Rebooting the financial casino

It seems there is a proposal to create a new board to set accounting standards (h/t Digby):

The mechanism is contained in an amendment set to be introduced in mid-November by Rep. Ed Perlmutter (D-Colo.) that would move final authority over the Financial Accounting Standards Board (FASB) from the Securities and Exchange Commission to a new body, a so-called “oversight” board, that would include the officials charged with managing systemic risks to the financial markets.

These regulators would have the authority to override FASB’s accounting guidelines by taking into account economic conditions. (emphasis added)

The key factor in Japanification is that you don’t allow bankrupt or insolvent banks or other major firms to fail.  You let them keep bad loans and “assets” on their book at inflated values, and you let time go by, intending to write the bad loans down very slowly as time goes by.  The effect of this is that real access to credit in the actual economy dries up, and as a result there is much less real growth.

Trading leverage at banks is up.  There are fewer, larger banks, few, too larger to fail banks, that is. Credit for consumers is more expensive, and the non-government guaranteed mortgage market has seized up.  Elsewhere Digby also notes that reports of mortgage fraud are actually up from last year.

There is going to be a recovery, it has already started in Asia.  Job numbers should start turning around in the spring in the US, though the number of people employed as a percentage of the population will not recover this economic cycle, and probably not for a generation.

However, Japanification doesn’t mean you don’t get some recoveries.  You do, then they sputter out.  Employment never really recovers, wages stagnate and things are just generally lousy without plunging the country into an all out depression.  So, yes, in that sense the country was “saved’ from a Great Depression, but choosing the worst alternative.

That alternative isn’t just Japanification, it is a continuation of the status-quo ante.  The Bush years, and indeed the Clinton years to a lesser extent, were about financial plays.  Instead of building a real economy, the chimerical returns of financialization were pursued.  Real businesses return 5% and consider that good.  Financialized companies, taking on too much risk and debt, slashing employees and capital and seeking returns through offshoring and outsourcing return 15%.  Leveraged financial plays return far more even than that.  The returns are fictional, the bailouts wiped out most of the profits of the last 8 years, but bonuses and salaries are paid on them, so they aren’t fictional to executives, and it is executives who make the decisions.

What Obama, Geithner and Bernanke have been doing is attempting to reboot the financialized economy.  Rather than winding it down, breaking up banks, reinstituting Glass-Steagall, and regulating banks like utilities, they are attempting to get the Busheconomy working again.

The cost of all of this has been high.  In the trillions.  Instead of increasing progressive taxation to make the rich pay for their bailouts, what is being done is to make the poor and middle class pay.  This may be through high interest rates (letting credit card rates go to 29%, among other things) or it may be forcing the population to buy private health insurance, but once again, the rich fail, and everyone else pays the price.

The end result of Japanifying, regressive taxation (whether direct or indirect) and  attempting to restart the financial casino will not be pretty.  There will not necessarily be any immediate disaster, and some numbers will look good.  But the fundamental problems of the economy under Bush have not only not been fixed, they have been made worse and the evidence is being systematically buried.  There won’t be another financial crisis immediately, but another one has been made inevitable.

Economically this is the legacy of this Congress, Federal reserve, and presidency.