Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy by Michael Hudson

Author:Michael Hudson [Hudson, Michael]
Language: eng
Format: epub, mobi, pdf
Publisher: Counterpunch
Published: 2015-08-25T19:00:00+00:00

15. Wall Street’s Pretends to Insure against the Crash

“Recognizing [Geithner’s] tsunami of deceit is actually central to recognizing what happened during the bailouts. … Geithner was hired to lie, steal, and cheat on behalf of bankers, and he did so. … the Geithner era is increasingly seen as a time of betrayal and lies, not just disagreements over ideas.”

—Matt Stoller, “The Con-Artist Wing of the Democratic Party” (2014)

The transition from the Bush to the Obama Administration was marked by an affair rife with conflict of interest between Treasury officials and Goldman Sachs. On the surface the scandal appeared to be a public takeover of American International Group (AIG), whose London office had insured junk-mortgage packages of Goldman and many European purchasers. Yet AIG’s property and casualty insurance arms were not endangered, nor had it originated or packaged junk mortgages. The problem was that its Financial Products division (AIGFP) in London insured them, for only a tiny premium.

This trade in credit default swaps and related derivatives gave credence to the illusion that the mountain of bad mortgage debt could be carried without lenders or investors suffering a loss, simply by negotiating offsetting option and insurance contracts. In order to have “worked,” the insurance premiums would have had to be large enough to build up reserves to pay for the trillions of dollars in losses that resulted from over-lending. Instead, risk models and ratings agencies said, “No risk from junk mortgages.” Wall Street denied that a bubble existed, and AIG pretended to insure against its collapse.

The charade was made real by government intervention. But when Congress would not go beyond the TARP’s $700 billion at the outset, the Fed and Treasury carved up AIG as a sacrificial lamb to save other financial giants from losses – and to preserve the illusion that financial asset prices were justified and that debts ultimately could be paid.

What was rescued was not AIG, but the illusion that Wall Street’s deregulated financial system could make the economy richer rather than poorer. Tim Geithner’s guiding principle upon being promoted to Secretary of the Treasury was that the financial sector’s (and hence, the One Percent’s) outsized profits and bonuses were a necessary condition for broader economic recovery. The reality was that the Federal Reserve’s $4 trillion in Quantitative Easing helped support the debt burden by re-inflating asset prices. Coupled with debt deflation for the rest of the economy, this asset-price inflation – while keeping debt deflation for the 99 Percent – has polarized the distribution of wealth and net worth since 2008.

That this policy was deliberate is reflected in the deception and secrecy that the Treasury and Federal Reserve tried to maintain to hide its insider dealings rank with conflict of interest, while the Obama Administration used junk-accounting to pretend that “taxpayers” gained. Fiction was piled upon fiction to deter recognition of how unworkable the financially gerrymandered economy had become.

None of the players or public agencies in this episode are very attractive. In 2005, New York Attorney General

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