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Banksters Live Up to the Nickname

June 26th, 2012 Posted in Uncategorized

Jun, 26 2012

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Matt Taibbi has done it again. His latest article in Rolling Stone focused on the case of United States of America v. Carollo, Goldberg and Grimm, in which the Obama Justice Department actually prosecuted some financial crimes. The three defendants worked for GE Capital (the finance arm of General Electric) and were involved in a bid-rigging conspiracy wherein the prices paid by banks to bond issuers were reduced (to the detriment of the local governments who issued those bonds).

The broker at the center of this case was a firm known as CDR. CDR would be hired by a state or local government which was planning a bond issue. Banks would then submit bids which are interest rates paid to the issuer for holding the money until payments became due to the various contractors involved in the project which was the subject of the particular bond. The brokers would tip off a favored bank about the amounts of competing bids in return for a kickback based on the savings made by avoiding an unnecessarily high bid. In the Carollo case, the GE Capital employees were supposed to be competing with other banks who would submit bids to CDR. CDR would then inform the bidders on how to coordinate their bids so that the bid prices could be kept low and the various banks could agree among themselves as to which entity would receive a particular bond issue. Four of the banks which “competed” against GE Capital in the bidding were UBS, Bank of America, JPMorgan Chase and Wells Fargo. Those four banks paid a total of $673 million in restitution after agreeing to cooperate in the government’s case.

The brokers would also pay-off politicians who selected their firm to handle a bond issue. Matt Taibbi gave one example of how former New Mexico Governor Bill Richardson received $100,000 in campaign contributions from CDR. In return, CDR received $1.5 million in public money for services which were actually performed by another broker – at an additional cost.

Needless to say, the mainstream news media had no interest in covering this case. Matt Taibbi quoted a remark made to the jury at the outset of the case by the trial judge, Harold Baer: “It is unlikely, I think, that this will generate a lot of media publicity”. Although the judge’s remark was intended to imply that the subject matter of the case was too technical and lacking in the “sex appeal” of the usual evening news subject, it also underscored the aversion of mainstream news outlets to expose the wrongdoing of their best sponsors: the big banks.

Beyond that, this case exploded a myth – often used by the Justice Department as an excuse for not prosecuting financial crimes. As Taibbi explained at the close of the piece:

There are some who think that the government is limited in how many corruption cases it can bring against Wall Street, because juries can’t understand the complexity of the financial schemes involved. But in USA v. Carollo, that turned out not to be true. “This verdict is proof of that,” says Hausfeld, the antitrust attorney. “Juries can and do understand this material.”

One important lesson to be learned from the Carollo case is a simple fact that the mainstream news media would prefer to ignore: This is but one tiny example of the manner in which business is conducted by the big banks. As Matt Taibbi explained:

The men and women who run these corrupt banks and brokerages genuinely believe that their relentless lying and cheating, and even their anti-competitive cartelstyle scheming, are all legitimate market processes that lead to legitimate price discovery. In this lunatic worldview, the bidrigging scheme was a system that created fair returns for everyone.

* * *

That, ultimately, is what this case was about. Capitalism is a system for determining objective value. What these Wall Street criminals have created is an opposite system of value by fiat. Prices are not objectively determined by collisions of price information from all over the market, but instead are collectively negotiated in secret, then dictated from above

* * *

Last year, the two leading recipients of public bond business, clocking in with more than $35 billion in bond issues apiece, were Chase and Bank of America – who combined had just paid more than $365 million in fines for their role in the mass bid rigging. Get busted for welfare fraud even once in America, and good luck getting so much as a food stamp ever again. Get caught rigging interest rates in 50 states, and the government goes right on handing you billions of dollars in public contracts.

By now we are all familiar with the “revolving door” principle, wherein prosecutors eventually find themselves working for the law firms which represent the same financial institutions which those prosecutors should have dragged into court. At the Securities and Exchange Commission, the same system is in place. Worst of all is the fact that our politicians – who are responsible for enacting laws to protect the public from such criminal enterprises as what was exposed in the Carollo case – are in the business of lining their pockets with “campaign contributions” from those entities. You may have seen Jon Stewart’s coverage of Jamie Dimon’s testimony before the Senate Banking Committee. How dumb do the voters have to be to reelect those fawning sycophants?

Yet it happens . . . over and over again. From the Great Depression to the Savings and Loan scandal to the financial crisis and now this bid-rigging scheme. The culprits never do the “perp walk”. Worse yet, they continue on with “business as usual” partly because the voting public is too brain-dead to care and partly because the mainstream news media avoid these stories. Our political system is incapable of confronting this level of corruption because the politicians from both parties are bought and paid for by the banking cabal. As Paul Farrell of MarketWatch explained:

Seriously, folks, the elections are relevant. Totally. Oh, both sides pretend it matters. But it no longer matters who’s president. Or who’s in Congress. Money runs America. And when it comes to the public interest, money is not just greedy, but myopic, narcissistic and deaf. Money from Wall Street bankers, Corporate CEOs, the Super Rich and their army of 261,000 highly paid mercenary lobbyists. They hedge, place bets on both sides. Democracy is dead.

Why would anyone expect America to solve any of its most pressing problems when the officials responsible for addressing those issues have been compromised by the villains who caused those situations?

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Manifesto

June 13th, 2012 Posted in Uncategorized

Jun, 13 2012

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For the past few years, a central mission of this blog has been to focus on Washington’s unending efforts to protect, pamper and bail out the Wall Street megabanks at taxpayer expense. From Maiden Lane III to TARP and through countless “backdoor bailouts”, the Federal Reserve and the Treasury Department have been pumping money into businesses which should have gone bankrupt in 2008. Worse yet, President Obama and Attorney General Eric Hold-harmless have expressed no interest in bringing charges against those miscreants responsible for causing the financial crisis. The Federal Reserve’s latest update to its Survey of Consumer Finances for 2010 revealed that during the period of 2007-2010, the median family net worth declined by a whopping thirty-eight percent. Despite the massive extent of wealth destruction caused by the financial crisis, our government is doing nothing about it.

I have always been a fan of economist John Hussman of the Hussman Funds, whose Weekly Market Comment essays are frequently referenced on this website. Professor Hussman’s most recent piece, “The Heart of the Matter” serves as a manifesto of how the financial crisis was caused, why nothing was done about it and why it is happening again both in the United States and in Europe. Beyond that, Professor Hussman offers some suggestions for remedying this unaddressed and unresolved set of circumstances. It is difficult to single out a passage to quote because every word of Hussman’s latest Market Comment is precious. Be sure to read it. What I present here are some hints as to the significance of this important essay:

The ongoing debate about the economy continues along largely partisan lines, with conservatives arguing that taxes just aren’t low enough, and the economy should be freed of regulations, while liberals argue that the economy needs larger government programs and grand stimulus initiatives.

Lost in this debate is any recognition of the problem that lies at the heart of the matter: a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.

Specifically, over the past 15 years, the global financial system – encouraged by misguided policy and short-sighted monetary interventions – has lost its function of directing scarce capital toward projects that enhance the world’s standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.

*   *   *

By our analysis, the U.S. economy is presently entering a recession. Not next year; not later this year; but now. We expect this to become increasingly evident in the coming months, but through a constant process of denial in which every deterioration is dismissed as transitory, and every positive outlier is celebrated as a resumption of growth. To a large extent, this downturn is a “boomerang” from the credit crisis we experienced several years ago. The chain of events is as follows:

Financial deregulation and monetary negligence -> Housing bubble -> Credit crisis marked by failure to restructure bad debt -> Global recession -> Government deficits in U.S. and globally -> Conflict between single currency and disparate fiscal policies in Europe -> Austerity -> European recession and credit strains -> Global recession.

In effect, we’re going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks. Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable.

*   *   *

Every major bank is funded partially by depositors, but those deposits typically represent only about 60% of the funding. The rest is debt to the bank’s own bondholders, and equity of its stockholders. When a country like Spain goes in to save a failing bank like Bankia – and does so by buying stock in the bank – the government is putting its citizens in a “first loss” position that protects the bondholders at public expense. This has been called “nationalization” because Spain now owns most of the stock, but the rescue has no element of restructuring at all. All of the bank’s liabilities – even to its own bondholders – are protected at public expense. So in order to defend bank bondholders, Spain is increasing the public debt burden of its own citizens. This approach is madness, because Spain’s citizens will ultimately suffer the consequences by eventual budget austerity or risk of government debt default.

The way to restructure a bank is to take it into receivership, write down the bad assets, wipe out the stockholders and much of the subordinated debt, and then recapitalize the remaining entity by selling it back into the private market. Depositors don’t lose a dime. While the U.S. appropriately restructured General Motors – wiping out stock, renegotiating contracts, and subjecting bondholders to haircuts – the banking system was largely untouched.

*   *   *

If it seems as if the global economy has learned nothing, it is because evidently the global economy has learned nothing. The right thing to do, again, is to take receivership of insolvent banks and wipe out the stock and subordinated debt, using the borrowed funds to protect depositors in the event that the losses run deep enough to eat through the intervening layers of liabilities (which is doubtful), and otherwise using the borrowed funds to stimulate the economy after the restructuring occurs. We’re going to keep having crises until global leaders recognize that short of creating hyperinflation (which also subordinates the public, in this case by destroying the value of currency), there is no substitute for debt restructuring.

For some insight as to why the American megabanks were never taken into temporary receivership, it is useful to look back to February of 2010 when Michael Shedlock (a/k/a“Mish”) provided us with a handy summary of the 224-page Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky). My favorite comment from Mish appeared near the conclusion of his summary:

Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.

My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so. This was done to bail out the banks at any and all cost to the taxpayers.

Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense? Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.

On January 29 2010, David Reilly wrote an article for Bloomberg BusinessWeek concerning the previous week’s hearing before the House Committee on Oversight and Government Reform. After quoting from Reilly’s article, Mish made this observation:

Most know I am not a big believer in conspiracies. I regularly dismiss them. However, this one was clear from the beginning and like all massive conspiracies, it is now in the light of day.

David Reilly began the Bloomberg Business Week piece this way:

The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter. After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner. David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:

By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

At least in the Eurozone there is fear that the taxpayers will never submit to enhanced economic austerity measures, which would force the citizenry into an impoverished existence so that their increased tax burden could pay off the debts incurred by irresponsible bankers. In the United States there is no such concern. The public is much more compliant. Whether that will change is anyone’s guess.

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Return of the POMO Junkies

June 5th, 2012 Posted in Uncategorized

Jun, 05 2012

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Most investors have been lamenting the recent stock market swoon. The Dow Jones Industrial Average has given up all of the gains earned during 2012. The economic reports keep getting worse by the day. Yet, for some people all of this is good news . . .

You might find them scattered along the curbs of Wall Street . . . with glazed eyes . . . British teeth . . . and mysterious lesions on their skin. They approach Wall Street’s upscale-appearing pedestrians, making such requests as: “POMO?” . . . “Late-day rally?” . . . “Animal Spirits?” These desperate souls are the “POMO junkies”. Since the Federal Reserve concluded the last phase of quantitative easing in June of 2011, the POMO junkies have been hopeless. They can’t survive without those POMO auctions, wherein the New York Fed would purchase Treasury securities – worth billions of dollars – on a daily basis. After the auctions, the Primary Dealers would take the sales proceeds to their proprietary trading desks, where the funds would be leveraged and used to purchase high-beta, Russell 2000 stocks. You saw the results: A booming stock market – despite a stalled economy.

Since I first wrote about the POMO junkies last summer, they have resurfaced on a few occasions – only to slink back into the shadows as the rumors of an imminent Quantitative Easing 3 were debunked.

The recent spate of awful economic reports and the resulting stock market nosedive have rekindled hopes that the Federal Reserve will crank-up its printing press once again, for the long-awaited QE 3. Economist John Hussman discussed this situation on Monday:

At this point, the S&P 500 has achieved a cumulative total return of less than 10% since April 2010. Meanwhile, of course, there remains a great deal of faith in the “Bernanke put,” because even though it’s fairly obvious that QE has done nothing durable for the economy or the financial markets over the last couple of years, a hit of QE might at least be good for a few months of “risk on” delirium. If the American public can’t get thoughtful economic leadership, at least Wall Street’s speculative junkies can hope for a little taste of Q from Sugar Daddy.

One of the problems with QE here, however, is that it would essentially represent fiscal policy for the benefit of speculators, at taxpayer expense. To see this, note that the 10-year Treasury yield is now down to less than 1.5%. One wonders how Bernanke would be able to argue, with a straight face, that this is not low enough. Nevertheless, a 10-year bond has a duration of 8 years – meaning that each 100 basis point fluctuation in interest rates is associated with a change of about 8% in the price of the bond. So if you buy the bond and hold it for a full year, an interest rate change of of 1.5/8 = .1875, or less than 20 basis points, is enough to wipe out the annual interest and leave you with a negative total return.

* * *

“QE3 – subsidizing banks and bond speculators at taxpayer expense” – there’s a pithy slogan. That doesn’t mean the Fed will refrain from more of its recklessness (which will be nearly impossible to reverse when it becomes necessary to do so), but does anyone actually believe by now that QE would improve the economy, durably elevate risky assets beyond a few months, or materially relieve global debt strains?

Obviously, the POMO junkies have no such concerns. Beyond that, the Federal Reserve’s “third mandate” – keeping the stock market bubble inflated – will be the primary factor motivating the decision, regardless of whether those asset prices hold for more than a few months.

The POMO junkies are finally going to score. As they do, a tragic number of retail investors will be led to believe that the stock market has “recovered”, only to learn – a few months down the road – that the latest bubble has popped.

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Cliff Notes

May 28th, 2012 Posted in Uncategorized

May, 28 2012

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On May 22, the Congressional Budget Office released its report on how the United States can avoid going off the “fiscal cliff” on January 1, 2013. The report is entitled, “Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013”. Forget about the Mayan calendar and December 21, 2012. The real disaster is scheduled for eleven days later. The CBO provided a brief summary of the 10-page report – what you might call the Cliff Notes version. Here are some highlights:

In fact, under current law, increases in taxes and, to a lesser extent, reductions in spending will reduce the federal budget deficit dramatically between 2012 and 2013 – a development that some observers have referred to as a “fiscal cliff” – and will dampen economic growth in the short term.

* * *

Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects – with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.

As the complete version of the report explained, the consequences of abruptly-imposed, draconian austerity measures while the economy is in a state of anemic growth in the wake of the 2008 financial crisis, could have a devastating impact because incomes will drop, shrinking the tax base and available revenue – the life blood of the United States government:

The weakening of the economy that will result from that fiscal restraint will lower taxable incomes and, therefore, revenues, and it will increase spending in some categories – for unemployment insurance, for instance.

An interesting analysis of the CBO report was provided by Robert Oak of the Economic Populist website. He began with a description of the cliff itself:

What the CBO is referring to is the fiscal cliff. Remember when the budget crisis happened, resulting in the United States losing it’s AAA credit rating? Then, Congress and this administration just punted, didn’t compromise, or better yet, base recommendations on actual economic theory, and allowed automatic spending cuts of $1.2 trillion across the board, to take place instead. These budget cuts will be dramatic and happen in 2012 and 2013.

Spending cuts, especially sudden ones, actually weaken economic growth. This is why austerity has caused a disaster in Europe. Draconian cuts have pushed their economies into not just recessions, but depressions.

The conclusion reached by Robert Oak was particularly insightful:

This report should infuriate Republicans, who earlier wanted to silence the CBO because they were telling the GOP their policies would hurt the economy in so many words. But maybe not. Unfortunately the CBO is not breaking down tax cuts, when there is ample evidence tax cuts for rich individuals do nothing for economic growth. Bottom line though, the CBO is right on in their forecast, draconian government spending cuts will cause an anemic economy to contract.

Although the CBO did offer a good solution for avoiding a drive off the fiscal cliff, it remains difficult to imagine how our dysfunctional government could ever implement these measures:

Or, if policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.

The foregoing passage was obviously part of what Robert Oak had in mind when he mentioned that the CBO report would “infuriate Republicans”. Any plans to “widen the deficit” would be subject to the same righteous indignation as an abortion festival or a national holiday for gay weddings. Nevertheless, Mitt Romney accidentally acknowledged the validity of the logic underlying the CBO’s concern. Bill Black had some fun with Romney’s admission by writing a fantastic essay on the subject:

Romney has periodic breakdowns when asked questions about the economy because he sometimes forgets the need to lie. He forgets that he is supposed to treat austerity as the epitome of economic wisdom. When he responds quickly to questions about austerity he slips into default mode and speaks the truth – adopting austerity during the recovery from a Great Recession would (as in Europe) throw the nation back into recession or depression. The latest example is his May 23, 2012 interview with Mark Halperin in Time magazine.

“Halperin: Why not in the first year, if you’re elected — why not in 2013, go all the way and propose the kind of budget with spending restraints, that you’d like to see after four years in office? Why not do it more quickly?

Romney: Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%. That is by definition throwing us into recession or depression. So I’m not going to do that, of course.”

Romney explains that austerity, during the recovery from a Great Recession, would cause catastrophic damage to our nation. The problem, of course, is that the Republican congressional leadership is committed to imposing austerity on the nation and Speaker Boehner has just threatened that Republicans will block the renewal of the debt ceiling in order to extort Democrats to agree to austerity – severe cuts to social programs. Romney knows this could “throw us into recession or depression” and says he would never follow such a policy.

* * *

Later in the interview, Romney claims that federal budgetary deficits are “immoral.” But he has just explained that using austerity for the purported purpose of ending a deficit would cause a recession or depression. A recession or depression would make the deficit far larger. That means that Romney should be denouncing austerity as “immoral” (as well as suicidal) because it will not simply increase the deficit (which he claims to find “immoral” because of its impact on children) but also dramatically increase unemployment, poverty, child poverty and hunger, and harm their education by causing more teachers to lose their jobs and more school programs to be cut.

Mitt Romney is beginning to sound as though he has his own inner Biden, who spontaneously speaks out in an unrestrained manner, sending party officials into “damage control” mode.

This could turn out to be an interesting Presidential campaign, after all.

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Get Ready for the Next Financial Crisis

May 21st, 2012 Posted in Uncategorized

May, 21 2012

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It was almost one year ago when Bloomberg News reported on these remarks by Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group:

“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan inTokyotoday in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”

I have frequently complained about the failed attempt at financial reform, known as the Dodd-Frank Act. Two years ago, I wrote a piece entitled, “Financial Reform Bill Exposed As Hoax” wherein I expressed my outrage that the financial reform effort had become a charade. The final product resulting from all of the grandstanding and backroom deals – the Dodd–Frank Act – had become nothing more than a hoax on the American public. My essay included the reactions of five commentators, who were similarly dismayed. I concluded the posting with this remark:

The bill that is supposed to save us from another financial crisis does nothing to accomplish that objective. Once this 2,000-page farce is signed into law, watch for the reactions. It will be interesting to sort out the clear-thinkers from the Kool-Aid drinkers.

During the past few days, there has been a chorus of commentary calling for a renewed effort toward financial reform. We have seen a torrent of reports on the misadventures of The London Whale at JP Morgan Chase, whose outrageous derivatives wager has cost the firm uncounted billions. By the time this deal is unwound, the originally-reported loss of $2 billion will likely be dwarfed.

Former Secretary of Labor, Robert Reich, has made a hobby of writing blog postings about “what President Obama needs to do”. Of course, President Obama never follows Professor Reich’s recommendations, which might explain why Mitt Romney has been overtaking Obama in the opinion polls. On May 16, Professor Reich was downright critical of the President, comparing him to the dog in a short story by Sir Arthur Conan Doyle involving Sherlock Holmes, Silver Blaze. The President’s feeble remarks about JPMorgan’s latest derivatives fiasco overlooked the responsibility of Jamie Dimon – obviously annoying Professor Reich, who shared this reaction:

Not a word about Jamie Dimon’s tireless campaign to eviscerate the Dodd-Frank financial reform bill; his loud and repeated charge that the Street’s near meltdown in 2008 didn’t warrant more financial regulation; his leadership of Wall Street’s brazen lobbying campaign to delay the Volcker Rule under Dodd-Frank, which is still delayed; and his efforts to make that rule meaningless by widening a loophole allowing banks to use commercial deposits to “hedge” (that is, make offsetting bets) their derivative trades.

Nor any mention Dimon’s outrageous flaunting of Dodd-Frank and of the Volcker Rule by setting up a special division in the bank to make huge (and hugely profitable, when the bets paid off) derivative trades disguised as hedges.

Nor Dimon’s dual role as both chairman and CEO of JPMorgan (frowned on my experts in corporate governance) for which he collected a whopping $23 million this year, and $23 million in 2010 and 2011 in addition to a $17 million bonus.

Even if Obama didn’t want to criticize Dimon, at the very least he could have used the occasion to come out squarely in favor of tougher financial regulation. It’s the perfect time for him to call for resurrecting the Glass-Steagall Act, of which the Volcker Rule – with its giant loophole for hedges – is a pale and inadequate substitute.

And for breaking up the biggest banks and setting a cap on their size, as the Dallas branch of the Federal Reserve recommended several weeks ago.

This was Professor Reich’s second consecutive reference within a week to The Dallas Fed’s Annual Report, which featured an essay by Harvey Rosenblum, the head of the Dallas Fed’s Research Department and the former president of the National Association for Business Economics. Rosenblum’s essay provided an historical analysis of the events leading up to the 2008 financial crisis and the regulatory efforts which resulted from that catastrophe – particularly the Dodd-Frank Act. Beyond that, Rosenblum emphasized why those “too-big-to-fail” (TBTF) banks have actually grown since the enactment of Dodd-Frank:

The TBTF survivors of the financial crisis look a lot like they did in 2008. They maintain corporate cultures based on the short-term incentives of fees and bonuses derived from increased oligopoly power. They remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation. Just as important, their significant presence in dozens of states confers enormous political clout in their quest to refocus banking statutes and regulatory enforcement to their advantage.

Last year, former Kansas City Fed-head, Thomas Hoenig discussed the problems created by the TBTFs, which he characterized as “systemically important financial institutions” – or “SIFIs”:

… I suggest that the problem with SIFIs is they are fundamentally inconsistent with capitalism. They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril.

Although the huge derivatives loss by JPMorgan Chase has motivated a number of commentators to issue warnings about the risk of another financial crisis, there had been plenty of admonitions emphasizing the risks of the next financial meltdown, which were published long before the London Whale was beached. Back in January, G. Timothy Haight wrote an inspiring piece for the pro-Republican Orange County Register, criticizing the failure of our government to address the systemic risk which brought about the catastrophe of 2008:

In response to widespread criticism associated with the financial collapse, Congress has enacted a number of reforms aimed at curbing abuses at financial institutions. Legislation, such as the Dodd-Frank and Consumer Protection Act, was trumpeted as ensuring that another financial meltdown would be avoided. Such reactionary regulation was certain to pacify U.S. taxpayers.

Unfortunately, legislation enacted does not solve the fundamental problem. It simply provides cover for those who were asleep at the wheel, while ignoring the underlying cause of the crisis.

More than three years after the calamity, have we solved the dilemma we found ourselves in late 2008? Can we rest assured that a future bailout will not occur? Are financial institutions no longer “too big to fail?”

Regrettably, the answer, in each case, is a resounding no.

Last month, Michael T. Snyder of The Economic Collapse blog wrote an essay for the Seeking Alpha website, enumerating the 22 Red Flags Indicating Serious Doom Is Coming for Global Financial Markets. Of particular interest was red flag #22:

The 9 largest U.S. banks have a total of 228.72 trillion dollars of exposure to derivatives. That is approximately 3 times the size of the entire global economy. It is a financial bubble so immense in size that it is nearly impossible to fully comprehend how large it is.

The multi-billion dollar derivatives loss by JPMorgan Chase demonstrates that the sham “financial reform” cannot prevent another financial crisis. The banks assume that there will be more taxpayer-funded bailouts available, when the inevitable train wreck occurs. The Federal Reserve will be expected to provide another round of quantitative easing to keep everyone happy. As a result, nothing will be done to strengthen financial reform as a result of this episode. The megabanks were able to survive the storm of indignation in the wake of the 2008 crisis and they will be able ride-out the current wave of public outrage.

As Election Day approaches, Team Obama is afraid that the voters will wake up to the fact that the administration itself is to blame for sabotaging financial reform. They are hoping that the public won’t be reminded that two years ago, Simon Johnson (former chief economist of the IMF) wrote an essay entitled, “Creating the Next Crisis” in which he provided this warning:

On the critical dimension of excessive bank size and what it implies for systemic risk, there was a concerted effort by Senators Ted Kaufman and Sherrod Brown to impose a size cap on the largest banks – very much in accordance with the spirit of the original “Volcker Rule” proposed in January 2010 by Obama himself.

In an almost unbelievable volte face, for reasons that remain somewhat mysterious, Obama’s administration itself shot down this approach. “If enacted, Brown-Kaufman would have broken up the six biggest banks inAmerica,” a senior Treasury official said. “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”

Whether the world economy grows now at 4% or 5% matters, but it does not much affect our medium-term prospects. The US financial sector received an unconditional bailout – and is not now facing any kind of meaningful re-regulation. We are setting ourselves up, without question, for another boom based on excessive and reckless risk-taking at the heart of the world’s financial system. This can end only one way: badly.

The public can forget a good deal of information in two years. They need to be reminded about those early reactions to the Obama administration’s subversion of financial reform. At her Naked Capitalism website, Yves Smith served up some negative opinions concerning the bill, along with her own cutting commentary in June of 2010:

I want the word “reform” back. Between health care “reform” and financial services “reform,” Obama, his operatives, and media cheerleaders are trying to depict both initiatives as being far more salutary and far-reaching than they are. This abuse of language is yet another case of the Obama Administration using branding to cover up substantive shortcomings. In the short run it might fool quite a few people, just as BP’s efforts to position itself as an environmentally responsible company did.

* * *

So what does the bill accomplish? It inconveniences banks around the margin while failing to reduce the odds of a recurrence of a major financial crisis.

On May 17, Noam Scheiber explained why the White House is ”sweating” the JPMorgan controversy:

In particular, the transaction appears to have been a type of proprietary trade – which is to say, a trade that a bank undertakes to make money for itself, not its clients. And these trades were supposed to have been outlawed by the “Volcker Rule” provision of Obama’s financial reform law, at least at federally-backed banks like JP Morgan. The administration is naturally worried that, having touted the law as an end to the financial shenanigans that brought us the 2008 crisis, it will look feckless instead.

* * *

But it turns out that there’s an additional twist here. The concern for the White House isn’t just that the law could look weak, making it a less than compelling selling point for Obama’s re-election campaign. It’s that the administration could be blamed for the weakness. It’s one thing if you fought for a tough law and didn’t entirely succeed. It’s quite another thing if it starts to look like you undermined the law behind the scenes. In that case, the administration could look duplicitous, not merely ineffectual. And that’s the narrative you see the administration trying to preempt . . .

When the next financial crisis begins, be sure to credit President Obama as the Facilitator-In-Chief.

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Dumping On The Dimon Dog

May 14th, 2012 Posted in Uncategorized

May, 14 2012

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The Dimon Dog has been eating crow for the past few days, following a very public humiliation. The outspoken critic of the Dodd-Frank Wall Street Reform and Consumer Protection Act found himself explaining a $2 billion loss sustained by his firm, JPMorgan Chase, as a result of involvement in the very type of activity the Act’s “Volcker Rule” was intended to prevent. Financial industry lobbyists have been busy, frustrating regulatory attempts to implement Dodd-Frank’s provisions which call for stricter regulation of securities trading and transactions involving derivatives. Appropriately enough, it was an irresponsible derivatives trading strategy which put Jamie Dimon on the hot seat. The widespread criticism resulting from this episode was best described by Lizzie O’Leary (@lizzieohreally) with a single-word tweet: Dimonfreude.

The incident in question involved a risky bet made by a London-based trader named Bruno Iksil – nicknamed “The London Whale” – who works in JP Morgan’s Chief Investment Office, or CIO. An easy-to-understand explanation of this trade was provided by Heidi Moore, who emphasized that Iksil’s risky position was no secret before it went south:

Everyone knew. Thousands of people. Iksil’s bets have been well known ever since Bloomberg’s Stephanie Ruhle broke the news in early April. A trader at rival bank, Bank of America Merrill Lynch wrote to clients back then, saying that Iksil’s huge bet was attracting attention and hedge funds believed him to be too optimistic and were betting against him, waiting for Iksil to crash. The Wall Street Journal reported that the Merrill Lynch trader wrote, “Fast money has smelt blood.”

When the media, analysts and other traders raised concerns on JP Morgan’s earnings conference call last month, JP Morgan CEO Jamie Dimon dismissed their worries as “a tempest in a teapot.”

Dimon’s smug attitude about the trade (prior to its demise) was consistent with the hubris he exhibited while maligning Dodd-Frank, thus explaining why so many commentators took delight in Dimon’s embarrassment. On May 11, Kevin Roose of DealBook offered a preliminary round-up of the criticism resulting from this episode:

In a research note, a RBC analyst, Gerard Cassidy, called the incident a “hit to credibility” at the bank, while the Huffington Post’s Mark Gongloff said, “Funny thing: Some of the constraints of the very Dodd-Frank financial reform act Dimon hates could have prevented it.” Slate’s Matthew Yglesias pointed back to statements Mr. Dimon made in opposition to the Volcker Rule and other proposed regulations, and quipped, “Indeed, if only JPMorgan were allowed to run a thinner capital buffer and riskier trades. Then we’d all feel safe.”

Janet Tavakoli pointed out that this event is simply the most recent chapter in Dimon’s history of allowing the firm to follow risky trading strategies:

At issue is corporate governance at JPMorgan and the ability of its CEO, Jamie Dimon, to manage its risk. It’s reasonable to ask whether any CEO can manage the risks of a bank this size, but the questions surrounding Jamie Dimon’s management are more targeted than that. The problem Jamie Dimon has is that JPMorgan lost control in multiple areas. Each time a new problem becomes public, it is revealed that management controls weren’t adequate in the first place.

* * *

Jamie Dimon’s problem as Chairman and CEO–his dual role raises further questions about JPMorgan’s corporate governance—is that just two years ago derivatives trades were out of control in his commodities division. JPMorgan’s short coal position was over sized relative to the global coal market. JPMorgan put this position on while the U.S. is at war. It was not a customer trade; the purpose was to make money for JPMorgan. Although coal isn’t a strategic commodity, one should question why the bank was so reckless.

After trading hours on Thursday of this week, Jamie Dimon held a conference call about $2 billion in mark-to-market losses in credit derivatives (so far) generated by the Chief Investment Office, the bank’s “investment” book. He admitted:

“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored.”

At The New York Times, Gretchen Morgenson focused on the karmic significance of Dimon’s making such an admission after having belittled Paul Volcker and Dallas FedHead Richard Fisher at a party in Dallas last month:

During the party, Mr. Dimon took questions from the crowd, according to an attendee who spoke on condition of anonymity for fear of alienating the bank. One guest asked about the problem of too-big-to-fail banks and the arguments made by Mr. Volcker and Mr. Fisher.

Mr. Dimon responded that he had just two words to describe them: “infantile” and “nonfactual.” He went on to lambaste Mr. Fisher further, according to the attendee. Some in the room were taken aback by the comments.

* * *

The hypocrisy is that our nation’s big financial institutions, protected by implied taxpayer guarantees, oppose regulation on the grounds that it would increase their costs and reduce their profit. Such rules are unfair, they contend. But in discussing fairness, they never talk about how fair it is to require taxpayers to bail out reckless institutions when their trades imperil them. That’s a question for another day.

AND the fact that large institutions arguing against transparency in derivatives trading won’t acknowledge that such rules could also save them from themselves is quite the paradox.

Dimon’s rant at the Dallas party was triggered by a fantastic document released by the Federal Reserve Bank of Dallas on March 21: its 2011 Annual Report, featuring an essay entitled, “Choosing the Road to Prosperity – Why We Must End Too Big to Fail – Now”. The essay was written by Harvey Rosenblum, the head of the Dallas Fed’s Research Department and the former president of the National Association for Business Economics. Rosenblum’s essay provided an historical analysis of the events leading up to the 2008 financial crisis and the regulatory efforts which resulted from that catastrophe – particularly the Dodd-Frank Act.

With his own criticism of Dimon’s attitude, Robert Reich invoked the position asserted by the Dallas Fed:

And now – only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent, pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression – J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, and poorly-executed and excessively risky trades that caused the crisis in the first place.

In light of all this, Jamie Dimon’s promise that J.P. Morgan will “fix it and move on” is not reassuring.

The losses here had been mounting for at least six weeks, according to Morgan. Where was the new transparency that’s supposed to allow regulators to catch these things before they get out of hand?

* * *

But let’s also stop hoping Wall Street will mend itself. What just happened at J.P. Morgan – along with its leader’s cavalier dismissal followed by lame reassurance – reveals how fragile and opaque the banking system continues to be, why Glass-Steagall must be resurrected, and why the Dallas Fed’s recent recommendation that Wall Street’s giant banks be broken up should be heeded.

At Salon, Andrew Leonard focused on the embarrassment this episode could bring to Mitt Romney:

Because if anyone is going to come out of this mess looking even stupider than Jamie Dimon, it’s got to be Mitt Romney – the presidential candidate actively campaigning on a pledge to repeal Dodd-Frank.

Perhaps Mr. Romney might want to consider strapping The Dimon Dog to the roof of his car for a little ride to Canada.

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When Pat Robertson Gets It Right and Obama Gets It Wrong

May 7th, 2012 Posted in Uncategorized

May, 07 2012

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Of course, televangelist Pat Robertson says lots of strange things. The host of the Christian Broadcasting Network’s program, The 700 Club has drawn criticism for such absurd statements as his claim that Hurricane Katrina was sent by God to punish America for leaglized abortion as well as his 2003 suggestion that State Department headquarters should be blown-up with a nuclear weapon.

Given that background, it must be particularly painful for President Obama when Pat Roberson is congratulated for speaking out sensibly on an issue which Obama is too timid to address. Beyond that, when Robertson asserts a position which is supported by clear-thinking, prominent members of society, it must be particularly embarrassing for a President who has abdicated the “bully pulpit”.

Pat Robertson turned some heads in March, when he spoke out in favor of marijuana legalization. Jesse McKinley of The New York Times discussed the reaction to a pro-legalization statement made by Robertson during a broadcast of The 700 Club:

Mr. Robertson’s remarks were hailed by pro-legalization groups, who called them a potentially important endorsement in their efforts to roll back marijuana penalties and prohibitions, which residents of Colorado and Washington will vote on this fall.

“I love him, man, I really do,” said Neill Franklin, executive director of Law Enforcement Against Prohibition, a group of current and former law enforcement officials who oppose the drug war. “He’s singing my song.”

* * *

Mr. Franklin, who is a Christian, said Mr. Robertson’s position was actually in line with the Gospel. “If you follow the teaching of Christ, you know that Christ is a compassionate man,” he said. “And he would not condone the imprisoning of people for nonviolent offenses.”

* * *

And while Mr. Robertson said his earlier hints at support for legalization had led to him being “assailed by those who thought that it was terrible that I had forsaken the straight and narrow,” he added that he was not worried about criticism this time around.

“I just want to be on the right side,” he said. “And I think on this one, I’m on the right side.”

It appears as though Pat Robertson is on the right side of another issue, with his recent comment about the Obama Justice Department’s failure to prosecute those responsible for causing the financial crisis. While reading a great posting on Washington’s Blog about institutional corruption, I encountered a link to a piece by James Crugnale of the Mediaite blog, which focused on Robertson’s praise of Iceland for prosecuting its banksters and setting an example for countries such as the United States:

“Guess what country is getting itself out of a financial problem by some draconian measures?” Robertson asked his co-host Terry Meeuwsen. “Greece?” she asked. “No, not even close. Iceland!” Robertson exclaimed. “They are putting people in jail. Prime ministers are being indicted. They are going after banks. The people said the banks are ripping us off. We don’t like what they did, and they brought our country to ruin. Suddenly, Iceland is turning around and they look like a big success story!”

“Think we could learn something?” Meeuwsen asked.

“We sure could!” Roberson continued. “We could start putting all of those bankers in jail. There was not one banker prosecuted and so many people were lying, and so-called “no-doc loans” and liars’ loans, and none of them have been held accountable. I’m not for putting people in jail. I’m sick of these – we’ve got too many penalties. Too many penalties, too many criminal sanctions, too many people in prison. But here is an opportunity for the people who wanted, you know, to enforce laws, to enforce that one. There must be some laws against lying on documents. I’m sure there are.”

“Lying to banks is a super no-no,” he added. “It has criminal sanctions, but nobody so far has had to pay the price, but Iceland is leading the way and their GDP is growing, and all of a sudden, they were in a terrible mess, terrible mess, and look what is happening!”

With the release of the Department of Labor’s non-farm payrolls report for April, attention is again being focused on the issue of whether President Obama did enough to help the country recover from the financial crisis. As the aforementioned Washington’s Blog essay made clear, the institutional corruption facilitated by the Obama administration’s failure to prosecute the culprits who caused the financial meltdown has brought even more harm to the American economy. Consider this passage from the Washington’s Blog piece:

Nobel Prize winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won’t recover:

The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that’s really the problem that’s going on.

***

I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That’s the point. There were victims all over the world.

***

Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.

Think about it: Joe Stiglitz and Pat Robertson are on the same page, while President Obama is somewhere else. Yikes!

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Christina Romer Was Right

May 5th, 2012 Posted in Uncategorized

May, 05 2012

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Now it’s official. Christina Romer was right. The signs that she was about to be proven correct had been turning up everywhere. When Charles Kaldec of Forbes reminded us – yet again – of President Obama’s willful refusal to seriously consider the advice of the former Chair of his Council of Economic Advisers, it became apparent that something was about to happen . . .

On Friday morning, the highly-anticipated non-farm payrolls report for April was released by the Department of Labor’s Bureau of Labor Statistics (BLS). Although economists had been anticipating an increase of 165,000 jobs during the past month, the report disclosed that only 115,000 jobs were added. In other words, the headline number was 50,000 less than the anticipated figure, missing economists’ expectations by a whopping 31 percent. The weak 115,000 total failed to match the 120,000 jobs added in March. Worse yet, even if payrolls were expanding at twice that rate, it would take more than five years to significantly reduce the jobs backlog and create new jobs to replace the 5.3 million lost during the recession.

Because this is an election year, Republicans are highlighting the ongoing unemployment crisis as a failure of the Obama Presidency. On Friday evening’s CNN program, Anderson Cooper 360, economist Paul Krugman insisted that this crisis has resulted from Republican intransigence. Bohemian Grove delegate David Gergen rebutted Krugman’s claim by emphasizing that Obama’s 2009 economic stimulus program was inadequate to address the task of bringing unemployment back to pre-crisis levels. What annoyed me about Gergen’s response was his dishonest implication that President Obama’s semi-stimulus was Christina Romer’s brainchild. Nothing could be further from the truth. The stimulus program proposed by Romer would have involved a more significant, $1.8 trillion investment. Beyond that, the fact that unemployment continues for so many millions of people who lost their jobs during the recession is precisely because of Barack Obama’s decision to ignore Christina Romer. I have been groaning about that decision for a long time, as I discussed here and here.

My February 13 discussion of Noam Scheiber’s book, The Escape Artists, demonstrated how abso-fucking-lutely wrong David Gergen was when he tried to align Christina Romer with Obama’s stimulus:

The book tells the tale of a President in a struggle to create a centrist persona, with no roadmap of his own. In fact, it was Obama’s decision to follow the advice of Peter Orszag, to the exclusion of the opinions offered by Christina Romer and Larry Summers – which prolonged the unemployment crisis.

* * *

The Escape Artists takes us back to the pivotal year of 2009 – Obama’s first year in the White House. Noam Scheiber provided us with a taste of his new book by way of an article published in The New Republic entitled, “Obama’s Worst Year”. Scheiber gave the reader an insider’s look at Obama’s clueless indecision at the fork in the road between deficit hawkishness vs. economic stimulus. Ultimately, Obama decided to maintain the illusion of centrism by following the austerity program suggested by Peter Orszag:

BACK IN THE SUMMER of 2009, David Axelrod, the president’s top political aide, was peppering White House economist Christina Romer with questions in preparation for a talk-show appearance. With unemployment nearing 10 percent, many commentators on the left were second-guessing the size of the original stimulus, and so Axelrod asked if it had been big enough. “Abso-fucking-lutely not,” Romer responded. She said it half-jokingly, but the joke was that she would use the line on television. She was dead serious about the sentiment. Axelrod did not seem amused.

For Romer, the crusade was a lonely one. While she believed the economy needed another boost in order to recover, many in the administration were insisting on cuts. The chief proponent of this view was budget director Peter Orszag. Worried that the deficit was undermining the confidence of businessmen, Orszag lobbied to pare down the budget in August, six months ahead of the usual budget schedule. . . .

The debate was not only a question of policy. It was also about governing style – and, in a sense, about the very nature of the Obama presidency. Pitching a deficit-reduction plan would be a concession to critics on the right, who argued that the original stimulus and the health care bill amounted to liberal overreach. It would be premised on the notion that bipartisan compromise on a major issue was still possible. A play for more stimulus, on the other hand, would be a defiant action, and Obama clearly recognized this. When Romer later urged him to double-down, he groused, “The American people don’t think it worked, so I can’t do it.”

That’s a fine example of great leadership – isn’t it? “The American people don’t think it worked, so I can’t do it.” In 2009, the fierce urgency of the unemployment and economic crises demanded a leader who would not feel intimidated by the sheeple’s erroneous belief that the Economic Recovery Act had not “worked”.

Ron Suskind’s book, Confidence Men is another source which contradicts David Gergen’s attempt to characterize Obama’s stimulus as Romer’s baby. Last fall, Berkeley economics professor, Brad DeLong had been posting and discussing excerpts from the book at his own website, Grasping Reality With Both Hands. On September 19, Professor DeLong posted a passage from Suskind’s book, which revealed Obama’s expressed belief (in November of 2009) that high unemployment was a result of productivity gains in the economy. Both Larry Summers (Chair of the National Economic Council) and Christina Romer (Chair of the Council of Economic Advisers) were shocked and puzzled by Obama’s ignorance on this subject:

“What was driving unemployment was clearly deficient aggregate demand,” Romer said. “We wondered where this could be coming from. We both tried to convince him otherwise. He wouldn’t budge.”

Obama’s willful refusal to heed the advice of Cristina Romer has facilitated the persistence of our nation’s unemployment problem. As Ron Suskind remarked in the previously-quoted passage:

The implications were significant. If Obama felt that 10 percent unemployment was the product of sound, productivity-driven decisions by American business, then short-term government measures to spur hiring were not only futile but unwise.

There you have it. Despite the efforts of Obama’s apologists to blame Larry Summers or others on the President’s economic team for persistent unemployment, it wasn’t simply a matter of “the buck stopping” on the President’s desk. Obama himself has been the villain, hypocritically advocating a strategy of “trickle-down economics” – in breach of his campaign promise to do the exact opposite.

As Election Day approaches, it becomes increasingly obvious that the unemployment situation will persist through autumn – and it could get worse. This is not Christina Romer’s fault. It is President Obama’s legacy. Christina Romer was right and President Obama was wrong.

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Seeing Through Obama

April 30th, 2012 Posted in Uncategorized

Apr, 30 2012

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Now that Mitt Romney has secured the Republican presidential nomination, commentators are focusing on the question of whether the candidate can motivate the conservative Republican base to vote for the “Massachusetts moderate” in November.

Meanwhile, it is becoming obvious that after three years in the White House, Barack Obama has managed to alienate the liberal base of the Democratic Party. The Firedog Lake website has been among the most vocal, left-leaning blogs to regularly criticize the President. The site’s publisher, Jane Hamsher, has picked up on Public Citizen’s campaign against the Trans-Pacific Partnership, which Obama is attempting to sneak past the public before November. On April 27, Ms. Hamsher provided us with this warning:

The White House wants to fast track the Trans-Pacific Partnership (TPP) “free trade” agreement with Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam. Japan is waiting in the wings, Canada and Mexico want in, Taiwan has announced its intention to meet membership requirements and China says it will “earnestly study” whether to seek entry into the agreement.

Basically, the TPP is NAFTA on steroids. The White House wants to reach a deal prior to the election because they know all the apparatchiks feeding on the $1 billion in Obama campaign money flowing through the system will launch tribalistic attacks on anyone organizing against it (activists, labor unions, workers) for “helping Mitt Romney win” – thus facilitating its easy passage.

* * *

At an April 4 press conference in the Rose Garden, President Obama said that TPP “could be a real model for the world.” Earlier this month the US limited the ability of public interest groups to have input into the process. So much for the “most transparent administration ever.”

At her Naked Capitalism blog, Yves Smith introduced a video clip of Matt Stoller’s appearance on Cenk Uygur’s television program with the following anecdote:

Matt Stoller, in this video clip from an interview last week with Cenk Uygur (hat tip Doug Smith), sets forth what should be widely accepted truths about Obama: that he’s an aggressive proponent of policies that favor the 1%. Yet soi disant progressives continue to regard him as an advocate of their interests, when at best, all he does is pander to them.

It reminds me of a conversation I had with a black woman after an Occupy Wall Street Alternative Banking Group meeting. She was clearly active in New York City housing politics and knowledgeable about policy generally. I started criticizing Obama’s role in the mortgage settlement. She said:

I have trouble with members of my community. I think Obama needs not to be President. I think he needs to be impeached. But no one in my community wants to hear that. I tell them it’s like when your mother sees you going out with someone who is no good for you.

“Why don’t you leave him? What does he do for you?”

“But Momma, I love him.”

“He knocked you down the stairs, took your keys, drove your car to Florida, ran up big bills on your credit card, and Lord only knows what else he did when he was hiding from you.”

“But Momma, I still love him.”

Her story applies equally well to the oxymoron of the Establishment Left in America. Obama is not only not their friend, but he abuses them, yet they manage to forgive all and come back for more.

In an article published by The Nation, Naomi Klein pulled the rose-colored glasses off the faces of many Obama fans with this review of the President’s performance so far:

After nine months in office, Obama has a clear track record as a global player. Again and again, US negotiators have chosen not to strengthen international laws and protocols but rather to weaken them, often leading other rich countries in a race to the bottom.

After discussing Obama’s failure to take a leading role to promote global efforts to combat pollution, or to promote human rights, Ms. Klein moved on to highlight Obama’s subservience to the financial oligarchy:

And then there are the G-20 summits, Obama’s highest-profile multilateral engagements. When one was held in London in April, it seemed for a moment that there might be some kind of coordinated attempt to rein in transnational financial speculators and tax dodgers. Sarkozy even pledged to walk out of the summit if it failed to produce serious regulatory commitments. But the Obama administration had no interest in genuine multilateralism, advocating instead for countries to come up with their own plans (or not) and hope for the best – much like its reckless climate-change plan. Sarkozy, needless to say, did not walk anywhere but to the photo session to have his picture taken with Obama.

Of course, Obama has made some good moves on the world stage – not siding with the coup government in Honduras, supporting a UN Women’s Agency… But a clear pattern has emerged: in areas where other wealthy nations were teetering between principled action and negligence, US interventions have tilted them toward negligence. If this is the new era of multilateralism, it is no prize.

While watching Saturday evening’s White House Correspondents’ Dinner, I was particularly impressed by Jimmy Kimmel’s face-to-face confrontation with President Obama concerning the administration’s crackdown on medical marijuana clinics. One of Obama’s most outspoken critics from the left – Constitutional lawyer Glenn Greenwald – pulled no punches while upbraiding the President for yet another broken campaign promise:

President Obama gave an interview to Rolling Stone‘s Jann Wenner this week and was asked about his administration’s aggressive crackdown on medical marijuana dispensaries, including ones located in states where medical marijuana is legal and which are licensed by the state; this policy is directly contrary to Obama’s campaign pledge to not “use Justice Department resources to try and circumvent state laws about medical marijuana.” Here’s part of the President’s answer:

I never made a commitment that somehow we were going to give carte blanche to large-scale producers and operators of marijuana – and the reason is, because it’s against federal law. I can’t nullify congressional law. I can’t ask the Justice Department to say, “Ignore completely a federal law that’s on the books” . . . .

The only tension that’s come up – and this gets hyped up a lot – is a murky area where you have large-scale, commercial operations that may supply medical marijuana users, but in some cases may also be supplying recreational users. In that situation, we put the Justice Department in a very difficult place if we’re telling them, “This is supposed to be against the law, but we want you to turn the other way.” That’s not something we’re going to do.

Aside from the fact that Obama’s claim about the law is outright false – as Jon Walker conclusively documents, the law vests the Executive Branch with precisely the discretion he falsely claims he does not have to decide how drugs are classified – it’s just extraordinary that Obama is affirming the “principle” that he can’t have the DOJ “turn the other way” in the face of lawbreaking.

* * *

The same person who directed the DOJ to shield torturers and illegal government eavesdroppers from criminal investigation, and who voted to retroactively immunize the nation’s largest telecom giants when they got caught enabling criminal spying on Americans, and whose DOJ has failed to indict a single Wall Street executive in connection with the 2008 financial crisis or mortgage fraud scandal, suddenly discovers the imperatives of The Rule of Law when it comes to those, in accordance with state law, providing medical marijuana to sick people with a prescription.

It’s becoming obvious that Mitt Romney is not the only candidate who will have to worry about whether his party’s “base” will bother to stand in line at the polls in November, to vote for a candidate who does not find it necessary to accommodate the will of the voters who elect him.

2008 financial crisis, Barack Obama, Cenk Uygur, centrist blog, climate change, Democratic Party, DOJ, financial oligarchy, Firedog Lake, free trade agreement, G-20, Glenn Greenwald, Jane Hamsher, Jann Wenner, Jimmy Kimmel, John T Burke Jr, Justice Department, left-leaning blogs, liberal base, London G-20 summit, Massachusetts moderate, Matt Stoller, medical marijuana, Mitt Romney, mortgage fraud, mortgage settlement, multilateralism, NAFTA, Naked Capitalism, Naomi Klein, Obama Administration, Obama campaign money, Occupy Wall Street, progressives, Public Citizen, public interest groups, Republican base, Republican nomination, Rolling Stone, Rose Garden, rule of law, Sarkozy, The Nation, TPP, Trans-Pacific Partnership, transnational financial speculators, Wall Street, White House, White House Correspondents Dinner, Yves Smith

Austeri-FAIL

April 26th, 2012 Posted in Uncategorized

Apr, 26 2012

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I have never accepted the idea that economic austerity could be at all useful in resolving our unending economic crisis. I posted my rant about this subject on December 19, 2011:

The entire European economy is on its way to hell, thanks to an idiotic, widespread belief that economic austerity measures will serve as a panacea for the sovereign debt crisis. The increasing obviousness of the harm caused by austerity has motivated its proponents to crank-up the “John Maynard Keynes was wrong” propaganda machine. You don’t have to look very far to find examples of that stuff. On any given day, the Real Clear Politics (or Real Clear Markets) website is likely to be listing at least one link to such a piece. Those commentators are simply trying to take advantage of the fact that President Obama botched the 2009 economic stimulus effort. Many of us realized – a long time ago – that Obama’s stimulus measures would prove to be inadequate. In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I pointed out that another stimulus program would be necessary because the American Recovery and Reinvestment Act of 2009 was not going to accomplish its intended objective. Beyond that, it was already becoming apparent that the stimulus program would eventually be used to support the claim that Keynesian economics doesn’t work. Economist Stephanie Kelton anticipated that tactic in a piece she published at the New Economic Perspectives website . . .

It has finally become apparent to most rational thinkers that economic austerity is of no use to any national economy’s attempts to recover from a severe recession. There have been loads of great essays published on the subject this week and I would like to direct you to a few of them.

Henry Blodget of The Business Insider wrote a great piece which included this explanation:

This morning brings news that Europe may finally be beginning to soften on the “austerity” philosophy that has brought it nothing but misery over the past several years.

The “austerity” idea, you’ll remember, was that the huge debt and deficit problem had ushered in a “crisis of confidence” and that, once business-people saw that governments were serious about debt reduction, they’d get confident and start spending again.

That hasn’t worked.

Instead, spending cuts have led to cuts in GDP which has led to greater deficits and the need for more spending cuts. And so on.

On April 23, Nicholas Kulich wrote an article for The New York Times which began with the ugly truth that austerity has turned out to be a fiasco:

With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun.

“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain. “Does this mean that Merkel has lost completely? No. But it does mean that the very nature of the debate about the euro-zone crisis is changing.”

A German-inspired austerity regimen agreed to just last month as the long-term solution to Europe’s sovereign debt crisis has come under increasing strain from the growing pressures of slowing economies, gyrating financial markets and a series of electoral setbacks.

Joe Weisenthal of The Business Insider provided us with this handy round-up of essays proclaiming the demise of economic austerity. Here is his own nail in the coffin:

As we wrote this morning, the bad news for Angela Merkel is that the jig is up: There’s almost nobody left who is willing to go along with the German idea that the sole solution forEurope is spending discipline and “reform,” whatever that means.

One of the best essays on this subject was written by Hale Stewart for The Big Picture. The title of the piece was “People Are Finally Figuring Out: Austerity is Stupid”.

Those in denial about the demise of economic austerity have found it necessary to ignore the increasing refutations of the policy from conservative economists, which began appearing early this year. The most highly-publicized of these came from Harvard economic historian Niall Ferguson. Mike Shedlock (a/k/a Mish) criticized the policy on a number of occasions, such as his posting of January 11, 2012:

Austerity measures in Italy, Spain, Portugal, Greece and France combined with escalating trade wars ensures the recession will be long and nasty.

One would think that a consensus of reasonable people, speaking out against this ill-conceived policy, should be enough to convince The Powers That Be to pull the plug on it. In a perfect world . . .

American Recovery and Reinvestment Act of 2009, Angela Merkel, austerity, Barcelona Center for International Affairs, centrist blog, conservative economists, debt, deficit, economic austerity, economic crisis, economic stimulus, European economy, eurozone, GDP, Germany, Greece, Hale Stewart, Harvard, Henry Blodget, Italy, Joe Weisenthal, John Maynard Keynes, John T Burke Jr, Jordi Vaquer i Fanés, Keynesian economics, Mike Shedlock, Mish, New Economic Perspectives, New York Times, Niall Ferguson, People Are Finally Figuring Out Austerity is Stupid, Portugal, President Obama, Real Clear Markets, Real Clear Politics, recession, sovereign debt crisis, Spain, spending cuts, Stephanie Kelton, The Big Picture, The Business Insider

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