The Dollar Bubble

SUBHEAD: Goldman Sachs continues to destroy US economy. Other nations must defend themselves from dollar collapse. Image above: Screen shot from and link to YouTube video "The Dollar Bubble". See video below. By Hossein Askari & Noureddine Krichene on 24 November 2009 in Asia Times (http://www.atimes.com/atimes/Global_Economy/KK24Dj06.html)

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.

Famous words, but uttered by whom and when? No, not some socialist or communist. It was none other than president Thomas Jefferson. The year was 1802. We forget these words at our own peril. On November 17, the "leader of the pack", aka Goldman Sachs, apologized. Its chief honcho, Lloyd Blankfein said: "Certainly, our industry is responsible for things. We're a leader in our industry, and we participated in things that were clearly wrong and we have reasons to regret and apologize for." To show remorse, Goldman Sachs will contribute US$100 million per year for five years to help small business. Wow! How generous! They only add insult to injury. After destroying millions of families, businesses and lives all over America and the world, they will contribute $100 million a year for five whole years. What are we supposed to say? Thank you? Let's look at the record and suggest a more appropriate remedy. Goldman was as responsible as any financial institution in bringing down the entire US economy, even threatening its own existence. It needed a government bailout and guarantees to survive; a fact it now denies. Today, after pocketing the government's helping hand, it is as arrogant as ever. Goldman received a $10 billion loan (which it has since paid back). It received $12.9 billion from AIG; let's not forget that the government paid AIG, and AIG then turned around and paid Goldman 100 cents on every dollar. Which bankrupt company has ever gotten such a deal? Shouldn't this alone be the subject of an investigation by the Justice Department? How could the Federal Reserve and the US Treasury possibly agree to this? Are they businessmen and businesswomen who guard America's national interests or are they simply collaborating with Wall Street? This year alone, Goldman has put aside $16.7 billion for 2009 bonuses. Compare that to the $100 million it is so generously earmarking for the millions of lives it has destroyed. Is this a measure of public-private justice? And the US taxpayer is still on the line to guarantee Goldman Sachs because it is too big too fail! Along with loose Fed monetary policy and inadequate lax supervision and regulation, banks and bankers have been right up there as leading causes of the worst financial crisis to hit the world since the Great Depression. Instead of exhibiting remorse, bankers are looking for new ways to extract another pound of flesh from ordinary Americans. Banks, not just Goldman Sachs, are again making record profits and plan to pay record bonuses to bankers for their "good work". Even after reporting record profits, some institutions want to delay the repayment of their federal bailouts to avoid dilution in their stock value; indeed, banks are putting up a fight to resist regulation calling for disclosure of overdraft fees that can amount to an annualized interest rate exceeding 3,500%. The banking industry obviously doesn't get it. A temporary tax should be imposed on banks that were bailed out to compensate for the damage they have inflicted on the economy. This is a fair solution. Our leaders profess surprise and powerlessness and do nothing. The White House, Congress, the Treasury and the Fed must put aside their own personal interests and relations with the financial industry, turn a cold shoulder on lobbyists and, for once, do what is right. The only way banks will learn not to repeat their greed-driven behavior is if they are held accountable for the financial crisis. While the final cost of the banks' irresponsible actions is anyone's guess - lost economic output in the US (the largest component), bailouts and stimulus expenditures - one thing is certain: current and future taxpayers will continue to pay as the exploding US national debt takes its toll. A temporary tax on the profits of banks would be a small step in exacting a small measure of justice for millions of ordinary Americans and could perhaps bring about a much-needed change in the way banks do business. The taxpayers' bailout of the banking industry has resulted in the prospect of budget deficits and a rising national debt as far as the eye can see. The spiraling national debt will not only result in a poor quality of life for our children and grandchildren, it will also impair other national initiatives. The US deficit for fiscal 2008 was $455 billion, or 3.2% of gross domestic product (GDP); in fiscal 2009, the figure has increased to a whopping $1.4 trillion, or 10% of GDP - that is, the highest ratio since 1945; and over the next 10 years the deficit will be an eye-popping $9 trillion! President Barack Obama has vowed to reduce the deficit to GDP ratio to 3% by the end of his first term in 2013, a task that may be all but impossible without new initiatives. The only solution is to reduce expenditures and increase taxes. In this, the financial industry must do its fair share. It will be tough to cut expenditures on entitlements and to increase taxes on average Americans who are already hurting. There is no other option but to increase the tax rate on a temporary basis on those who are more fortunate. This is only fair. Financial institutions that were bailed out should take a bigger hit than other entities since they brought on the financial crisis and would have declared bankruptcy had it not been for Uncle Sam. Moreover, unless something is done to make them take note, banks are going to take us right back down the same road to ruin - with continued overleveraging, speculation and price gauging. They have already started exploiting their customers again as attested by their exorbitant fees for overdrafts. Here is how a temporary tax would work. The temporary tax could be levied on the excess profits of all federally rescued financial institutions, with excess profits defined as the rate of return on equity (before payment of bonuses) minus the average return for all sectors of the US economy. The tax would be temporary, enforced until the estimated damage done by the financial institutions is paid back. The rescued banks would still continue to make handsome profits for bankers and their stockholders. Bankers would pay back some of their above-average profits to reduce the US national debt and to compensate for the damage they have caused by their selfishness. If we wait and do nothing, the national debt will become unmanageable, and we will have to take even more drastic action in the future. Jefferson would turn in his grave. Let's make sure we're ahead of the curve for a change. Institutions such as Goldman Sachs are bringing in huge profits right now. If the government calls on banks to help clean up their mess, then the American taxpayers might regain a measure of the trust they have lost in their leaders, who are so susceptible to lobbyists. To support this initiative and set an example, the US Fed should also stop enriching banks by acting as a quasi-fiscal institution. The Fed should stop paying interest on bank reserves. The Fed should refrain from inundating banks with free money in the form of zero-interest lending. Banks are not lending the money to the business. Instead, banks are lending the same money to the Treasury and are taking big trading risks, and are making obscene profits to enrich themselves at the national expense. Such a policy is purely redistributive in favor of the banks, imposing a huge tax on workers and pensioners, and requiring trillions of dollars in bailouts. The government must stop frightening Americans by saying that the sky will fall if they take retaliatory action against the financial institutions that have been responsible for our economic crisis. With the dollar in free fall and gold, oil and food prices again on the rise, foreigners will do whatever they can to protect themselves from losses in their dollar-denominated assets. We must act now before a full-blown dollar crisis, an oil crisis and hunger also envelop the world. Video above: "The Dollr Bubble" on www.YouTube.com http://www.youtube.com/watch?v=eZA0qNsf4m0 Hossein Askari is professor of international business and international affairs at George Washington University. Noureddine Krichene is an economist at the International Monetary Fund and a former advisor, Islamic Development Bank, Jeddah.