Down the drain

I believe Gov. Arnold Schwarzenegger when he says he’s not depressed about the state’s present financial predicament, as he did in The New York Times Magazine earlier this month. He’s not depressed. He’s scared shitless, or he ought to be. Someone’s done pulled the plug on the Jacuzzi, and the entire global economy is swirling down the drain, with California leading the way.

Forget about the state budget agreement reached earlier this week. That was based on a $26 billion deficit for fiscal year 2009, but if the rule of thumb for the worst downturn since the Great Depression continues to hold, it’s probably more like $50 billion. The resulting layoffs of yet more state employees will only contribute to the decline in economic activity and tax revenue, increasing the velocity of the state’s economic death spiral.

Meanwhile, the last great action hero fiddles while the state burns, making asinine comments to the media, jetting off to Malibu instead of rolling up his sleeves, and sending a volleyball-sized metal sculpture of a bull’s testicles to Senate President Pro Tem Darrell Steinberg, suggesting that Steinberg and his Democratic colleagues in the Legislature grow a pair.

I didn’t see a photograph of the sculpture, but I imagined it to be made of bronze or brass, heavy metal balls in a golden sack. That’s when it hit me.

Golden sack.

Goldman Sachs.

Was Arnold’s gift a secret cry for help?

Thanks to Rolling Stone’s Matt Taibbi, who recently penned an excoriating exposé of Wall Street’s pre-eminent bank holding company, Goldman Sachs has come under increased media scrutiny of late. Taibbi essentially blamed the investment bank for manipulating every recession since the Great Depression. He may not be far off the mark. Few companies have profited as handsomely over the long run.

As investigative journalist Peter Byrne reported in Salon in February 2005, Schwarzenegger has a long history with Goldman Sachs. In fact, he had millions invested in the company before he took office in 2003. Although his investments are now held in a blind trust, undoubtedly a large chunk of it remains with Goldman Sachs, which has underwritten billions of dollars in bonds for the state since Schwarzenegger became governor.

As Byrne noted, if that’s not a conflict of interest, nothing is. Of course, in these days of rampant government corruption, conflicts of interest have become passé, and that’s not why Schwarzenegger has cause to be fearful. He should be frightened because Goldman Sachs and its Wall Street cohorts are on the brink of a breathtaking economic collapse.

Forget about the Goldman Sachs’ much-ballyhooed second-quarter profit and its prediction that the Standard & Poor’s 500-stock index is set to see its biggest second-half rally since 1982. If the company had to declare the true value of the toxic assets on its books today, it would be declared insolvent tomorrow. That goes for most of the world’s major banking and investment institutions, which are sitting on tens of trillions of dollars of securitized mortgage debt that in the wake of the real-estate bubble’s ongoing collapse have become virtually worthless. No one will touch them. That’s why they’re called toxic.

According to Bloomberg News, the Federal Reserve System has already spent some $3 trillion attempting to plug the leak, and has pledged another $5.7 trillion in the future. Even if it’s made up of whole cloth, that’s our money, and no one knows where it’s going. The Fed has refused to disclose which institutions were doled out the first $3 trillion, forcing Bloomberg to sue under the Freedom of Information Act.

As startling as those numbers sound, it may not be enough to prop up the global banking system, which, according to financial experts, may be holding as much as $500 trillion in now-worthless toxic assets, or half-a-quadrillion dollars. No doubt the Federal Reserve will attempt some last-second maneuvers, but sooner or later the banks will be forced to mark their toxic assets to true market value, and when they do, the sucking sound will be deafening.

Schwarzenegger imagines he’s urbane, but he remains a rube at heart, playing to the conservative pro-business, anti-tax rabble that’s led us down the drain. Their days will soon be over. Maybe Steinberg should send the governor a return gift, say, a wax statue of a disheveled celebrity, grabbing his ankles and kissing his ass goodbye.

It’s a shame we’ll all be going down with him.