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Spread The Word

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September 29, 2009

I’ve seen quite a few articles and broadcasts from “mainstream” news sources during the past few weeks that have actually made me feel encouraged about the public’s response to the financial crisis and our current economic predicament.  Six months ago, the dirty picture of what caused last year’s near-meltdown and what has continued to prevent the necessary reforms, was something one could find only by reading a relatively small number of blogs.  Michael Panzner wrote a book entitled Financial Armageddon in 2006, predicting what many “experts” later described as unforeseeable.  Mr. Panzner now has a blog called Financial Armageddon (as well as another: When Giants Fall).  At his Financial Armageddon website, Mr. Panzner has helped ease the pain of the economic catastrophe with a little humor by educating his readers on some novel measurements of our recession level — such as the increased use of hair dye and “The Hot Waitress Index”.   (He ran another great posting about the increasing number of disastrous experiences for people who tried to save money by cutting their own hair.)   Meanwhile, Matt Taibbi has continued to serve as a gadfly against crony capitalism.   Zero Hedge keeps us regularly apprised of the suspicious activities in the equities and futures markets, which are of no apparent concern to regulatory officials.   Some bloggers, including Jr Deputy Accountant, have criticized the manic money-printing and other inappropriate activities at the Federal Reserve — which resists all efforts at oversight and transparency.  One no longer experiences the stigma of “conspiracy theorist” by accepting the view that our financial and economic problems were caused primarily by regulatory failure.

On September 23, Dan Gerstein wrote a piece for Forbes, about the impressive, 25-page article concerning last year’s financial crisis, written by James Stewart for The New Yorker, entitled:   “Eight Days”.  At the outset, Mr. Gerstein noted how the New Yorker article provided the reader with some shocking insight on someone we all thought we knew pretty well:

But the biggest eye-opener was that the most incisive and damning questions raised by any of our leaders during this existential crisis came from none other than the era’s top free-market cheerleader in Washington, George W. Bush.

*   *   *

Paulson and Bernanke alerted Bush that AIG was about to fail, warned of the massive ripple effect AIG going bust would have on the global economy, and explained why the Fed could not intervene with an insurance company to stop this systemic threat.  In response, Bush asked  “How have we come to the point where we can’t let an institution fail without affecting the whole economy?”

The question raised by President Bush is still tragically apt, since nothing has been accomplished in the past year to break up or downsize those institutions considered “too big to fail”.  Mr. Gerstein’s experience from reading the New Yorker article helped reinforce the understanding that our current situation is not only the result of regulatory failure, but it’s also a by-product of something called “regulatory capture” —  wherein the regulators are beholden to those whom they are supposed to regulate:

Once disaster was averted and the system stabilized, Paulson, Geithner and Bernanke had no excuse for not laying down the law to Wall Street — figuratively and literally — in the ensuing weeks.  By that I mean restructuring the deals we struck with the banks to get far better returns for taxpayers and rewriting the rules governing the financial system to prevent them from ever thinking they could gamble risk-free with our money again.

*   *   *

There’s no apparent sense of apartness or independence between regulator and regulated.  To the contrary, there’s a power imbalance in the wrong direction, with the regulators dependent on and even at the mercy of the regulated.  What does it say about the integrity and even the sanity of this system when the doctors have to ask the inmates how to restructure their treatments?

I was particularly impressed by Dan Gerstein’s closing remarks in the Forbes piece.  It was encouraging to see another commentary in a mainstream media source, consistent with the ranting I did here, here and here.  Mr. Gerstein expressed dismay at the lack of attention given to the unpleasant truth that we live in a plutocracy which won’t be changed until the people demand it:

That’s why I was so disappointed to find Stewart’s epic article buried in the elite pages of the New Yorker.  It should have been serialized on the front pages of every newspaper in the country last week, so every American would be reminded in full detail of just how warped and rigged our financial system has been — and why it still is.  Maybe then it might sink in that getting mad won’t get us even in the power struggle with the financial elites for control of our economy, and that change won’t happen until taxpayers demand it.  You want public accountability for Wall Street?  Let’s start with an accountable public.

Each time an article such as Dan Gerstein’s “Too Close For Comfort” gets widespread exposure, we move one step closer to the point where we have an informed, accountable public.  It’s unfortunate that his commentary was buried in the elite pages of Forbes.  That’s why I have it here.  Spread the word.



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Turning Over A Rock

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September 24, 2009

Last year’s financial crisis and our current economic crisis have exposed some pretty ugly things to an unsuspecting public.  As news reporters dig and as witnesses are called to testify, these investigations are turning over a very large rock, revealing all the colonies of maggots and fungus infestations, just below ground level, out of our usual view.  The voters are learning more about the sleaziness that takes place on Wall Street and in the halls of Congress.  Hopefully, they will become motivated to demand some changes.

A recent report by American Public Media’s Steve Henn revealed how the law prohibiting “insider trading” (i.e. acting on confidential corporate information when making a transaction involving that company’s publicly-traded stock) does not apply to members of Congress.  Remember how Martha Stewart went to prison?  Well, if she had been representing Connecticut in Congress, she might have been able to interpose the defense that she was inspired to sell her ImClone stock based on information she acquired in the exercise of her official duties.  Mr. Henn’s report discussed the investment transactions made by some Senators after having been informed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, that our financial system was on the verge of a meltdown.  After quoting GOP House Minority Leader John Boehner’s public acknowledgement last September that:

We clearly have an unprecedented crisis in our financial system.   .   .   .

On behalf of the American people our job is to put our partisan differences aside and to work together to help solve this crisis.

Mr. Henn proceeded to explain how swift Senatorial action resulted in a bipartisan exercise of greed:

The next day, according to personal financial disclosures, Boehner cashed out of a fund designed to profit from inflation.  Since he sold, it’s lost more than half its value.

Sen. Dick Durbin, an Illinois Democrat, who was also at that meeting sold more than $40,000 in mutual funds and reinvested it all with Warren Buffett.

Durbin said like millions of others he was worried about his retirement. Boehner says his stock broker acted alone without even talking to him.  Both lawmakers say they didn’t benefit from any special tips.

But over time members of Congress do much better than the rest of us when playing the stock market.

*   *   *

The value of information that flows from the inner workings of Washington isn’t lost on Wall Street professionals.

Michael Bagley is a former congressional staffer who now runs the OSINT Group. Bagley sells access and research. His clients are hedge funds, and he makes it his business to mine Congress and the rest of Washington for tips.

MICHAEL Bagley: The power center of finance has moved from Wall Street to Washington.

His firm is just one recent entry into Washington’s newest growth industry.

CRAIG HOLMAN: It’s called political intelligence.

Craig Holman is at Public Citizen, a consumer watchdog.  Holman believes lobbyists shouldn’t be allowed to sell tips to hedge funds and members of Congress shouldn’t trade on non-public information.  But right now it’s legal.

HOLMAN: It’s absolutely incredible, but the Securities and Exchange Act does not apply to members of Congress, congressional staff or even lobbyists.

That law bans corporate insiders, from executives to their bankers and lawyers, from trading on inside information.  But it doesn’t apply to political intelligence.  That makes this business lucrative.  Bagley says firms can charge hedge funds $25,000 a month just to follow a hot issue.

BAGLEY: So information is a commodity in Washington.

Inside information on dozens of issues, from bank capitol requirements to new student loan rules, can move markets.  Consumer advocate Craig Holman is backing a bill called the STOCK Act.  Introduced in the House, it would force political-intelligence firms to disclose their clients and it would ban lawmakers, staffers, and lobbyists from profiting on non-public knowledge.

Mr. Henn’s report went on to raise concern over the fact that there is nothing to stop members of Congress from acting on such information to the detriment of their constituents in favor of their own portfolios.

In his prepared testimony before the House Financial Services Committee this morning, former Federal Reserve Chair Paul Volcker made this observation:

I understand, and share, concern that the financial crisis has revealed weaknesses in our regulatory and supervisory agencies as well as in the activities of private financial institutions.  There has been criticism of the Federal Reserve itself, and even proposals to remove responsibilities other than monetary policy, strictly defined, from the Fed.

Mr. Volcker discussed a number of suggestions for regulatory changes to prevent a repeat of last year’s crisis.  He criticized Treasury Secretary “Turbo” Tim Geithner’s approach toward what amounts to simply baby-sitting for those financial institutions considered “too big to fail”.   Here is some of Mr. Volcker’s discussion on that point:

However well justified in terms of dealing with the extreme threats to the financial system in the midst of crisis, the emergency actions of the Federal Reserve, the Treasury, and ultimately the Congress to protect the viability of particular institutions – their bond holders and to some extent even their stockholders – have inevitably left an indelible mark on attitudes and behavior patterns of market participants.

  • Will not the pattern of protection for the largest banks and their holding companies tend to encourage greater risk-taking, including active participation in volatile capital markets, especially when compensation practices so greatly reward short-term success?
  • Are community or regional banks to be deemed “too small to save”, raising questions of competitive viability?

*   *   *

What all this amounts to is an unintended and unanticipated extension of the official “safety net”, an arrangement designed decades ago to protect the stability of the commercial banking system.  The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted.  Ultimately, the possibility of further crises – even greater crises – will increase.

This concern is often discussed as the “moral hazard” issue.  William Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City published an excellent paper concerning this issue on September 10.  He made some great suggestions as to how to deal with these “Systemically Dangerous Institutions”:

Historically, “too big to fail” was a misnomer – large, insolvent banks and S&Ls were placed in receivership and their “risk capital” (shareholders and subordinated debtholders) received nothing.  That treatment is fair, minimizes the costs to the taxpayers, and minimizes “moral hazard.”  “Too big to fail” meant only that they were not placed in liquidating receiverships (akin to a Chapter 7 “liquidating” bankruptcy).  In this crisis, however, regulators have twisted the term into immunity.  Massive insolvent banks are not placed in receivership, their senior managers are left in place, and the taxpayers secretly subsidize their risk capital.  This policy is indefensible.  It is also unlawful.  It violates the Prompt Corrective Action law.  If it is continued it will cause future crises and recurrent scandals.

*   *   *

Under the current regulatory system banks that are too big to fail pose a clear and present danger to the economy.  They are not national assets.  A bank that is too big to fail is too big to operate safely and too big to regulate.  It poses a systemic risk. These banks are not “systemically important”, they are “systemically dangerous.”  They are ticking time bombs – except that many of them have already exploded.

Mr. Black then listed twenty areas of reform where these institutions would face additional regulatory compliance and restrictions on their activities, including a ban on “all new speculative investments”.     Paul Volcker took that issue a step further with his criticism of “proprietary trading” by these institutions, which often can result in conflicts of interest with customers, since these banks are trading on their own accounts while in a position to act on the confidential investing strategies of their clients.

Paul Volcker made a point of emphasizing the need to clarify the overlapping jurisdictions of the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC).  On September 18, David Corn wrote a piece about the CFTC, describing it as:

…  a somewhat obscure federal agency, but an important one. Its mission is to protect consumers and investors by preventing misconduct in futures trading that could distort the prices of agricultural and energy commodities.  In 2000, the CFTC wanted to regulate credit default swaps — complicated and privately traded financial instruments that helped grease the way to the subprime meltdown — but Republican Sen. Phil Gramm, then the chair of the Senate Banking Committee, Fed chair Alan Greenspan and Clinton administration officials (including Lawrence Summers, now President Obama’s top economic adviser) blocked that effort.  Had the CFTC been allowed to police swaps, the housing finance crisis that begot the economic crash of last year might not have been as bad.  So the CFTC is a critical agency.  And under Obama’s proposal for more robust financial regulation — which he talked about during a Wall Street visit on Monday — the CFTC would have greater responsibility to make sure no one was gaming the financial system.  Consequently, the composition of the CFTC is more significant than ever.

Mr. Corn expressed his concern over the fact that the Obama administration had nominated Scott O’Malia, a Republican Senate aide, to be a commissioner on the CTFC:

For the past seven years, he’s been a GOP staffer in the Senate.  But before that he was a lobbyist for Mirant, an Atlanta-based electricity company. According to House and Senate records, while at Mirant O’Malia was registered to lobby for greater deregulation at a time when his company was exploiting the then-ongoing deregulation of the energy market to bilk consumers.  Remember the Enron-driven electricity crisis in California of 2001, when Enron and other companies were manipulating the state’s deregulated electricity markets, causing prices to go sky-high, creating rolling black-outs and triggering a statewide emergency?  Mirant was one of those other companies.  According to state investigators, Mirant deliberately held back power to force prices up.

After the crisis, Mirant was investigated by various federal and local agencies and became the target of a number of lawsuits.  It ultimately agreed to pay California about half a billion dollars to settle claims it had screwed the state’s residents.  It also was fined $12.5 million — by the CFTC! — for attempting to manipulate natural gas prices.

Mr. O’Malia had previously been nominated for this position by President George W. Bush.  Nevertheless, Washington Senator Maria Cantwell helped block the nomination.  As a result, David Corn was understandably shocked when O’Malia was re-nominated for this same position by the Obama administration:

Yet Obama has brought it back.  Why would a president who craves change in Washington and who wants the CFTC to be a tougher watchdog do that?

The answer to that question is another question:  Does President Obama really want the CFTC to be a tougher watchdog or just another “lap dog” like the SEC?

After all the promises of the needed regulatory “clean-up” to prevent another financial crisis, can we really trust our current leadership to accomplish anything toward that goal?



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The Broken Promise

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September 21, 2009

We expect those politicians aiming for re-election, to make a point of keeping their campaign promises.  Many elected officials break those promises and manage to win another term anyway.  That fact might explain the reasoning used by so many pols who decide to go the latter route  —  they believe they can get away with it.  Nevertheless, many leaders who break their campaign promises often face crushing defeat on the next Election Day.  A good example of this situation arose during the Presidential campaign of George H.W. Bush, who assured America:  “Read my lips:  No new taxes!” in his acceptance speech (written by Peggy Noonan) at the 1988 Republican National Convention.  Although he didn’t enact any new taxes during his sole term in office, he also promised the voters that he would not raise existing taxes after telling everyone to read his lips.  When he broke that promise after becoming President, he was confronted with the “read my lips” quote by everyone from Pat Buchanan to Bill Clinton.

Back on July 15, 2008 and throughout the Presidential campaign, Barack Obama promised the voters that if he were elected, there would be “no more trickle-down economics”.  Nevertheless, his administration’s continuing bailouts of the banking sector have become the worst examples of trickle-down economics in American history — not just because of their massive size and scope, but because they will probably fail to achieve their intended result.  Although the Treasury Department is starting to “come clean” to Congressional Oversight chair Elizabeth Warren, we can’t even be sure about the amount of money infused into the financial sector by one means or another because of the lack of transparency and accountability at the Federal Reserve.  (I seem to remember the word “transparency” being used by Candidate Obama.)  Although we are all well-aware of the $750 billion TARP slush fund that benefited the banks to some degree, speculation as to the amount given (or “loaned”) to the banks by the Federal Reserve runs from $2 trillion to as high as $6 trillion.  So far, the Fed has managed to thwart efforts by some news organizations to learn the ugly truth.  As Pat Choate reported for The Huffington Post:

Bloomberg News filed a federal lawsuit in November 2008 in the U.S. District Court, Southern District of New York (Manhattan) challenging that stonewalling and won the case.  Chief U.S. District Judge Loretta Preska on August 24 ruled that the Fed had “improperly withheld agency records” giving it a week to disclose daily reports on its loans to banks and other financial institutions.

Three days later, Federal Reserve lawyers asked the courts for a delay so that they could make an expedited appeal of her decision.  Several major banks, operating through an organization named “The Clearing House,” filed a supporting brief with the appeals court, claiming that the Federal Reserve had provided its members emergency funds under an agreement not to identify the recipients or the loan terms.

The Clearing House brief described its members as, “[T]he most important participants in the international banking and payments systems and among the world’s largest intermediaries in interbank funds transfers.”  They include ABN Amro Bank, N.V. (Dutch), Bank of America, The Bank of New York Mellon, Citibank, Deutsche Bank Trust (Germany), JP MorganChase Bank, UBS (Switzerland), and Wells Fargo.

*   *   *

Why are the Fed and the banks fighting so hard to keep the loan details secret?  Congress and taxpayers cannot know until they have the information the Federal Reserve is keeping from them, but several plausible explanations exist.

One is that the Fed has taken a great deal of worthless collateral and is propping up failed companies and banks.  A second is that the information will make the issue of paying out huge Wall Street bonuses in 2009 politically radioactive, particularly if it turns out the payments are dependent on these federal loans.

Finally, the Federal Reserve probably does not want that information to be part of the forthcoming Senate hearings on the re-confirmation of Ben Bernanke, current Chairman of the Federal Reserve.

President Obama’s failure to keep his campaign promise of “no more trickle-down economics” is rooted in his decision to rely on the very same individuals who caused the financial crisis — to somehow cure the nation’s economic ills.  These people (Larry Summers, “Turbo” Tim Geithner and Ben Bernanke) have convinced Mr. Obama that “trickle-down economics” (i.e. bailing out the banks, rather than distressed businesses or the taxpayers themselves) would be the best solution.

On Saturday, Australian economist Steve Keen published a fantastic report from his website, explaining how the “money multiplier” myth, fed to Obama by the very people who caused the crisis, was the wrong paradigm to be starting from in attempting to save the economy.  Here’s some of what Professor Keen had to say:

While economic outsiders like myself, Michael Hudson, Niall Ferguson and Nassim Taleb argue that the only way to restart the economic engine is to clear it of debt, the government response, has been to attempt to replace the now defunct private debt economic turbocharger with a public one.

In the immediate term, the stupendous size of the stimulus has worked, so that debt in total is still boosting aggregate demand.  But what will happen when the government stops turbocharging the economy, and waits anxiously for the private system to once again splutter into life?

I am afraid that all it will do is splutter.

This is especially so since, following the advice of neoclassical economists, Obama has got not a bang but a whimper out of the many bucks he has thrown at the financial system.

In explaining his recovery program in April, PresidentObama noted that:

“there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask”.

He justified giving the money to the lenders, rather than to the debtors, on the basis of  “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook.  Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt:  “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

*   *   *

If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375% — more than twice the level that ushered in the Great Depression.

This is a rescue?  It’s a “hair of the dog” cure:  having booze for breakfast to overcome the feelings of a hangover from last night’s binge.  It is the road to debt alcoholism, not the road to teetotalism and recovery.

Fortunately, it’s a “cure” that is also highly unlikely to work, because the model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

*    *    *

I’ve recently developed a genuinely monetary, credit-driven model of the economy, and one of its first insights is that Obama has been sold a pup on the right way to stimulate the economy:  he would have got far more bang for his buck by giving the stimulus to the debtors rather than the creditors.

*    *    *

The model shows that you get far more “bang for your buck” by giving the money to firms, rather than banks.  Unemployment falls in both case below the level that would have applied in the absence of the stimulus, but the reduction in unemployment is far greater when the firms get the stimulus, not the banks: unemployment peaks at over 18 percent without the stimulus, just over 13 percent with the stimulus going to the banks, but under11 percent with the stimulus being given to the firms.

*    *    *

So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch — the opposite of the advice given to Obama by his neoclassical advisers.

This could also be one reason that the Australian experience has been better than the USA’s:  the stimulus in Australia has emphasized funding the public rather than the banks (and the model shows the same impact from giving money to the workers as from giving it to the firms — and for the same reason, that workers have to spend, so that the money injected into the economy circulates more rapidly.

*    *    *

Obama has been sold a pup by neoclassical economics:  not only did neoclassical theory help cause the crisis, by championing the growth of private debt and the asset bubbles it financed; it also is undermining efforts to reduce the severity of the crisis.

This is unfortunately the good news:  the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle.  That is our actual problem, and while a stimulus will work for awhile, the drag from debt-deleveraging is still present.  The economy will therefore lapse back into recession soon after the stimulus is removed.

You can be sure that if we head into a “double-dip” recession as Professor Keen expects, the President will never hear the end of it.  If only Mr. Obama had stuck with his campaign promise of “no more trickle-down economics”, we wouldn’t have so many people wishing they lived in Australia.



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The Window Of Opportunity Is Closing

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September 17, 2009

In my last posting, I predicted that President Obama’s speech on financial reform would be “fine-sounding, yet empty”.  As it turned out, many commentators have described the speech as just that.  There weren’t many particulars discussed at all.  As Caroline Baum reported for Bloomberg News:

At times he sounded more like a parent scolding a disobedient child than a president proposing a new regulatory framework.

“We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis,” Obama said in a speech at Federal Hall in New York City.  (“You will not stay out until 2 a.m. again.”)

*   *   *

Obama warned “those on Wall Street” against taking “risks without regard for consequences,” expecting the American taxpayer to foot the bill.  But his words rang hollow.

*   *   *

But you can’t, with words alone, alter the perception — now more entrenched than ever — that the government won’t allow large institutions to fail.

How do you convince bankers they will pay for their risk-taking when they’ve watched the government prop up banks, investment banks, insurance companies, auto companies and housing finance agencies?

They learn by example.  The system of privatized profits and socialized losses has suited them fine until now.

Although the President had originally voiced support for expanding the authority of the Federal Reserve to include the role of “systemic risk regulator”, Ms. Baum noted that Allan Meltzer, professor of political economy at Carnegie Mellon University, believes that Mr. Obama has backed away from that ill-conceived notion:

“The Senate Banking Committee doesn’t want to give the Fed more power,” Meltzer said.   “I’ve never seen such unanimity, and I’ve been testifying before the committee since 1962.”

Ms. Baum took that criticism a step further with her observation that the mission undertaken by any systemic risk regulator would not likely fare well:

Bankers Outfox Regulators

It is fantasy to believe a new, bigger, better regulator will ferret out problems before they grow to system-sinking size.  Those being regulated are always one-step ahead of the regulator, finding new cracks or loopholes in the regulatory fabric to exploit.  When the Basel II accord imposed higher risk- based capital requirements on international banks, banks moved assets off the balance sheet.

What’s more, regulators tend to identify with those they regulate, a phenomenon known as “regulatory capture,” making it highly unlikely that a new regulator would succeed where previous ones have failed.

At this point in the economic crisis, with Federal Reserve chairman Ben Bernanke’s recent declaration that the recession is “very likely over”, there is concern that President Obama’s incipient attempt at enacting financial reform may already be too late.  A number of commentators have elaborated on this theme.  At Credit Writedowns, Edward Harrison made this observation:

If you are looking for reform in the financial sector, the moment has passed.  And only to the degree that the underlying weaknesses in the global financial system are made manifest and threaten the economy will we see any appetite for reform amongst politicians.  So, as I see it, the Obama administration has missed the opportunity for reform.

More important, the following point by Mr. Harrison has been expressed in several recent essays:

Irrespective, I believe the need for reform is clear.  Those gloom & doom economists were right because the economic model which brought us to the brink of disaster in 2008 is the same one we have at present and that necessarily means another crisis will come.

At MSN’s MoneyCentral, Michael Brush shared that same fear in a piece entitled, “Why a meltdown could happen again”:

Some observers say it’s OK that a year has gone by without reform; we don’t want to get it wrong.  But the political reality is that as the urgency passes, it’s harder to pass reforms.

“We have lulled ourselves into the mind-set that we are out of the woods, when we aren’t,” says Cornelius Hurley, the director of the Morin Center for Banking and Financial Law at Boston University School of Law.  “I don’t think time is our friend here. We risk losing the sense of urgency so that nothing happens.”

*   *   *

Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution, thinks the unofficial deadline for financial-sector reform is now October 2010 — right before the next congressional elections.

That leaves lawmakers a full year to get the job done.

But given all the details they have to work out — and the declining sense of urgency as stocks keep ticking higher — you have to wonder how much progress they’ll make.

On the other hand, back at Credit Writedowns, Edward Harrison voiced skepticism that such a deadline would be met:

You are kidding yourself if you think real reform is coming to the financial sector before the mid-term elections, especially with healthcare, two wars and the need to ensure recovery still on politicians’ plates. Obama could go for real reform in 2011 — or in a second term in 2013.  But, unless economic crisis is at our door, there isn’t a convincing argument which says reform is necessary.

At The Washington Post, Brady Dennis discussed the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry.  Mr. Dennis pointed out how the success of the Pecora Commission was rooted in the fact that populist outrage provided the fuel to help mobilize reform efforts, and he contrasted that situation with where we are now:

“Pecora’s success was his ability to crystallize the anger that a lot of Americans were feeling toward Wall Street,” said Michael Perino, a law professor at St. John’s University and author of an upcoming book about the hearings. “He was able to create a clamor for reform.”

But Pecora also realized that such clamor was fleeting

*   *   *

“We’ve passed the moment when there’s this palpable anger directed at the financial community,” Perino said of the current crisis.  “When you leave the immediate vicinity of the crisis, as you get farther and farther away in time, the urgency fades.”

Unfortunately, we appear to be at a point where it is too late to develop regulations against many of the excesses that led to last year’s financial crisis.  Beyond that, many people who allowed the breakdown to occur (Bernanke, Geithner, et al.) are still in charge and the players who gamed the system with complex financial instruments are back at it again, with new derivatives — even some based on life insurance policies.  Perhaps another harbinger of doom can be seen in this recent Bloomberg article:  “Credit Swaps Lose Crisis Stigma as Confidence Returns”.  Nevertheless, from our current perspective, some of us don’t have that much confidence in our financial system or our leadership.



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The Longest Year

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September 14, 2009

As I write this, President Obama is preparing another fine-sounding, yet empty speech.  His subject this time is financial reform.  You may recall last week’s lofty address to the joint session of Congress, promoting his latest, somewhat-less-nebulous approach to healthcare reform.  He assured the audience that the so-called “public option” (wherein a government-created entity competes with private sector healthcare insurers) would be an integral part of the plan.  Within a week, two pieces of political toast from the Democratic Party (Nancy Pelosi and Harry Reid) set about undermining that aspect of the healthcare reform agenda.  This is just one reason why, on November 2, 2010, the people who elected Democrats in 2006 and 2008 will be taking a “voters’ holiday”, paving the way for Republican majorities in the Senate and House.  The moral lapse involving the public option was documented by David Sirota for Danny Schechter’s NewsDissector blog:

House Speaker Nancy Pelosi for the first time yesterday suggested she may be backing off her support of the public option – the government-run health plan that the private insurance industry is desperately trying to kill.  According to CNN, Pelosi and Senate Majority Leader Harry Reid “said they would support any provision that increases competition and accessibility for health insurance – whether or not it is the public option favored by most Democrats.”

This announcement came just hours before Steve Elmendorf, a registered UnitedHealth lobbyist and the head of UnitedHealth’s lobbying firm Elmendorf Strategies, blasted this email invitation throughout Washington, D.C. I just happened to get my hands on a copy of the invitation from a source – check it out:

From: Steve Elmendorf [mailto:steve@elmendorfstrategies.com]
Sent: Friday, September 11, 2009 8:31 AM
Subject: event with Speaker Pelosi at my home
You are cordially invited to a reception with

Speaker of the House
Nancy Pelosi

Thursday, September 24, 2009
6:30pm ~ 8:00pm

At the home of
Steve Elmendorf
2301 Connecticut Avenue, NW
Apt. 7B
Washington, D.C.

$5,000 PAC
$2,400 Individual

Again, Elmendorf is a registered lobbyist for UnitedHealth, and his firm’s website brags about its work for UnitedHealth on its website.

The sequencing here is important: Pelosi makes her announcement and then just hours later, the fundraising invitation goes out. Coincidental?  I’m guessing no – these things rarely ever are.

I wrote a book a few years ago called Hostile Takeover whose premise was that corruption and legalized bribery has become so widespread that nobody in Washington even tries to hide it. This is about as good an example of that truism as I’ve ever seen.

Whatever President Obama proposes to accomplish in terms of financial reform will surely be met with a similar fate.  Worse yet, his appointment of “Turbo” Tim Geithner as Treasury Secretary and his nomination of Ben Bernanke to a second term as Federal Reserve chairman are the best signals of the President’s true intention:  Preservation of the status quo, regardless of the cost to the taxpayers.

On this first anniversary of the demise of Lehman Brothers and the acknowledgment of the financial crisis, many commentators have noted the keen observations by Simon Johnson, a former chief economist at the International Monetary Fund, published in the May, 2009 issue of The Atlantic.  The theme of Johnson’s article, “The Quiet Coup” was that the current economic and financial crisis in the United States is “shockingly reminiscent” of those experienced in emerging markets (i.e. banana republics and proto-capitalist regimes).  The devil behind all the details in setting these systems upright after a financial crisis is the age-old concept of moral hazard or more simply:  sleaze.  In making the comparison of the United States to the emerging market countries he encountered at the IMF, Mr. Johnson began this way:

But there’s a deeper and more disturbing similarity:  elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.  More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.  The government seems helpless, or unwilling, to act against them.

Here are a few more passages from “The Quiet Coup” that our political leaders would be well-advised to consider:

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason:  it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change.  As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.”  But there’s the rub:  the economy can’t recover until the banks are healthy and willing to lend.

*   *   *

The second problem the U.S. faces—the power of the oligarchy— is just as important as the immediate crisis of lending.  And the advice from the IMF on this front would again be simple:  break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business.  Where this proves impractical—since we’ll want to sell the banks quickly— they could be sold whole, but with the requirement of being broken up within a short time.  Banks that remain in private hands should also be subject to size limitations.

Mr. Johnson pointed out the need to overhaul our current antitrust laws – not because any single institution controls so much market share as to influence prices – but because the failure of any one “to big to fail” bank could collapse the entire financial system.

One of my favorite reporters at The New York Times, Gretchen Morgenson, observed the anniversary of the Lehman Brothers failure with an essay that focused, in large part, on a recent paper by Edward Kane, a finance professor at Boston College, who created the expression: “zombie bank” in 1987.   This month, the Networks Financial Institute at Indiana State University published a policy brief by Dr. Kane on the subject of financial regulation.  In her article:  “But Who Is Watching Regulators?”, Ms. Morgenson summed up Professor Kane’s paper in the following way:

This ugly financial episode we’ve all had to live through makes clear, Mr. Kane says, that taxpayers must protect themselves against two things:  the corrupting influence of bureaucratic self-interest among regulators and the political clout wielded by the large institutions they are supposed to police. Finally, he argues, taxpayers must demand that the government publicize the costs of efforts taken to save the financial system from itself.

Although you may have seen widely-publicized news reports about an “overwhelming number” of academicians opposing the current efforts to require transparency from the Federal Reserve, Professor Kane provides a strong argument in favor of Fed transparency as well as scrutiny of the Treasury and the other government entities enmeshed the complex system of bailouts created within the past year.

At thirty-eight pages, his paper is quite a deep read.  Nevertheless, it’s packed with great criticism of the Federal Reserve and the Treasury.  We need more of this and when someone of Professor Kane’s stature provides it, there had better be people in high places taking it very seriously.  The following are just a few of the many astute observations made by Dr. Kane:

Agency elitism would be evidenced by the extent to which its leaders use crises to establish interpretations and precedents that cover up its mistakes, inflate its powers, expand its discretion, and extend its jurisdiction. According to this standard, Fed efforts to use the crisis as a platform for self-congratulation and for securing enlarged systemic-risk authority sidetracks rather than promotes effective reform.

*   *   *

A financial institution’s incentive to disobey, circumvent or lobby against a particular rule increases with the opportunity cost of compliance. This means that, to sort out the welfare consequences of any regulatory program, we must assess not only the costs and benefits of compliance, but include the costs and benefits of circumvention as well.

*   *   *

Realistically, every government-managed program of disaster relief is a strongly lobbied and nontransparent tax-transfer scheme for redistributing wealth and shifting risk away from the disaster’s immediate victims.  A financial crisis externalizes – in margin and other collateral calls, in depositor runs, and in bank and borrower pleas for government assistance – a political and economic struggle over when and how losses accumulated in corporate balance sheets and in the portfolios of insolvent financial institutions are to be unwound and reallocated across society.  At the same time, insolvent firms and government rescuers share a common interest in mischaracterizing the size and nature of the redistribution so as to minimize taxpayer unrest.

In principle, lenders and investors that voluntarily assume real and financial risks should reap the gains and bear the losses their risk exposures generate.  However, in crises, losers pressure government officials to rescue them and to induce other parties to share their pain.

The advocates of crony capitalism and their tools (our politicians and regulatory bureaucrats) need to know that we are on to them.  If the current administration is willing to facilitate more of the same, then it’s time for some new candidates to step forward.




The Forgotten Urgency Of Financial Reform

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September 10, 2009

With all the fighting over healthcare reform and the many exciting controversies envisioned by its opponents, such as:  death panels, state-sponsored abortions and illegal aliens’ coming to America for free breast implants, the formerly-urgent need for financial reform his slipped away from public concern.  Alan Blinder recently wrote a piece for The New York Times, lamenting how the subject of financial reform has disappeared from the Congressional radar:

After all we’ve been through, and with so much anger still directed at financial miscreants, the political indifference toward financial reform is somewhere between maddening and tragic.  Why is the pulse of reform so faint?

Blinder then discussed five reasons why.  My favorite concerned lobbying:

Almost everything becomes lobbied to death in Washington.  In the case of financial reform, the money at stake is mind-boggling, and one financial industry after another will go to the mat to fight any provision that might hurt it.

Mr. Blinder expressed concern that these three important changes would be left out of any financial reform legislation:  a) resolving the problem of having financial institutions that are “too big to fail”, b) cleaning up the derivatives mess and c) creating a “systemic risk regulator”.   (All right — I rearranged the order.)

In case you’re wondering just what the hell a “systemic risk regulator” is, Blinder provided the readers with a link to one of his earlier articles, which said this:

The main task of a systemic-risk regulator is to serve as an early-warning-and-prevention system, on the prowl for looming risks that extend across traditional boundaries and are becoming large enough to have systemic consequences.

*   *   *

Suppose such a regulator had been in place in 2005.  Because the market for residential mortgages and the mountain of securities built on them constituted the largest financial market in the world, that regulator probably would have kept a watchful eye on it.  If so, it would have seen what the banking agencies apparently missed:  lots of dodgy mortgages being granted by nonbank lenders with no federal supervision.

If the regulator saw those mortgages, it might then have looked into the securities being built on them.  That investigation might have turned up the questionable triple-A ratings being showered on these securities, and it certainly should have uncovered the huge risk concentrations both on and off of banks’ balance sheets.  And, unless it was totally incompetent, the regulator would have been alarmed to learn that a single company, American International Group, stood behind an inordinate share of all the credit-default swaps — essentially insurance policies against default — that had been issued.

Blinder shares the view, expressed by Treasury Secretary “Turbo” Tim Geithner, that the Federal Reserve should serve as systemic risk regulator, because “there is no other alternative”.  Unfortunately, President Obama is also in favor of such an approach.  The drawback to empowering the Fed with such additional responsibility was acknowledged by Mr. Blinder:

On the other hand, some members of Congress are grumbling that the Fed has already overreached, usurping Congressional authority.  Others contend that it has performed so poorly as a regulator that it hardly deserves more power.

Federal Reserve Chairman Ben Bernanke discussed this issue himself back on March 5, in a speech entitled:  “Financial Reform to Address Systemic Risk”.  Near the end of this speech, Bernanke discussed the subject objectively, although he concluded with a pitch to get this authority for his own realm:

Some commentators have proposed that the Federal Reserve take on the role of systemic risk authority; others have expressed concern that adding this responsibility would overburden the central bank.  The extent to which this new responsibility might be a good match for the Federal Reserve depends a great deal on precisely how the Congress defines the role and responsibilities of the authority, as well as on how the necessary resources and expertise complement those employed by the Federal Reserve in the pursuit of its long-established core missions.

It seems to me that we should keep our minds open on these questions.  We have been discussing them a good deal within the Federal Reserve System, and their importance warrants careful consideration by legislators and other policymakers. As a practical matter, however, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role.     .  .   .   The Federal Reserve plays such a key role in part because it serves as liquidity provider of last resort, a power that has proved critical in financial crises throughout history.  In addition, the Federal Reserve has broad expertise derived from its wide range of activities, including its role as umbrella supervisor for bank and financial holding companies and its active monitoring of capital markets in support of its monetary policy and financial stability objectives.

This rationale leads me to suspect that Mr. Bernanke might be planning to use his super powers as: “liquidity provider of last resort” to money-print away any systemic risks that might arise on his watch in such a capacity.  This is reminiscent of how comedian Steve Smith always suggests the use of duct tape to solve just about any problem that might arise in life.

In the September 8 edition of The Wall Street Journal, Peter Wallison wrote an article entitled:  “The Fed Can’t Monitor ‘Systemic Risk’”.   More important was the subtitle:  That’s like asking a thief to police himself.  Wallison begins with the point that President Obama’s inclusion of granting such powers to the Fed as the centerpiece of his financial regulatory reform agenda “is a serious error.”  Wallison seemed to share my concern about Bernanke’s “duct tape” panacea:

The problem is the Fed itself can create systemic risk.  Many scholars, for example, have argued that by keeping interest rates too low for too long the Fed created the housing bubble that gave us the current mortgage meltdown, financial crisis and recession.

Vesting such authority in the Fed creates an inherent conflict of interest.  Mr. Wallison explained this quite well:

Tasking the Fed with that responsibility would bury it among many other inconsistent roles and give the agency incentives to ignore warning signals that an independent body would be likely to spot.

Unlike balancing its current competing assignments — price stability and promoting full employment — detecting systemic risk would require the Fed to see the subtle flaws in its own policies.  Errors that are small at first could grow into major problems.  It is simply too much to expect any human institution to step outside of itself and see the error of its ways when it can plausibly ignore those errors in the short run.  If we are going to have a systemic-risk monitor, it should be an independent council of regulators.

When the dust finally settles on the healthcare reform debate, perhaps Congress can approach the subject of financial reform  . .  .  if it’s not too late by that point.



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Just In Time For Labor Day

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September 7, 2009

Friday’s report from the Bureau of Labor Statistics, concerning non-farm payrolls for the month of August, left many people squirming.  The “green shoots” crowd usually has no trouble cherry-picking through the monthly BLS reports for something they can spin into happy-sounding news, utilizing the “not as bad as expected” approach.  Nevertheless, the August BLS report portrayed unpleasant conditions, not only for the unemployed but for those currently working full-time in the labor force, as well.

The current unemployment level is a living nightmare for the unemployed individuals and their families.  It also brings some degree of discomfort (although less significant) to those people with money to invest, who are waiting for signs of a sustainable economic upturn before heading back out from the sidelines and into the equities markets.  Both groups got an unvarnished look at the latest BLS data from Dave Rosenberg, Chief Economist at Gluskin Sheff in Toronto.  His September 4 economic commentary: Lunch with Dave, gave us a thorough analysis of the BLS report:

While the Obama economics team is pulling rabbits out of the hat to revive autos and housing, there is nothing they can really do about employment; barring legislation that would prevent companies from continuing to adjust their staffing requirements to the new world order of credit contraction. While nonfarm payrolls were basically in line with the consensus, declining 216,000 in August, there were downward revisions of 49,000 and the details were simply awful.  The fact that 65% of companies are still in the process of cutting their staff loads is quite disturbing — even manufacturing employment fell 63,000 in August, to its lowest level since April 1941 (!), despite the inventory replenishment in the automotive sector and all the excitement over the recent 50+ print in the ballyhooed ISM index.  The fact that temp agency employment is still declining, albeit at a slower pace, alongside the flat workweek and jobless claims stuck at 570,000, are all foreshadowing continued weakness in the labour market ahead.  Until we see signs of a sustained turnaround in the jobs market all bets are off over the sustainability of any economic recovery.

Looking at the details of the Household Survey, Rosenberg found “a rather alarming picture” of what is happening in the labor market:

First, employment in this survey showed a plunge of 392,000, but that number was flattered by a surge in self-employment (whether these newly minted consultants were making any money is another story) as wage & salary workers (the ones that work at companies, big and small) plunged 637,000 — the largest decline since March (when the stock market was testing its lows for the cycle).  As an aside, the Bureau of Labor Statistics also publishes a number from the Household survey that is comparable to the nonfarm survey (dubbed the population and payroll-adjusted Household number), and on this basis, employment sank — brace yourself — by over 1 million, which is unprecedented.  We shall see if the nattering nabobs of positivity discuss that particular statistic in their post-payroll assessments; we are not exactly holding our breath.

Second, the unemployment rate jumped to 9.7% from 9.4% in July, the highest since June 1983 and at the pace it is rising, it will pierce the post-WWII high of 10.8% in time for next year’s midterm election.  And, this has nothing to do with a swelling labour force, which normally accompanies a turnaround in the jobs market — the ranks of the unemployed surged 466,000 last month.

The language of the BLS report itself on this subject demonstrates how the current unemployment crisis is not an “equal opportunity” phenomenon:

Among the major worker groups, the unemployment rates for adult men (10.1 percent), whites (8.9 percent), and Hispanics (13.0 percent) rose in August.  The jobless rates for adult women (7.6 percent), teenagers (25.5 percent), and blacks (15.1 percent) were little changed over the month.  The unemployment rate for Asians was 7.5 percent, not seasonally adjusted. (See tables A-1, A-2, and A-3.)The civilian labor force participation rate remained at 65.5 percent in August.  The employment population ratio, at 59.2 percent, edged down over the month and has declined by 3.5 percentage points since the recession began in December 2007.

Dave Rosenberg added the painful reminder that the unemployment picture always lags behind the end of a recession.  How far behind?  Look at this:

Jobless claims started off August at 554k and closed the month at 570k.  So it seems as though we enter September with the prospect of yet another month of declining payrolls because claims have to break decisively below 500k before jobs stop vanishing and below 400k before the unemployment rate stops rising.  Remember, in the early 1990s credit crunch the recession ended in March 1991 and yet the unemployment rate did not peak until June 1992; and in the last cycle, which was an asset deflation phase, the recession ended in November 2001 and yet the jobless rate did not peak until June 2003. So in the last two cycles, it took 15-20 months for the unemployment rate to peak even after the economic downturn officially ended.

At least Mr. Rosenberg had some constructive criticism for the current administration’s efforts at job creation.  It’s one thing to just yell:  “FAIL” and yet, quite another to put some thought into what needs to be done:

Our advice to the Obama team would be to create and nurture a fiscal backdrop that tackles this jobs crisis with some permanent solutions rather than recurring populist short-term fiscal goodies that are only inducing households to add to their burdensome debt loads with no long-term multiplier impacts.  The problem is not that we have an insufficient number of vehicles on the road or homes on the market; the problem is that we have insufficient labour demand.

As for those who are still in the labor force, the situation is also deteriorating, rather than improving.  A report by Carlos Torres for Bloomberg News noted that the “real number” for unemployment is 16.8 percent.  Beyond that, the work week for factory employees is currently 39.8 hours.  It will have to reach 41 hours before we even get a chance to see some changes:

The index of total hours worked, which takes into account changes in payrolls and the workweek, fell 0.3 percent last month to the lowest level since 2003.

“It tells us payrolls aren’t turning positive any time soon,” Joseph LaVorgna, chief  U.S.  economist at Deutsche Bank Securities Inc. in New York, said on a conference call yesterday, referring to the workweek figures. “This wasn’t a friendly report.”

A measure of unemployment, which includes the part-time workers who would prefer a full-time position and people who want work but have given up looking, reached 16.8 percent last month, the highest level in data going back to 1994.

The workweek for factory employees, which held at 39.8 hours last month, leads total payrolls by about three months, LaVorgna said.  Once it reaches at least 41 hours and once payrolls for temporary workers stabilize, then an increase in total employment can be expected months later, he said.

Payrolls for temporary workers started turning down in January 2007, 11 months before the recession began.  They dropped by another 6,500 workers in August, the government’s report showed yesterday.

In other words, the decline in temporary worker payrolls preceded the recession by 11 months!  Worse yet, the payrolls for temporary workers must stabilize before an increase in total employment comes along “months later”.

Meanwhile, at the Financial Times, Sarah O’Connor reports that many people who have jobs must still rely on food stamps to survive:

The number of working Americans turning to free government food stamps has surged as their hours and wages erode, in a stark sign that the recession is inflicting pain on the employed as well as the newly jobless.

*   *   *

The food stamp data suggest that “the labour market problems are more significant than you would expect, given just the unemployment rate”, said John Silvia, chief economist at Wells Fargo.  “For me it suggests the consumer is not going to rebound or contribute to economic growth for the next year, as the consumer would in a traditional economic recovery.”

Consumer spending has traditionally been the engine of the US economy, making up about two thirds of GDP.  Economists fear that people may be unwilling to resume that role.

That conclusion is exactly what the “green shoots” enthusiasts don’t seem to understand.  Those who are well-off enough to pay for their groceries with real money will be focused on paying down their credit cards and saving money before they go out to buy another television or jet ski.  If these people have little or no “discretionary income”, then the High Frequency Trading computers on Wall Street can talk to each other all they want — but the stock values will not go up.

Happy Labor Day!



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The Big Lie Gets Some Blowback

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September 3, 2009

My favorite “blowback” story of the week resulted from the ill-advised decisions by people at The New York Times and the Financial Times to trumpet talking points apparently “Fed” (pun intended) to them by the Federal Reserve.  Both publications asserted that the TARP program has already returned profits for the Untied States government.  The Financial Times claimed the profit so far has been $14 billion.  The New York Times, reporting the amount as $18 billion, claimed that “taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.”  So where is my check?  Anyone with a reasonable degree of intelligence, who bothered to completely read through either of these articles, could quickly recognize yet another rendition of The Big Lie.  The blowback against these articles was swift and harsh.  Matt Taibbi’s critique was short and sweet:

This is sort of like calculating the returns on a mutual fund by only counting the stocks in the fund that have gone up.  Forgetting for a moment that TARP is only slightly relevant in the entire bailout scheme — more on that in a moment — the TARP calculations are a joke, apparently leaving out huge future losses from AIG and Citigroup and others in the red.  Since only a small portion of the debt has been put down by the best borrowers, and since the borrowers in the worst shape haven’t retired their obligations yet, it’s crazy to make any conclusions about TARP, pure sophistry.

*   *   *

The other reason for that is that it’s only a tiny sliver of the whole bailout picture.  The real burden carried by the government and the Fed comes from the various anonymous bailout facilities — the TALF, the PPIP, the Maiden Lanes, and so on.       .  .  .

And there are untold trillions more the Fed has loaned out in the last 18 months and which we are not likely to find out much about, unless the recent court ruling green-lighting Bloomberg’s FOIA request for those records actually goes through.

Over at The Business Insider, John Carney also quoted Matt Taibbi’s piece, adding that:

We simply don’t know how to value the mortgage backed securities the Fed bought.  We don’t know how much the government will wind up paying on the backstops of Citi and Bear Stearns assets.  And we don’t know how much more money might have to be pumped into the system to keep it afloat.

At another centrist website called The Moderate Voice, Michael Silverstein pointed out that any news reporter with a conscience ought to feel a bit of shame for participating in such a propaganda effort:

I’ve been an economics and financial writer for 30 years.  I used to enjoy my work.  I used to take pride in it.  The markets were kinky, sure, but that made the writing more fun.

*   *   *

That’s not true anymore.  Reportage about the economy and the markets — at least in most mainstream media — now largely consists of parroting press releases from experts of various stripes or government spokespeople.  And the result is not just infuriating for a long-term professional in this field, but outright embarrassing.

A perfect example was yesterday’s “good news” supposedly showing that our economic masters were every bit as smart as they think they are.  A few banks have repaid their TARP loans, part of the $4 trillion that government has sunk into our black hole banking system.

*   *   *

The $74 billion the government has been repaid is less than two percent of the $4 trillion the government has borrowed or printed to keep incompetent lenders from going down.  Less than two percent!  Even this piddling sum was generated by a manipulated stock market rally that allowed banks shares to soar, bringing a lot of money into bank coffers, almost all of which they added to reserves before paying back a few billion to the government.

Rolfe Winkler at Reuters joined the chorus criticizing the sycophantic cheerleading for these claims of TARP profitability:

A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money.

“As big banks repay bailout, U.S.sees profit” read the headline in the New York Times on Monday.  The story was parroted on evening newscasts.

*   *   *

Taxpayers should keep that in mind whenever they see misguided reports that they are making money from bailouts.  The truth is that the biggest banks are still insolvent and, ultimately, their losses are likely to be absorbed by taxpayers.

As the above-quoted sources have reported, the ugly truth goes beyond the fact that the Treasury and the Federal Reserve have been manipulating the stock markets by pumping them to the stratosphere  —  there is also a coordinated “happy talk” propaganda campaign to reinforce the “bull market” fantasy.  Despite the efforts of many news outlets to enable this cause, it’s nice to know that there are some honest sources willing to speak the truth.  The unpleasant reality is exposed regularly and ignored constantly.  Tragically, there just aren’t enough mainstream media outlets willing to pass along the type of wisdom we can find from Chris Whalen and company at The Institutional Risk Analyst:

Plain fact is that the Fed and Treasury spent all the available liquidity propping up Wall Street’s toxic asset waste pile and the banks that created it, so now Main Street employers and private investors, and the relatively smaller banks that support them both, must go begging for capital and liquidity in a market where government is the only player left.  The notion that the Fed can even contemplate reversing the massive bailout for the OTC markets, this to restore normalcy to the monetary models that supposedly inform the central bank’s deliberations, is ridiculous in view of the capital shortfall in the banking sector and the private sector economy more generally.

Somebody ought to write that on a cake and send it over to Ben Bernanke, while he celebrates his nomination to a second term as Federal Reserve chairman.



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