders can always lobby to prevent the reform of a corrupt system. If you're receiving a massive State subsidy, you can always lobby to keep it! This is the virtuous positive feedback cycle of complete economic collapse. Lobbying the State for favors is more profitable than performing actual useful work.

Notice how the details of each bailout proposal are slightly different. Each new proposal is presented as completely original and different, rather than variations on the same fundamentally corrupt monetary system.

In a mild recession, the Federal Reserve bails out banks simply by cutting the Fed Funds Rate. When interest rates are lowered, existing loans become more valuable. Suppose a bank has borrowed at a Fed Funds Rate of 5% to purchase a bond yielding 6%. If the Fed Funds Rate is cut to 3%, then the bank is borrowing at 3% to purchase a bond yielding 6%. The bank's profit has tripled. During a mild recession, there is a slightly greater risk of default on the bond. The Federal Reserve corrects for this by lowering the Fed Funds Rate, which restores the banks' profit equation.

By keeping the Fed Funds Rate below the true inflation rate, the Federal Reserve subsidizes the profits of financial industry insiders.

Suppose the housing market crashes by 50%. Effectively, the State has modified each existing debt contract saying "Amount of payments due has doubled." During a boom, the Federal Reserve subsidizes banksters and borrowers via inflation and negative real interest rates. During a bust, the Federal Reserve subsidizes banks by cutting interest rates. Debt contracts that were formed before the Fed Funds Rate cut don't qualify for a discount. For example, mortgage rates have declined slightly, but if your house is worth less than your mortgage, you can't refinance. You still have to pay the higher rate or forfeit your house.

During a severe recession/depression, individuals lose their homes, their savings, and their jobs. Insiders always qualify for a bailout. Large banks may continue operating even though they're technically bankrupt. Police will violently evict someone from their house for not paying their mortgage.

The present recession/depression is so severe that the Federal Reserve cannot end it via a Fed Funds Rate cut. More clever bailouts are necessary. The Federal government must explicitly bail out the banksters. Due to the Compound Interest Paradox, large banks must be bailed out lest the entire monetary system collapse in hyperdeflation.

What are the other bailout methods have been tried so far?

There was the TARP program. Originally, the Treasury department was going to buy toxic assets directly from banks. By definition, the State always pays an above-market price when it buys assets from politically connected insiders.

The TARP program gave the Treasury secretary wide discretion over how to actually spend the bailout money. Instead of purchasing "toxic debt", the Treasury secretary instead made direct capital investments in the banks, purchasing convertible preferred stock.

There was the Federal Reserve "Term Auction Facility" and other variations. Assets are moved from the balance sheet of banks to the Federal Reserve's balance sheet. The Federal Reserve normally purchases Treasury debt when it "monetizes the debt". The Federal Reserve can purchase any type of bonds or assets it chooses, without approval from Congress. The Federal Reserve merely prints new money to buy whatever Ben Bernanke wants.

Strict mark-to-market accounting was cited as an excuse for the State to seize small banks. Some went bankrupt. Some were bought by larger banks, via a State/FDIC/Federal Reserve bailout. Now that large banks are obviously insolvent, mark-to-market accounting rules are suspended. The adoption and then suspension of mark-to-market accounting is another way that insiders loot and pillage.

Via creative accounting, large banks may continue operating even though they're technically bankrupt. State restriction of the banking industry gives depositors no alternate safe place to store their savings. Operating a gold/silver warehouse receipt bank is illegal.

There was the bailout of AIG and Bear Stearns and GM. The actual recipients of these bailouts were the banksters who were the creditors. In a bankruptcy, the creditors would have had huge losses. By avoiding bankruptcy, there is a stealth bailout of the creditors of AIG and Bear Stearns and GM.

There was the stimulus spending law. Via deficit spending, the Federal government increases the inflation rate. By increasing the rate of inflation, real interest rates can be lowered further, even though nominal interest rates can't fall below 0%. Inflation bails out the banksters. The value of assets backing shady debt rises in value.

In the latest bailout, there's the "Public Private Partnership" program. Both the government and the banksters will contribute money to purchase the bad mortgage bonds. If the investment is profitable, then the banksters get the profit. If the investment is unprofitable, then the government bears the loss. What a great deal!

Another bailout method tried in other countries is explicit nationalization. The government takes possession of the banks, manages them for a year or two, and then re-sells them to the general public minus the bad debt. There's no reason to not try such a bailout in the USA. The same insiders would control the banks either way. The only negative risk would be public disclosure of what's actually on the banks' balance sheets. The current bailout methods don't require banks to disclose how bailout money is actually spent.

Rather than acknowledging a fundamentally corrupt monetary system, the bad guys keep inventing new tricks for looting and pillaging. Insiders look for ways to patch a corrupt system, rather than fix the fundamental flaw of fiat debt-based money. New fnord phrases are continually invented to distract attention from the real issues.


s_baar said...

Do you know how often the banks take advantage of the discount rate? I hear mixed things about this, a lot or a little, but it seems pretty pivotal to your point.

Anonymous said...

Another thing, quasi-private "NGOs" performing nanny-state and other functions essentially get deputized and given powers and immunities normally reserved for government agencies. An incestuous relationship, even absent overt or occult malfeasance.

Anonymous said...

In the UK, there are Public-Private finance initiatives (PFIs).

I read in a book that a private company will borrow money from a bank to finance building a hospital.

The bank says as there is risk the private company will not complete the construction, they will be charged a high interest rate.

The private company charges the government for the high interest rate they are paying.

The private company finishes the construction and goes back to the banks. The bank then re-packages the loan at a lower rate at most of the risk has now gone.

The difference in rates may be 60 million pounds and is pure profit for the private company.

I believe the government has been informed of this trick and said that there needs to be some incentive for private companies to get involved!

The journalist that wrote the book said he was wondering why the number of NHS beds was falling but NHS spending by the government was going up.

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