Now that financial reform is on the front burner along with health care reform, I thought it’d be a good idea to call attention (once again) to an article that appeared in the Nation magazine in May 2009.  It is entitled “The Quiet Coup,” and was written by Simon Johnson.

Among many other things, Johnson is a professor at MIT’s Sloan School of Management and was the chief economist for the International Monetary Fund (IMF).

It was Johnson’s experience at IMF that informs much of this article.  One of the important roles of the IMF is to advise countries in economic trouble about how to emerge from their problems.  If necessary the IMF can bring literally billions of dollars in assistant to the table on behalf of these countries:  But only after the IMF believes the country’s leadership is ready to make the tough decisions necessary.

A year ago Johnson wrote in this article about some disturbing parallels he saw between the problems faced by emerging economies in trouble, and the problems he saw in the United States as its financial platform unraveled.

“Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.”

If that situation sounds familiar to what we witnessed, and still are witnessing based upon the difficulty Congress is having coming to consensus on financial regulatory reform, it looked very familiar to Johnson too. 

“From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.”

 Johnson noticed the cozy relationships formed between Wall Street and Washington D.C.  This looked all too familiar to him when he studied much smaller, emerging countries that found themselves in trouble.

“Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.”

In other words the cronyism Johnson saw in much smaller countries was writ large in the United States.  If anything, the dominant player wasn’t the government in the United States, it was Wall Street.

“Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.”

Johnson maintains that the ideology of Wall Street had taken over the nation’s capital.  They became brothers in the belief that private markets were dominant over the public’s government.

“As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.”

Johnson then lists a virtual “what did it” that sprung out of this confluence and almost brought a proud country to its collective knees. 

“From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.”

Read the entire article if you can.  If you do you will know for certain whether Congress is about to pass real reform, or just something to keep you passified while the financial Oligarchy remains intact and unaffected–at least until the next time the government needs to Hoover your pocketbook to keep them in power.

James Galbraith is an economist who teaches at the LBJ School of Public Affairs at the University of Texas.  Like his father, Galbraith can write clearly.  Also like his father Galbraith is very good at skewering ideas that should have been put to rest long ago.  What follows is a nice article explaining the difference between public and private debt.  This is from an article Galbraith authored earlier this month in the Nation.

“To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.

All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters–led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous “bipartisan” enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget–have labored mightily to confuse the issues. These spirits never uttered a single word of warning about the financial crisis, which originated on Wall Street under the noses of their bag men. But they constantly warn, quite falsely, that the government is a “super subprime” “Ponzi scheme,” which it is not.

We also hear, from the same people, about the impending “bankruptcy” of Social Security, Medicare–even the United States itself. Or of the burden that public debts will “impose on our grandchildren.” Or about “unfunded liabilities” supposedly facing us all. All of this forms part of one of the great misinformation campaigns of all time.

The misinformation is rooted in what many consider to be plain common sense. It may seem like homely wisdom, especially, to say that “just like the family, the government can’t live beyond its means.” But it’s not. In these matters the public and private sectors differ on a very basic point. Your family needs income in order to pay its debts. Your government does not.

Private borrowers can and do default. They go bankrupt (a protection civilized societies afford them instead of debtors’ prisons). Or if they have a mortgage, in most states they can simply walk away from their house if they can no longer continue to make payments on it.

With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand. As the inspired amateur economist Warren Mosler likes to say, the person who writes Social Security checks at the Treasury does not have the phone number of the tax collector at the IRS. If you choose to pay taxes in cash, the government will give you a receipt–and shred the bills. Since it is the source of money, government can’t run out.

It’s true that government can spend imprudently. Too much spending, net of taxes, may lead to inflation, often via currency depreciation–though with the world in recession, that’s not an immediate risk. Wasteful spending–on unnecessary military adventures, say–burns real resources. But no government can ever be forced to default on debts in a currency it controls. Public defaults happen only when governments don’t control the currency in which they owe debts–as Argentina owed dollars or as Greece now (it hasn’t defaulted yet) owes euros. But for true sovereigns, bankruptcy is an irrelevant concept. When Obama says, even offhand, that the United States is “out of money,” he’s talking nonsense–dangerous nonsense. One wonders if he believes it.

Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid. Personal debts are generally settled during the lifetime of the debtor or at death, because one person cannot easily encumber another. But public debt does not ever have to be repaid. Governments do not die–except in war or revolution, and when that happens, their debts are generally moot anyway.

So the public debt simply increases from one year to the next. In the entire history of the United States it has done so, with budget deficits and increased public debt on all but about six very short occasions–with each surplus followed by a recession. Far from being a burden, these debts are the foundation of economic growth. Bonds owed by the government yield net income to the private sector, unlike all purely private debts, which merely transfer income from one part of the private sector to another.

Nor is that interest a solvency threat. A recent projection from the Center on Budget and Policy Priorities, based on Congressional Budget Office assumptions, has public-debt interest payments rising to 15 percent of GDP by 2050, with total debt to GDP at 300 percent. But that can’t happen. If the interest were paid to people who then spent it on goods and services and job creation, it would be just like other public spending. Interest payments so enormous would affect the economy much like the mobilization for World War II. Long before you even got close to those scary ratios, you’d get full employment and rising inflation–pushing up GDP and, in turn, stabilizing the debt-to-GDP ratio. Or the Federal Reserve would stabilize the interest payouts, simply by keeping short-term interest rates (which it controls) very low.

What about indebtedness to foreigners? True, foreigners do us a favor by buying our bonds. To acquire them, China must export goods to us, not offset by equivalent imports. That is a cost to China. It’s a cost Beijing is prepared to pay, for its own reasons: export industries promote learning, technology transfer and product quality improvement, and they provide jobs to migrants from the countryside. But that’s China’s business.

For China, the bonds themselves are a sterile hoard. There is almost nothing that Beijing can do with them. China already imports all the commodities and machinery and aircraft it can use–if it wanted more, it would buy them now. So unless China changes its export policy, its stock of T bonds will just go on growing. And we will pay interest on it, not with real effort but by typing numbers into computers. There is no burden associated with this, not now and not later. (If the Chinese hoard the interest, they also don’t help much with job creation here. So the fact that we’re buying a lot of goods from China simply means we have to be more imaginative, and bolder, if we want to create all the jobs we need.) Finally, could China dump its dollars? In principle it could, substituting Greek bonds for American and overpriced euros for cheap dollars. On brief reflection, no Beijing bureaucrat is likely to think this a smart move.

What is true of government as a whole is also true of particular programs. Social Security and Medicare are government programs; they cannot go bankrupt, and they cannot fail to meet their obligations unless Congress decides–say on the recommendation of the Simpson-Bowles Commission–to cut the benefits they provide. The exercise of linking future benefits and projected payroll tax revenues is an accounting farce, done for political reasons. That farce was started by FDR as a way of protecting Social Security from cuts. But it has become a way of creating needless anxiety about these programs and of precluding sensible reforms, like expanding Medicare to those 55 and older, or even to the whole population.

Social Security and Medicare are transfer programs. What they do, mainly, is move resources around within our society at a given time. The principal transfer is not from the young to the old, since even without Social Security the old would still be around and someone would have to support them. Rather, Social Security pools resources, so that the work of the young collectively supports the senior population. The effective transfer is from parents who have children who would otherwise support them (a fairly rare thing), to seniors who don’t. And it is from workers who do not have parents to support, to workers who would otherwise have to support their parents. In both cases this burden sharing is fair, progressive and sustainable. There is a healthcare cost problem, as everyone knows, but that’s not a Medicare problem. It should not be solved by cutting back on healthcare for the old. Social Security and Medicare also replace private insurance with cheap and efficient public administration. This is another reason these programs are the hated targets, decade after decade, of the worst predators on Wall Street.

Public deficits and private lending are reciprocal. Increased private lending generates new tax revenue and smaller deficits; that’s what happened in the 1990s. A credit collapse kills the tax base and generates more spending; that’s what’s happening now, and our big deficits are the accounting counterpart of the massive decline, last year, in private bank loans. The only choice is what kind of deficit to run–useful deficits that rebuild the country, as in the New Deal, or useless ones, with millions kept unnecessarily on unemployment insurance when they could instead be given jobs.

If we could revive private lending, should we do it? Well, yes, up to a point there is good reason to have a robust private lending sector. Government is by nature centralized and policy driven. It works by law and regulation. Decentralized and competitive private banks have much more flexibility. A good banking system, run by capable people with good business judgment who know their clients, is good for the economy. The fact that you have to pay interest on a loan is also an important motivator of investment over consumption.

But right now, we don’t have functional big banks. We have a cartel run by an incompetent plutocracy, with its long fingers deep in the pockets of the state. For functional credit to return, we’ll have to reduce the unpayable private debts now outstanding, to restore private incomes (meaning: create jobs) and collateral (meaning: home values), and we’ll have to restructure the big banks. We need to break them up, shrink the financial sector overall, expose and prosecute frauds, and create incentives for profitable lending in energy conservation, infrastructure and other sectors. Or we could create a new parallel banking system, as was done in the New Deal with the Reconstruction Finance Corporation and its spinoffs, including the Home Owners’ Loan Corporation and later Fannie Mae and Freddie Mac.

Either way, until we have effective financial reform, public budget deficits are the only way toward economic growth. You don’t have to like budget deficits to realize that we must have them, on whatever scale necessary to restore growth and jobs. And we will need them not just now but for a long while, until we’ve shaped a strategic program for investment, energy and the environment, financed in part by a reformed, restored and disciplined financial sector.

It’s possible, of course, that all the deficit hysteria is intended to divert attention from the dysfunctions of private banking, and so to help thwart calls for financial reform. Is that giving them too much credit? Maybe. Maybe not.”

An interesting piece that appeared in the Nation explains all the cash and commitments the Federal Government is using to shore up banks.  Not all banks, of course, primarily the larger ones who reside on Wall Street.   Thanks to the website Alternet.com for the link.

The article does this explaining, however, in a unique way:  By using a fictional couple who have run into financial problems.  

“As we mark the end of the first year of the financial bailout, the public seems to regard the government’s actions with a toxic combination of rage and confusion. People are pissed off but too bewildered to know what to do with that anger. The confusion isn’t an accident. The government hasn’t exactly been forthcoming about how it’s made buckets of money available to the banking sector. When it does disclose some information–such as in July’s SIGTARP report from the Treasury or the Federal Reserve’s weekly balance sheet–it’s in the form of intimidating descriptions, accounting mumbo jumbo and technical reports that do little to illuminate just what the hell is going on.

What’s worse, banks and the establishment press have portrayed TARP as the sum of the banking industry’s federal subsidies. An August 30

New York Times

article, “As Banks Repay Bailout Money, U.S. Sees a Profit,” gives the impression that taxpayers should be happy to have made $4 billion on the deal, as if our checks were in the mail. But when the government became Wall Street’s bank, it wasn’t just $700 billion of TARP money that flew north to Wall Street. TARP was but a small fraction (roughly 4 percent) of the full $17.5 trillion bailout and subsidization of the financial sector. The details of this total bailout are complicated, but the basic mechanisms aren’t beyond the average citizen’s grasp. We’re going to walk you through it.

Five Easy Pieces: The Tale of Joe and Katie

There are five ways the Treasury, the Fed and other government entities have propped up the banking sector. In order to understand how each of these works, let’s consider how this assistance might have looked had it been directed at a household, rather than a bank, teetering on the edge of bankruptcy. The analogy isn’t exact, but considering the bailout in this manner helps make the whole thing a lot clearer.

Imagine a couple living in a three-bedroom house outside the Twin Cities. Call them Joe and Katie Hazzard. The Hazzards own a small off-track-betting (OTB) business and have some investments and a mortgage on their house. But business is terrible (no one has extra money to make bets); Katie recently lost her job; their investments have hemorrhaged value; and they can’t make their mortgage, car or credit card payments. So they ask their local bank for a loan. “No dice,” says the bank. “We can’t give you money to pay your debts because you’re no longer a good credit risk for us.” That’s more or less what happened to the banks last fall: they couldn’t and wouldn’t lend to one another.

Capital Injections and Direct Loans

So the Hazzards go to the Federal Bailout Bank, which says, “Here’s some money. Do with it what you want, and someday down the road, if and when you’re out of the woods, you’ll have to pay us back with a little bit of interest.” That’s roughly what the $700 billion TARP was: a direct injection of capital to purchase preferred shares, which is really more like extending a loan than making the investment the government said it was, with some very light strings attached.

But then Joe says that the handout isn’t enough. It turns out that not only does he own a gambling business; he has a bit of a gambling habit. Joe made big money in previous years betting on the New England Patriots to win the Super Bowl and figured he couldn’t go wrong placing the same wager again. But then Tom Brady injured his knee last year, and Joe got creamed. Inveterate gambler that he is, he’s doubled down on the Patriots this year, but he won’t be paid off (if, that is, the Patriots win) until later in the year. But Joe has a boatload of outstanding gambling debts he needs to pay now.

So the Federal Bailout Bank decides it’ll help out. To cover the truly pressing debts (the bookie is about to send over some goons with baseball bats), the bank will just write a check. That’s what the Fed did to back the losses of AIG’s credit default swaps and other businesses, and what the Fed and Treasury did together by providing protection to Citigroup in the event that more of its toxic assets lost value. The money–$1.4 trillion–was structured as a loan, but it’s a bit unclear how it will ever be paid back.

In addition to his bets on the Patriots, it turns out, Joe’s been making bets on just about anything, the outcomes of which have yet to be determined. The Hazzards are scared that a lot of these bets don’t look too promising (e.g., Joe’s wager that Kanye West will win this year’s Nobel Peace Prize). What they want is to unload their positions in those bets, to have some other gambler pay them the original sum they put down and take on the risk. If the bet makes good, the new gambler would get the rewards. If it doesn’t, he would take the loss. But they can’t find anyone to do that because so many of Joe’s wagers were so reckless.

Once again, the Bailout Bank steps in to sweeten the deal, telling would-be gamblers it will put in $6 for every $1 they put up. That means Joe’s Kanye West bet for $100 (at very long odds) can now be purchased by a fellow gambler for just $14.28. If Kanye does, in fact, win the Nobel, then this lucky gambler will get paid as if he had put up the whole $100. If not, he’s only out fourteen bucks. That’s the crux of Tim Geithner’s $1 trillion Public-Private Investment Fund, which would bring the full amount of capital injections and direct loans to $2.4 trillion.

Indirect Loans and Guarantees 

The Hazzards come back and claim that wasn’t enough; they’re still screwed. So the bank says, “We can give you some more short-term, thirty-day loans to get you through (even longer-term ones if that doesn’t work), but you have to post collateral. It doesn’t have to be very valuable: your old bicycles in the garage, your basement sofa-bed, maybe that baseball card collection you planned to use to pay for your kids’ college educations. And if you still need more at the end of the thirty days, you can post some more junk from your attic as collateral.”

This more or less corresponds to the newly established Federal Reserve facilities (think: credit unions for banks), which provide money to banks in exchange for various assets as collateral. Both the Federal Reserve and the Federal Reserve Bank of New York administer these facilities. They run the gamut from the $1.8 trillion Commercial Paper Funding Facility, created to provide more credit for households and businesses (which, to be fair, did help calm the markets; but it didn’t get to households or to most small businesses), to the $540 billion Money Market Investor Funding Facility, created to back private funds owned by banks, insurance companies or investment advisory companies.

Joe comes back again to Bailout Bank and says that he’s still short, but he has a proposal. “I’m not going to ask you for any more loans. Promise. Instead, I’m going to see if someone else will lend me money. The problem is, I’m such a terrible credit risk I need someone to back me up. Maybe instead of me asking for a loan, I could kind of use your name to ask?” That’s the role the FDIC played for Goldman Sachs and other firms, which took advantage of $940 billion in FDIC guarantees to raise cheap money for themselves and another $684 billion of backing for their trading accounts as an additional perk.

All in all, these kinds of guarantees, along with the indirect collateral loans for the banking industry, total $6.7 trillion, and there is precious little transparency coming from the Fed regarding most of it. In fact, Ben Bernanke told Congress in November that too much transparency about which banks got which loans and for what collateral would be “counterproductive.”

General Backing and Subsidization

Bailout Bank isn’t done helping the Hazzards. It turns out that the couple also has a vacation condo that’s lost some value. As part of propping up their balance sheet, the Bailout Bank promises to guarantee the price of the condo. In other words, if Joe and Katie are forced to sell the condo for less than its value before the housing crisis, the Bailout Bank will write them a check for the difference in price.

This is considered “general backing,” and in the bailout economy it applies to all kinds of things that weren’t supposed to lose value but did and might continue to do so in the future–most important, money market funds. About $4.4 trillion was set aside for general backing of financial firms, including $3.7 trillion to mitigate any future problems with money market funds and an extra $700 billion for the FDIC to continue to back depositor funds. (The banks didn’t want to pony up more premiums to do it themselves. Can you imagine just deciding you don’t want to pay your insurance premiums, yet receiving insurance anyway? Well, it’s like that.)

Government-Sponsored Entities Help

Another part of what’s putting the hurt on the Hazzards is the plummeting value of their big investment in what had been the rock-solid, blue-chip ABC Corp. This was supposed to be one of their safest investments, but now they can’t sell the stock without taking a massive loss. So the Bailout Bank steps in. It starts buying tons of ABC stock, flooding it with capital and creating an inflated price for the stock in the process. This in turn raises the value of the Hazzards’ investment. Bailout Bank even goes so far as to start buying ABC’s products, hoping to increase its sales and thus its stock price.

Though a bit imprecise, this is basically how the Fed and Treasury propped up Fannie Mae and Freddie Mac and in the process helped the banks. The Treasury bought Fannie and Freddie stock and also the mortgages that the two enterprises sell, plus it gave them some extra money to lend. All the government’s financial assistance to prop up entities that were considered safe at one point comes to $2.2 trillion.

Global Market and Credit Expansions

Finally, just to make sure the Hazzards can get by, the Bailout Bank decides to help everyone who might use their business with some capital of their own. Since the couple runs an OTB business, when the bank gives a shot of money to everyone in town, a few people start gambling with the Hazzards again. In effect, that’s what the Fed did when it dumped $905 billion into international markets to move things along and another $881 billion into domestic ones. Throwing cash here and there into the markets is the Fed’s job; throwing the amounts it did was an act of desperation, although almost certainly needed.

It’s important to remember that not everything the government did was solely bank-friendly. The Fed and Treasury extended $1.82 trillion in fiscal support, including about $1 trillion in direct consumer assistance (including the Recovery Act, the Cash for Clunkers program and first-time homebuyer tax breaks). It gave another $881 billion to help guarantee various federal home mortgage programs, which really did help homeowners. But this help is dwarfed by the mountains of dollars thrown at Wall Street [See Tags: Alternet, Bank bailout, the Nation
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