Obama’s multi-trillion-dollar cover-up

The return of prosperity for Nevada may await a national house-cleaning

By Steven Miller
  • Thursday, April 23, 2009

Recovery for Nevada's economy — so dependent on recreational tourism — clearly requires a return of prosperity to the underlying American economy.

Unfortunately, the policies embraced by the Obama administration are precisely those that will ensure a zombie U.S. economy for many years to come.

This observation comes from well-informed individuals at all points on the political spectrum. Free-market economists and big-government regulators alike point out how the Geithner-Summers-Obama "recovery" plan is actually designed to ignore the requirements of recovery and instead just shovel taxpayer dollars into walking-dead banks.

Take for example William K. Black, former deputy director of the Federal Savings and Loan Insurance Corporation. He argues that the primary motivation of the Obama administration — like the Bush administration before it — is to conceal from the American people the full scope of the U.S. banking system's insolvency.

Black, who worked hard to elect Obama but is now disillusioned, is a veteran of the late-1980s S&L crisis and a vigorous proponent of regulation. Nevertheless, in the candor of his critique, both then and now, what he regularly reveals is the systemic nature of regulatory failure.

Numerous investigative reports on the S&L crisis strongly suggest that, while federal agencies always have an overt mission that sounds eminently worthwhile, they also have a covert function that is never publicly acknowledged but routinely enforced by the political class.

That more hidden function is to deploy the agencies' discretionary powers to give both financial and regulatory benefits to the politically favored. If you've ever wondered why politically powerful interest groups regularly advocate federal or state regulation for their industries, now you know.

This particular dynamic has long operated within the U.S. banking system. Now, before the eyes of an aghast American public, it has metastasized into multi-trillion-dollar U.S. government bailouts and an accompanying cover-up.

Black — once called "cursed with an abundance of moral courage" — cannot stomach it. He contrasts the present with the "... 15 years after the Savings and Loan crisis." Then, "it didn't matter which party was in power — the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, ‘You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead, you're covering up the bank losses, because ... you say you need confidence, and so [you] have to lie to the people to create confidence [which] doesn't work. You will cause your recession to continue and continue.'"

The Japanese call it the "Lost Decade," notes Black. Of course, by now, Japan's economic funk has lasted for a generation.

"So, now we [in the U.S.] get in trouble, and what do we do?" asks Black. "We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan."

He notes that, "Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — 2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized.

"Both statements can't be true. It can't be that they need $2 trillion, because they have massive losses, and that they're fine."

Like numerous financial analysts, Black argues that the Obama administration's well-publicized Public-Private Investment Program (PPIP) is intended to mislead the public.

"It is worse than a lie," Black told Barrons. "Geithner has appropriated the language of his critics and of the forthright to support dishonesty. That is what's so appalling — numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians."

In actuality, Geithner's actions are designed to prevent people from learning how bad the condition of the banks really is, Black told Bill Moyers on PBS. Giving huge sums of taxpayer money to tottering mega-banks advances this objective because it keeps in place complicit bankers who have a big stake in the cover-up.

"We don't want to change the bankers, because if we do, if we put honest people in who didn't cause the problem, their first job would be to find the scope of the problem," he said.

Black believes that the Obama administration is attempting such a massive cover-up because it is "scared to death of a collapse."

"They're afraid that if they admit the truth, that many of the large banks are insolvent, they think Americans are a bunch of cowards, and that we'll run screaming to the exits," Black told Moyers.

Of course, another explanation also exists — one entirely as likely.

It's that the political class in Washington fears that Americans are not a bunch of cowards.

Admit the true scope of banking-system insolvency and the most natural thing in the world would be for Americans to seek to understand exactly what happened.

Suddenly, they'll be learning how every bank in the country gets to create "money" out of thin air, charge big money for that reprocessed thin-air and leverage itself at a nine-to-one ratio of debt-to-a-phantom-reserve. Then, should it go belly up, taxpayers get stuck with the tab. Suddenly, they'll start to understand the actual nature of fractional-reserve banking.

Why, they may even grasp what was widely understood in the days of Thomas Jefferson and Andrew Jackson: the always ultimately predatory nature of central banking — most definitely including America's current Federal Reserve System. After all, for a century now the Fed has regularly produced financial crises ruining millions of honest, trusting Americans.

Yes, there well could be widespread social upheaval. And it would be coming directly at an existing, deeply complicit — and thus alarmed — U.S. political class.

Unfortunately, such a house-cleaning may be the only way that genuine prosperity can return to Nevada.

Steven Miller is the vice president for policy at the Nevada Policy Research Institute.

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