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Geithner And Summers Draw Flak

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August 30, 2010

It’s coming from everywhere.  House Minority Leader, John “BronzeGel” Boehner, while giving a speech in Cleveland on August 24, called for the ouster of Treasury Secretary Timothy Geithner as well as the removal of National Economic Council Director, Larry Summers.  Bridget Johnson reported for The Hill that on August 28, Representative Tom Price (R-Georgia) echoed the call for Geithner and Summers to step down:  “They need to resign because the policies that they’re putting in place are not being effective.”

An editorial from the Republican-oriented Investors Business Daily expanded on Boehner’s criticism of the duo, without really giving any specific examples of what Geithner or Summers did wrong.  That’s because what they did wrong was to protect the banks at the expense of the taxpayers  —  the same thing a Republican administration would have done.  As a result, there have been simultaneous calls from the left for the sacking of Geithner and Summers.  Robert Scheer wrote a piece for The Nation entitled, “They Go or Obama Goes”.  Here is some of what he said:

It is Obama’s continued deference to the sensibilities of the financiers and his relative indifference to the suffering of ordinary people that threaten his legacy, not to mention the nation’s economic well-being.

*    *    *

While Obama continued the Bush practice of showering the banks with bailout money, he did not demand a moratorium on foreclosures or call for increasing the power of bankruptcy courts to force the banks, which created the problem, to now help distressed homeowners.

*    *     *

There is no way that Obama can begin to seriously reverse this course without shedding the economic team led by the Clinton-era “experts” like Summers and Treasury Secretary Timothy Geithner who got us into this mess in the first place.

Economist Randall Wray wrote a great piece for Wall Street Pit entitled, “Boehner Gets One Right:  Fire Obama’s Economics Team”.  Professor Wray distinguished his argument from Boehner’s theme that because neither Geithner nor Summers ever ran a business, they don’t know how to create jobs:

Obama’s economics team doesn’t care about job creation. (here)  So far, nearly three years into the worst depression since the Great Depression, they’ve yet to turn any serious attention to Main Street.  The health of Wall Street still consumes almost all of their time — and almost all government funds.  Trillions for Wall Street, not even peanuts for Americans losing their jobs and homes.  No one, except a highly compensated Wall Street trader, could possibly disagree with Boehner.  Fire Timmy and Larry and the rest of the Government Sachs team.

As an aside:  If you take offense at Professor Wray’s suggestion that the government should get actively involved in job creation, be sure to watch the interview with economist Robert Shiller by Simon Constable of The Wall Street Journal.

The Zero Hedge website recently published an essay by Michael Krieger of KAM LP.  One of Krieger’s points, which resonated with me, was the idea that whether you have a Democratic administration or a Republican administration, both parties are beholden to the financial elites, so there’s not much room for any “change you can believe in”:

.   .  .   the election of Obama has proven to everyone watching with an unbiased eye that no matter who the President is they continue to prop up an elite at the top that has been running things into the ground for years.  The appointment of Larry Summers and Tiny Turbo-Tax Timmy Geithner provided the most obvious sign that something was seriously not kosher.  Then there was the reappointment of Ben Bernanke.  While the Republicans like to simplify him as merely a socialist he represents something far worse.

*    *    *

What Obama has attempted to do is to wipe a complete economic collapse under the rug and maintain the status quo so that the current elite class in the United States remains in control.  The “people” see this ploy and are furious.  Those that screwed up the United States economy should never make another important decision about it yet they remain firmly in control of policy.  The important thing in any functioning democracy is the turnover of the elite class every now and again.  Yet, EVERY single government policy has been geared to keeping that class in power and to pass legislation that gives the Federal government more power to then buttress this power structure down the road.  This is why Obama is so unpopular.  Everything else is just noise to keep people divided and distracted.

“Keeping people divided and distracted” helps preserve the illusion that there really is a difference between the economic policies of the two parties.  If you take a close look at how President Obama’s Deficit Commission is attempting to place the cost of deficit reduction on the backs of working people, the unified advocacy for the financial sector becomes obvious.  What we are left with are the fights over abortion and gay marriage to differentiate the two parties from each other.

It’s time to pay more attention to that man behind the curtain.



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Keeping Americans Dumb

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August 26, 2010

Much has been written lately about the fact that Americans are becoming increasingly dumb.  How has this happened?  Some commentators have expressed the opinion that young people spend too much time playing video games and not enough time reading.  Whatever the cause, the statistics are shocking.  Lloyd de Vries recently did a report for CBS News concerning a Roper Poll of people aged 18-24, conducted for National Geographic.  Despite the wall-to-wall coverage of Hurricane Katrina, one-third of those polled could not locate Louisiana on a map.  Only 50 percent could locate New York State on a map.  Sixty percent could not locate Iraq on a map of the Middle East.  A recent Gallup Poll revealed more of the same:

When Americans are asked to identify the country from which America gained its independence, 76% correctly name Great Britain.  A handful, 2%, think America’s freedom was won from France, 3% mention some other country (including Russia, China, and Mexico, among others named), while 19% are unsure.

*   *   *

Only 66% of those aged 18-29 know that America gained its independence from England, compared to 79% of those aged 30 and older.

My favorite result from that poll was the revelation that 18 percent of the respondents believe that the sun revolves around the earth.  Roll over, Copernicus!

After reading so much of the news coverage concerning the Deepwater Horizon catastrophe in the Gulf of Mexico (it’s west of Florida and south of the Alabama – Mississippi border) I’m beginning to suspect that the news and entertainment industries are responsible for dumbing-down Americans.  While we’re at it – we should be mindful of the role of the United States government in this effort.  Consider what our President said on August 4th:

“A report out today by our scientists shows that the vast majority of the spilled oil has been dispersed or removed from the water,” Obama said.

Beth Daley of the Boston Globe gave us another example of what our government told us about all that oil:

Earlier this month, Jane Lubchenco, National Oceanic and Atmospheric Administration chief, declared that “at least 50 percent of the oil that was released is now completely gone from the system, and most of the remainder is degrading rapidly or is being removed from the beaches.’’

On August 20, we learned about the falsity of the government’s claims that the oil had magically disappeared.  The Washington Post put it this way:

Academic scientists are challenging the Obama administration’s assertion that most of BP’s oil in the Gulf of Mexico is either gone or rapidly disappearing — with one group Thursday announcing the discovery of a 22-mile “plume” of oil that shows little sign of vanishing.

As time drags on, it is becoming more apparent that both BP and the federal government are deliberately trying to conceal the extent of the damage caused by the Deepwater Horizon blowout.  Lisa Hooper-Bui is a professor of entomology at Louisiana State University.  She recently wrote an op-ed piece for The New York Times, discussing the frustration experienced by scientists (including herself) who are attempting to measure the impact of this event on the environment.  As it turns out, unless you know “the secret handshake” – you might as well give up because you ain’t findin’ out nuttin’:

The problem is that researchers for BP and the government are being kept quiet, and their data is unavailable to the rest of the community.  When damages to the gulf are assessed in court or Congress, there might not be enough objective data to make a fair judgment.

*   *   *

Independent researchers like me and my team — we study the effect of things like oil and dispersants on insects — have had to rely on the meager discretionary funds provided by our university departments, particularly in the early weeks of the disaster.  And, as the weeks have rolled into months, we have found ourselves blocked from a widening list of sites, all of which are integral to completing our investigations.

America’s dumbed-down “sheeple” have been conditioned by the news media to disregard accounts of cover-ups, unless such accounts have been authorized by the corporate sponsors of those news outlets.  The expression “conspiracy theory” is invoked to serve as a stamp of falsehood on any factual account running contrary to a mainstream-approved narrative.  The usual tactics involve the use of such terms as “grassy knoll” or “Oliver Stone” as though the evidence disputing the “single bullet theory” of President Kennedy’s assassination has been conclusively discredited and that anyone who rejects the Warren Report is a fool.  (In fact, the most recent of the thousands of books on this subject —  Head Shot by physicist G. Paul Chambers, PhD — demonstrates that the physics behind the lone-gunman theory is not only wrong — but scientifically impossible.)

Uncritical reliance of the authority of the “mainstream” news media (and – for that matter – whatever can be found on the Internet) has also served to “dumb-down” Americans in a big way.  The horizons of our reality have been crimped to exclude “troublesome” information and our attention has been focused on American Idol drivel.  I was reminded of another example of the “conspiracy theory” stigma when I stumbled across this piece, appearing in the Financial Times, which was co-authored by President Clinton’s former Chief of Staff, John Podesta.  The article presented a great argument for allowing the Bush tax cuts to expire for the wealthiest two percent of households.  When I saw Podesta’s name, I was reminded of his position on another so-called, “cover-up conspiracy theory” —  the subject of UFOs and what the government really knows about them.  Here is a video clip of John Podesta making the case for disclosure of data compiled by the United States government on the subject.  In a speech before the National Press Club on November 14, 2007, Mr. Podesta said this:

“I think it’s time to open the books” (on government investigations of UFOs).    .  .  .  “We ought to do it because it’s right.  We ought to do it because the American people, quite frankly, CAN handle the truth and we ought to do it because it’s the law.”

Yes, the truth is out there  —  but if you limit your information intake to what you are fed by the mainstream media (or any other authoritarian source) – you might not find it.



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The Invisible Bank Bailout

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August 23, 2010

By now, you are probably more than familiar with the “backdoor bailouts” of the Wall Street Banks – the most infamous of which, Maiden Lane III, included a $13 billion gift to Goldman Sachs as a counterparty to AIG’s bad paper.  Despite Goldman’s claims of having repaid the money it received from TARP, the $13 billion obtained via Maiden Lane III was never repaid.  Goldman needed it for bonuses.

On August 21, my favorite reporter for The New York Times, Gretchen Morgenson, discussed another “bank bailout”:  a “secret tax” that diverts money to banks at a cost of approximately $350 billion per year to investors and savers.  Here’s how it works:

Sharply cutting interest rates vastly increases banks’ profits by widening the spread between what they pay to depositors and what they receive from borrowers.  As such, the Fed’s zero-interest-rate policy is yet another government bailout for the very industry that drove the economy to the brink.

Todd E. Petzel, chief investment officer at Offit Capital Advisors, a private wealth management concern, characterizes the Fed’s interest rate policy as an invisible tax that costs savers and investors roughly $350 billion a year.  This tax is stifling consumption, Mr. Petzel argues, and is pushing investors to reach for yields in riskier securities that they wouldn’t otherwise go near.

*   *   *

“If we thought this zero-interest-rate policy was lowering people’s credit card bills it would be one thing but it doesn’t,” he said.  Neither does it seem to be resulting in increased lending by the banks.  “It’s a policy matter that people are not focusing on,” Mr. Petzel added.

One reason it’s not a priority is that savers and people living on fixed incomes have no voice in Washington.  The banks, meanwhile, waltz around town with megaphones.

Savers aren’t the only losers in this situation; underfunded pensions and crippled endowments are as well.

Many commentators have pointed out that zero-interest-rate-policy (often referred to as “ZIRP”) was responsible for the stock market rally that began in the Spring of 2009.  Bert Dohmen made this observation for Forbes back on October 30, 2009:

There is very little, if any, investment buying.  In my view, we are seeing a mini-bubble in the stock market, fueled by ZIRP, the “zero interest rate policy” of the Fed.

At this point, retail investors (the “mom and pop” customers of discount brokerage firms) are no longer impressed.  After the “flash crash” of May 6 and the revelations about stock market manipulation by high-frequency trading (HFT), retail investors are now avoiding mutual funds.  Graham Bowley’s recent report for The New York Times has been quoted and re-published by a number of news outlets.   Here is the ugly truth:

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group.  Now many are choosing investments they deem safer, like bonds.

The pretext of providing “liquidity” to the stock markets is no longer viable.  The only remaining reasons for continuing ZIRP are to mitigate escalating deficits and stopping the spiral of deflation.  Whether or not that strategy works, one thing is for certain:  ZIRP is enriching the banks —  at the public’s expense.



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Geithner Watch

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August 19, 2010

It’s that time once again.  The Treasury Department has launched another “charm offensive” – and not a moment too soon.  “Turbo” Tim Geithner got some really bad publicity at the Daily Beast website by way of a piece by Philip Shenon.  The story concerned the fact that a man named Daniel Zelikow — while in between revolving door spins at JP Morgan Chase — let Geithner live rent-free in Zelikow’s $3.5 million Washington townhouse, during Geithner’s first eight months as Treasury Secretary.  Zelikow (who had previously worked for JP Morgan Chase from 1999 until 2007) was working at the Inter-American Development Bank at the time.  The Daily Beast described the situation this way:

At that time, Geithner was overseeing the bailout of several huge Wall Street banks, including JPMorgan, which received $25 billion in federal rescue funds from the TARP program.

Zelikow, a friend of Geithner’s since they were classmates at Dartmouth College in the early 1980s, begins work this month running JPMorgan’s new 12-member International Public Sector Group, which will develop foreign governments as clients.

*   *   *

Stephen Gillers, a law professor at New York University who is a specialist in government ethics and author of a leading textbook on legal ethics, described Geithner’s original decision to move in with Zelikow last year as “just awful” —  given the conflict-of-interest problems it seemed to create.

He tells The Daily Beast that Geithner now needs to avoid even the appearance of assisting JPMorgan in any way that suggested a “thank-you note” to Zelikow in exchange for last year’s free rent.

“He needs to be purer than Caesar’s wife — purer than Caesar’s whole family,” Gillers said of the Treasury secretary.

The Daily Beast story came right on the heels of Matt Taibbi’s superlative article in Rolling Stone, exposing the skullduggery involved in removing all the teeth from the financial “reform” bill.  Taibbi did not speak kindly of Geithner:

If Obama’s team had had their way, last month’s debate over the Volcker rule would never have happened.  When the original version of the finance-­reform bill passed the House last fall  – heavily influenced by treasury secretary and noted pencil-necked Wall Street stooge Timothy Geithner – it contained no attempt to ban banks with federally insured deposits from engaging in prop trading.

Just when it became clear that Geithner needed to make some new friends in the blogosphere, another conclave with financial bloggers took place on Monday, August 16.  The first such event took place last November.  I reviewed several accounts of the November meeting in a piece entitled “Avoiding The Kool -Aid”.  Since that time, Treasury has decided to conduct such meetings 4 – 6 times per year.  The conferences follow an “open discussion” format, led by individual senior Treasury officials (including Turbo Tim himself) with three presenters, each leading a 45-minute session.  A small number of financial bloggers are invited to attend.  Some of the bloggers who were unable to attend last November’s session were sorry they missed it.  The August 16 meeting was the first one I’d heard about since the November event.  The following bloggers attended the August 16 session:  Phil Davis of Phil’s Stock World, Yves Smith of Naked Capitalism, John Lounsbury for Ed Harrison’s Credit Writedowns, Michael Konczal of Rortybomb, Steve Waldman of Interfluidity, as well as Tyler Cowen and Alex Tabarrok of Marginal Revolution.  As of this writing, Alex Tabarrok and John Lounsbury were the only attendees to have written about the event.  You can expect to see something soon from Yves Smith of Naked Capitalism.

At this juncture, the effort appears to have worked to Geithner’s advantage, since he made a favorable impression on Alex Tabarrok, just as he had done last November with Tabarrok’s partner at Marginal Revolution, Tyler Cowen:

As Tyler said after an earlier visit, Geithner is smart and deep.  Geithner took questions on any topic.  Bear in mind that taking questions from people like Mike Konczal, Tyler, or Interfluidity is not like taking questions from the press.  Geithner quickly identified the heart of every question and responded in a way that showed a command of both theory and fact.  We went way over scheduled time.  He seemed to be having fun.

It will be interesting to see whether the upcoming accounts of the meeting continue to provide Geithner with the image makeover he so desperately needs.


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Bogus Editorial Gets Exposed

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August 16, 2010

One of my favorite commentators, Bill Fleckenstein, wrote an interesting piece calling attention to the fact that the Patent Office is underfunded to the tune of about $1 billion.  The good news is that fixing this problem might create as many as 2.5 million new jobs over the next three years.  Fleck based his article on a New York Times essay by Paul Michel (former Chief Judge of the United States Court of Appeals for the District of Columbia Circuit) and Henry Nothhaft, co-author of the upcoming book, Great Again.

Bill Fleckenstein began his discussion by noting another letdown by our Disappointer-In-Chief:

As the financial crisis was unfolding in late 2008 and early 2009, I actually thought for a while that the incoming Obama administration might try to do something intelligent regarding incentivizing jobs.  That was 100% incorrect.  The only incentives it has created are ones not to hire more employees, which has only made a bad situation worse.

Unfortunately, Fleck decided to support his perspective with an editorial from the August 9 Wall Street Journal entitled, “Why I’m Not Hiring” by Michael Fleischer.  Fleischer whined about how President Obama has made things difficult for his “little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings.”  Fleischer concluded the piece with this lament:

And even if the economic outlook were more encouraging, increasing revenues is always uncertain and expensive.  As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company’s vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up.  From where I sit, the government’s message is unmistakable:  Creating a new job carries a punishing price.

Bill Fleckenstein was not the only commentator who was apparently “taken in” by this editorial.  It has been getting re-blogged all over the Web.

What most people don’t realize is that the author of the Wall Street Journal editorial, Michael Fleischer, is the brother of Ari Fleischer, the former press secretary to President George W. Bush.

Kevin Drum wrote a piece for Mother Jones, which began with his criticism of the Journal for not admitting that the aforementioned editorial was written by Ari Fleischer’s brother.  Beyond that, Mr. Drum provided us with a little more information about Michael Fleischer’s background:

Michael, thanks to his White House connections, was one of the squadron of free market evangelizers who parachuted into Baghdad to privatize Iraqi industry after the war.  We all know how well that went, which is probably what qualifies him to write op-eds about creeping Obama-ism for the Wall Street Journal.

Drum then quoted this reader’s comment, posted at the Outside The Beltway blog, concerning the Fleischer editorial:

The fact is that if Mr. Fleisher’s company has to buy an extra box of paper clips it will cause them to go belly up.  He’s in not position to hire anyone regardless of tax policy.

The reason Mr. Fleischer’s company isn’t hiring has nothing to do with taxes or the policies of any administration.  It’s because his business has been in decline for a decade.  As the CEO, that decline is his fault.  All his complaining about taxes and benefits is just a smokescreen for his own incompetence.

The world changed around them a decade ago and they failed to adapt.  In 2000, their annual sales were 66 million dollars with cash on hand of 12 million.  By 2003, sales were down to 55 million and cash was down to 6 million.  That was before the financial crisis and under the allegedly pro business policies of the previous administration.  In 2009, sales were down to 44 million and cash was down to 2 million.     They managed to lose 17 million dollars that year and got a carry back refund of some 5 million dollars.  Mr. Fleischer should spend less time complaining about taxes and more time thinking about how he can correct 10 years of mismanagement.

Don’t take my word for it, read the balance sheets yourself.

http://www.bogen.com/aboutus/financials/#historical

Another blogger had some fun digging into the truth about Fleischer’s Bogen Communications and hanging out the dirty laundry on the Internet:

Here’s the thing, though.  If you actually look into Bogen, you find out that there are far better reasons for why Fleischer isn’t hiring.  Like the stock price absolutely cratering last year.  Or the settlement that they reached with a contractor who alleged “multiple causes of action for breach of contract and various torts”; a settlement that came after the contractor had already been awarded a cool $12.5 mil in “compensatory and punitive damages.”

It’s always funny when a political hatchet job gets exposed.  It’s even funnier when the perpetrators are too dumb to realize that —  in  what Marshall McLuhan used to call “the electronic information environment” (back in the 1960s)  — it’s pretty easy to dig up the truth.

Anyone trying to ascertain the truth about why companies aren’t hiring would be better served to peruse websites such as MarketWatch or Bloomberg, rather than the Wall Street Journal’s editorial page.  Bill Fleckenstein should have known better.



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Jobless Recovery Myth Is Dead

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August 12, 2010

On July 29, I discussed the fact that for over a year, many pundits have been anticipating a “jobless recovery”.  In other words:  don’t be concerned about the fact that so many people can’t find jobs – the economy will recover anyway.  Recent economic reports have exposed how the widespread corporate tactic of cost-cutting by mass layoffs (to gin-up the bottom line in time for earnings reports) has finally taken its toll.  Although this tactic has helped to inflate stock prices and produce the illusion that the broader economy is experiencing a sustained recovery, we are finding out that the opposite is true.  The “jobless recovery” advocates ignore the fact the American economy is 70 percent consumer-driven.  If those consumers don’t have jobs, they aren’t going to be spending money.  Timothy Homan and Alex Tanzi of Bloomberg News gave us the ugly truth on Wednesday:

A lack of jobs will shackle consumer spending and restrain the U.S. recovery more than previously estimated, according to economists polled by Bloomberg News.

*   *   *

“Simply put, job growth in the private sector hasn’t improved as we would’ve expected,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina.  “The consumer continues to contribute to growth but at a subpar pace.”

*   *   *

Purchases, which rose 3 percent on average over the past three decades, dropped 1.2 percent last year, the biggest decrease since 1942.

*   *   *

Joblessness will be slow to fall, signaling it will take years for the economy to recover the more than 8 million jobs lost during the recession that began in December 2007.  Unemployment will average 9.6 percent in 2010 and 9.1 percent next year, according to the survey.

*   *   *

“We need a stronger economy, job creation and better consumer confidence,” Richard Dugas, chief executive officer of Pulte Group Inc., said in an Aug. 4 conference call.  “Our industry continues to face incredibly low demand.”

The August 10 press release from the Federal Open Market Committee (FOMC) began this way:

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.  Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.  Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls.  Housing starts remain at a depressed level.  Bank lending has continued to contract.

Steve Goldstein of MarketWatch recently wrote a piece entitled, “The jobless recovery won’t go further without jobs”.   Mr. Goldstein explains that the corporations relying on layoffs to juice their earnings reports are running out of people to sacrifice for their bottom line:

Earnings per share grew 43% for the 450 members of the S&P 500 that have reported second-quarter results, according to FactSet Research data.

So what these productivity figures may be showing is that, as the Great Recession blew into town, companies stretched their employees to the limit.

The data suggest companies won’t be able to job-cut their way to continued profit growth — and, at some point, if companies want to expand, they will need to start offering jobs to the pool of 14.6 million out of work in July.

Business consultant Matthew C. Keegan wrote an essay for the SayEducate website entitled, “Jobless Recovery & Other Illusions”.  He began the piece with this thought:

The economic numbers continue to pour in with very few people believing that they offer a promise of a sustained recovery.  That’s bad news for America, because high unemployment (9.5 percent in July 2010) means that every sector of the economy will remain depressed longer than some imagined it would.

Steve Goldstein’s MarketWatch article raised the possibility that this cloud may have a silver lining:

The productivity report isn’t great news, but at least it shows that the jobless recovery won’t be able to recover much further without employment making a significant contribution.

Another myth bites the dust.





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Not Getting It Done

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August 9, 2010

Are the Democrats trying to lose their majorities in both the Senate and the House in November?  Their two biggest accomplishments, the healthcare “reform” bill and the financial “reform” bill haven’t really impressed the electorate.  According to a Gallup Poll, voter reaction to the passage of the “Affordable Healthcare Act” is 49 percent contending that the bill is a “good thing” as opposed to 46 percent who believe it is a “bad thing”, with 5 percent undecided.  Criticism of the “Wall Street Reform and Consumer Protection Act of 2010” has been widespread, as I have previously discussed here, here and here.  The latest critique of the bill came from Professor Thomas F. Cooley, of the Stern School of Business at NYU.  His Forbes article entitled, “The Politics Of Regulatory Reform”, was based on this theme:

The awareness of how close we came to paralyzing the financial system created an opportunity to do something truly significant to make the system safer and more in tune with the needs of our economy.  Sadly, because all things in Washington are political, we fumbled the ball.

Rahm Emanuel’s infamous doctrine, “You never want a serious crisis to go to waste” is apparently being disregarded by Rahm Emanuel and company at The White House.  Of course, the entire economic catastrophe has provided the Obama administration with a boatload of crises – most of which have already gone to waste.  For example, consider this fiasco-in-progress:  The “small business” sector plays such an important role in keeping Americans employed, a bill to facilitate lending to small businesses has been sponsored by Senator Mary Landrieu (D-Louisiana).  An August 7 report by Sharon Bernstein of the Los Angeles Times provided this update on the status of the measure:

The small business loan assistance ran into trouble in the Senate when members from both parties began attaching amendments to support their favored causes.

The ineffective efforts of Senate Democrats are unfairly souring public opinion on their more unified counterparts in the House.  In attempt to redeem the image of Congressional Dems, House Speaker Nancy Pelosi scheduled a special session of Congress for Tuesday, August 10, (an interruption of their August recess) to pass a $26-billion bill to avert public employee layoffs.

With the passing of time, it has become more obvious that President Obama’s biggest mistake since taking office was his weak leadership in promoting the economic stimulus effort.  Many commentators have expressed the opinion that Christina Romer’s resignation as chair of the President’s Council of Economic Advisors was based on her frustration with the under-funded stimulus program.

I recently wrote an “I told you so” piece, referencing my July, 2009 prediction that it would eventually become necessary for President Obama to introduce a second stimulus bill because the $787 billion proposal would prove inadequate.  At his blog, liberal economist Paul Krugman similarly reminded readers of his prediction about the consequences for failing to pass an effective stimulus bill:

So here’s the picture that scares me:  It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up.  Mr. Obama finally concedes that a bigger stimulus is needed.

But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts.  And as a result, the recession rages on, unchecked.

The reality has turned out even worse than Krugman’s prediction because we are now approaching September 2010 – an election year – and the unemployment rate is being understated at 9.5 percent.  The conflation Krugman discussed has manifested itself in the narrative of the Tea Party movement.  In September of 2009, I discussed why Obama should have been listening to Australian economist Steve Keen, who – by that point – was saying basically the same thing:

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.

Economist Joseph Stiglitz recently provided us with this update about how the global financial crisis is affecting Australia in August of 2010:

Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world.  He realized that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon.  So the first part of the stimulus was cash grants, followed by investments, which would take longer to put into place.

Rudd’s stimulus worked:  Australia had the shortest and shallowest of recessions of the advanced industrial countries.

Meanwhile, President Obama and the Democrats have decided to utilize a mid-term campaign strategy of assessing all of the blame for our current financial chaos on President George W. Bush.  Criticism of this approach has been voiced by people outside of the Republican camp.  Frank Rich of The New York Times lamented the lack of message control exercised by the Democrats and their ill-advised focus on the Bush era:

But rather than wait for miracles or pray that Bushphobia will save the day, Democrats might instead start playing the hand they’ve been dealt.  Elections, the cliché goes, are about the future, not the past.  At the very least they’re about the present.

At this point in American history, it’s becoming more obvious that the two-party system has served no other purpose than to perpetuate the careers of blundering grafters.  The voting public must accept the reality that the only way it will be honestly and effectively represented in Washington is by independent candidates.  The laws that keep those independents off the ballots must be changed.




Getting Rolled By Wall Street

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August 5, 2010

For the past few years, investors have been flocking to exchange-traded funds (ETFs) as an alternative to mutual funds, which often penalize investors for bailing out less than 90 days after buying in.  The ETFs are traded on exchanges in the same manner as individual stocks.  Investors can buy however many shares of an ETF as they desire, rather than being faced with a minimum investment as required by many mutual funds.  Other investors see ETFs as a less-risky alternative than buying individual stocks, since some funds consist of an assortment of stocks from a given sector.

The most recent essay by one of my favorite commentators, Paul Farrell of MarketWatch, is focused on the ETFs that are based on commodities, rather than stocks.  As it turns out, the commodity ETFs have turned out to be yet another one of Wall Street’s weapons of mass financial destruction.  Paul Farrell brings the reader’s attention to a number of articles written on this subject – all of which bear a theme similar to the title of Mr. Farrell’s piece:  “Commodity ETFs: Toxic, deadly, evil”.

Mr. Farrell discussed a recent article from Bloomberg BusinessWeek, exposing the hazards inherent in commodity ETFs.  That article began by discussing the experience of a man who invested $10,000 in an ETF called the U.S. Oil Fund (ticker symbol: USO), designed to track the price of light, sweet crude oil.  The investor’s experience became a familiar theme for many who had bought into commodity ETFs:

What happened next didn’t make sense.  Wolf watched oil go up as predicted, yet USO kept going down.  In February 2009, for example, crude rose 7.4 percent while USO fell by 7.4 percent.  What was going on?

What was going on was something called “contango”.  The BusinessWeek article explained it this way:

Contango is a word traders use to describe a specific market condition, when contracts for future delivery of a commodity are more expensive than near-term contracts for the same stuff.  It is common in commodity markets, though as Wolf and other investors learned, it can spell doom for commodity ETFs. When the futures contracts that commodity funds own are about to expire, fund managers have to sell them and buy new ones; otherwise they would have to take delivery of billions of dollars’ worth of raw materials.  When they buy the more expensive contracts — more expensive thanks to contango — they lose money for their investors.  Contango eats a fund’s seed corn, chewing away its value.

*   *   *

Contango isn’t the only reason commodity ETFs make lousy buy-and-hold investments.  Professional futures traders exploit the ETFs’ monthly rolls to make easy profits at the little guy’s expense.  Unlike ETF managers, the professionals don’t trade at set times.  They can buy the next month ahead of the big programmed rolls to drive up the price, or sell before the ETF, pushing down the price investors get paid for expiring futures.  The strategy is called “pre-rolling.”

“I make a living off the dumb money,” says Emil van Essen, founder of an eponymous commodity trading company in Chicago.  Van Essen developed software that predicts and profits from pre-rolling.  “These index funds get eaten alive by people like me,” he says.

A look at 10 well-known funds based on commodity futures found that, since inception, all 10 have trailed the performance of their underlying raw materials, according to Bloomberg data.

*   *   *

Just as they did with subprime mortgage-backed securities, Wall Street banks are transferring wealth from their clients to their trading desks.  “You walk into a casino, you expect to lose money,” says Greg Forero, former director of commodities trading at UBS (UBS).  “It’s the same with these products.  You’re playing a game with a very high rake, a very high house advantage, and you’re not the house.”

Another problem caused by commodity ETFs is the havoc they create by raising prices of consumer goods – not because of a supply and demand effect – but purely by financial speculation:

Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, N.Y., to fire five of its 32 employees.  “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.

Paul Farrell also brought our attention to an article entitled “ETFs Gone Wild” to highlight the hazards these products create for the entire financial system:

In Bloomberg Markets’ “ETFs Gone Wild,” investors are warned that many ETFs are “stuffed with exotic derivatives,” at risk of becoming “the next financial time bomb.”  In short, thanks to ETFs, Wall Street is already creating a dangerous new kind of global weapon of mass destruction — a bomb primed to detonate like the 2000 dot-coms, the 2008 subprimes — and detonation is dead ahead.

Mr. Farrell’s essay included a discussion of a Rolling Stone article by McKenzie Funk, describing the exploits of Phil Heilberg, a former AIG commodity trader.  The Rolling Stone piece demonstrated how commodity ETFs are just the latest weapon used to advance “Chaos Capitalism”:

And yet, as Funk puts it:  “Heilberg’s bet on chaos is beginning to play out on the streets.”  The toxic trail of commodity ETFs is already proving to be deadly, starving thousands worldwide, while the new Capitalists of Chaos only see incredible profit opportunities, as they make huge bets that they’ll get even richer in the next round of catastrophes, disasters, poverty, starvation and wars.

Bottom line: Commodity ETF/WMDs are mutating into a toxic pandemic fueled (and protected by) the insatiable greed of banks, traders and politicians whose brains are incapable of giving up their profit machine, won’t until it implodes and self-destructs.  The Wall Street Banksters have no sense of morals, no ethics, no soul, no goal in life other than getting very rich, very fast.  They care nothing of democracy, civilization or the planet.

Don’t count on the faux financial “reform” bill to remedy any of the problems created by commodity ETFs.  As the BusinessWeek article pointed out, the Commodity Futures Trading Commission is going to have its hands full:

How much the new law will help remains to be seen, says Jill E. Sommers, one of the agency’s five commissioners, because Congress still needs to appropriate funds and write guidelines for implementation and enforcement.

Let’s not overlook the fact that those “guidelines” are going to be written by industry lobbyists.  The more things change — the more they remain the same.



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More Good Stuff From David Stockman

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August 2, 2010

The people described by Barry Ritholtz as “deficit chicken hawks” have their hands full.  Just as some Democrats, concerned about getting campaign contributions from rich people, were joining the ranks of the deficit chicken hawks to support extension of the Bush tax cuts, people from across the political spectrum spoke out against the idea.  As I pointed out on July 19, President Reagan’s former director of the Office of Management and Budget (OMB) – David Stockman – spoke out against extending the Bush tax cuts for the wealthy, during an interview with Lloyd Grove of The Daily Beast:

The Bush tax cuts never should’ve been passed because, one, we couldn’t afford them, and second, we didn’t earn them  …

The infamous former Federal Reserve chairman, Alan Greenspan, had already spoken out against the Bush tax cuts on July 16, during an interview with Judy Woodruff on Bloomberg Television.  In response to Ms. Woodruff’s question as to whether the Bush tax cuts should be extended, Greenspan replied:  “I should say they should follow the law and let them lapse.”

When Alan Greenspan appeared on the August 1 broadcast of NBC’s Meet The Press, David Gregory directed Greenspan’s attention back to the interview with Judy Woodruff, and asked Mr. Greenspan if he felt that all of the Bush tax cuts should be allowed to lapse.  Here is Greenspan’s reply and the follow-up:

MR.GREENSPAN:  Look, I’m very much in favor of tax cuts, but not with borrowed money.  And the problem that we’ve gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous.  And my view is I don’t think we can play subtle policy here on it.

MR. GREGORY:  You don’t agree with Republican leaders who say tax cuts pay for themselves?

MR. GREENSPAN:  They do not.

The drumbeat to extend the Bush tax cuts has been ongoing.  Federal Reserve chairman, Ben Bernanke, claimed on July 23, that those tax cuts would be one way of providing stimulus for the economy – provided that such a move were to be offset “with increased revenue or lower spending.”  Increased revenue?  Does that mean that people – other than those earning in excess of $250,000 per year – should make up the difference by paying higher taxes?

On July 31, David Stockman came back with a huge dose of common sense, in the form of an op-ed piece for The New York Times entitled, “Four Deformations of the Apocalypse”.  It began with this statement:

IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing.  The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion.  That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice.  It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

The article included a boxcar full of great thoughts – among them was Stockman’s criticism of the latest incarnation of voodoo economics:

Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too.  But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

Mr. Stockman took care to lay blame at the foot of the man he described in the Lloyd Grove interview as an “evil genius” – Milton Friedman – who convinced President Nixon in 1971 to “to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves.”

Despite the fact that tax cuts are considered by many as the ultimate panacea for all of America’s economic problems, David Stockman set the record straight about how the religion of taxcut-ology began:

Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts.  But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation, enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts.

By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s.

Stockman’s discussion of “the vast, unproductive expansion of our financial culture” is probably just a teaser for his upcoming book on the financial crisis:

But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises.  They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives.  They could never have survived, much less thrived, if their deposits had not been governmentguaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.

On the day following the publication of Stockman’s essay, Sarah Palin appeared on Fox News Sunday – prepared with notes again written on the palm of her hand – to argue in support of extending the Bush tax cuts.  Although her argument was directed against the Obama administration, I was fixated on the idea of a debate on the subject between Palin and her fellow Republican, David Stockman.  Some of those Republicans vying for their party’s 2012 Presidential nomination were probably thinking about the same thing.