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Niall Ferguson Softens His Austerity Stance

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I have previously criticized Niall Ferguson as one of the gurus for those creatures described by Barry Ritholtz as “deficit chicken hawks”.  The deficit chicken hawks have been preaching the gospel of economic austerity as an excuse for roadblocking any form of stimulus (fiscal or monetary) to rehabilitate the American economy.  Ferguson has now backed away from the position he held two years ago – that the United States has been carrying too much debt

Henry Blodget of The Business Insider justified his trip to Davos, Switzerland last week by conducting an important interview with Niall Ferguson at the annual meeting of the World Economic Forum.  For the first time, Ferguson conceded that he had been wrong with his previous criticism about the level of America’s sovereign debt load, although he denied ever having been a proponent of “instant austerity” (which is currently advocated by many American politicians).  While discussing the extent of the sovereign debt crisis in Europe, Ferguson re-directed his focus on the United States:

I think we are going to get some defaults one way or the other.  The U.S. is a different story.  First of all I think the debt to GDP ratio can go quite a lot higher before there’s any upward pressure on interest rates.  I think the more I’ve thought about it the more I’ve realized that there are good analogies for super powers having super debts.  You’re in a special position as a super power.  You get, especially, you know, as the issuer of the international reserve currency, you get a lot of leeway.  The U.S. could conceivably grow its way out of the debt.  It could do a mixture of growth and inflation.  It’s not going to default.  It may default on liabilities in Social Security and Medicare, in fact it almost certainly will.  But I think holders of Treasuries can feel a lot more comfortable than anyone who’s holding European bonds right now.

BLODGET: That is a shockingly optimistic view of the United States from you.  Are you conceding to Paul Krugman that over the near-term we shouldn’t worry so much?

FERGUSONI think the issue here got a little confused, because Krugman wanted to portray me as a proponent of instant austerity, which I never was.  My argument was that over ten years you have to have some credible plan to get back to fiscal balance because at some point you lose your credibility because on the present path, Congressional Budget Office figures make it clear, with every year the share of Federal tax revenues going to interest payments rises, there is a point after which it’s no longer credible.  But I didn’t think that point was going to be this year or next year.  I think the trend of nominal rates in the crisis has been the trend that he forecasted.  And you know, I have to concede that. I think the reason that I was off on that was that I hadn’t actually thought hard enough about my own work.  In the “Cash Nexus,” which I published in 2001, I actually made the argument that very large debts are sustainable, if your borrowing costs are low. And super powers – Britain was in this position in the 19th century – can carry a heck of a lot of debt before investors get nervous.  So there really isn’t that risk premium issue. There isn’t that powerful inflation risk to worry about.  My considered and changed view is that the U.S. can carry a higher debt to GDP ratio than I think I had in mind 2 or 3 years ago.  And higher indeed that my colleague and good friend, Ken Rogoff implies, or indeed states, in the “This Time Is Different” book.  I think what we therefore see is that the U.S. has leeway to carry on running deficits and allowing the debt to pile up for quite a few years before we get into the kind of scenario we’ve seen in Europe, where suddenly the markets lose faith.  It’s in that sense a safe haven more than I maybe thought before.

*   *   *

There are various forces in [the United States’] favor. It’s socially not Japan.  It’s demographically not Japan. And I sense also that the Fed is very determined not to be the Bank of Japan. Ben Bernanke’s most recent comments and actions tell you that they are going to do whatever they can to avoid the deflation or zero inflation story.

Niall Ferguson deserves credit for admitting (to the extent that he did so) that he had been wrong.  Unfortunately, most commentators and politicians lack the courage to make such a concession.

Meanwhile, Paul Krugman has been dancing on the grave of the late David Broder of The Washington Post, for having been such a fawning sycophant of British Prime Minister David Cameron and Jean-Claude Trichet (former president of the European Central Bank) who advocated the oxymoronic “expansionary austerity” as a “confidence-inspiring” policy:

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs.  Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.”  He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate.  And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Nevertheless, you can be sure that many prominent American politicians will ignore the evidence, as well as Niall Ferguson’s course correction, and continue to preach the gospel of immediate economic austerity – at least until the time comes to vote on one of their own pet (pork) projects.

American voters continue to place an increasing premium on authenticity when evaluating political candidates.  It would be nice if this trend would motivate voters to reject the “deficit chicken haws” for the hypocrisy they exhibit and the ignorance which motivates their policy decisions.


 

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Nasty Cover-Up Gets Exposed

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Ever since the Deepwater Horizon oil rig disaster occurred on that horrible, twentieth day of April 2010, I have been criticizing the cover-up concerning the true extent of this tragedy.  Sitting here in my tinfoil hat, I felt frustrated that the mainstream media had been facilitating the obfuscation by British Petroleum and the Obama administration in their joint efforts to conceal an ongoing environmental disaster in the Gulf of Corexit.  On July 22 of that year, I wrote a piece entitled, “BP Buys Silence of Expert Witnesses”.  On August 26 of 2010, I expressed my cynicism in a piece entitled “Keeping Americans Dumb”:

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.

I got some good news this week when I learned that the mainstream media are finally beginning to acknowledge the extent of this cover-up.  While reading an essay by Gerri Miller for Forbes, I learned about a new documentary concerning the untold story of the Deepwater Horizon Disaster:  The Big Fix.

Once my enthusiasm was sparked, I began reading all I could find about this new documentary, which was co-produced by Peter Fonda.  The Guardian (at its Environment Blog) provided this useful analysis of the movie:

The Big Fix, by Josh and Rebecca Tickell, re-opens some of the most persistent questions about last year’s oil spill.  How BP was able to exert so much control over the crisis as it unfolded?  What were the long-term health consequences of using a toxic chemical, Corexit, to break up the oil and drive it underwater?

Rebecca Tickell herself had a serious reaction to the chemical after being out on the open water – and as it turned out so did the doctor she consulted in an Alabama beach town.  She still has health problems.

Josh Tickell, who grew up in Louisiana, said the Obama administration’s decision to allow the use of Corexit, which is banned in Britain, was the biggest surprise in the making of the film.

“The most shocking thing to me was the disregard with which the people of the Gulf region were dealt,” Tickell said.

“Specifically I think that there was sort of a turn-a-blind-eye attitude towards the spraying of dispersants to clean up the spill. I don’t think anyone wanted to look too deeply at the consequences.”

Gerri Miller’s article for Forbes provided more insight on what the film revealed about the injuries sustained by people in the local shrimping communities:

Dean Blanchard, whose shrimp processing company was once the largest in the U.S., has seen his supply dwindle to “less than 1 percent of the shrimp we produced before.  We get shrimp with oil in the gills and shrimp with no eyes.  The fish are dead and there are no dolphins swimming around my house.”  He knows five people who worked on cleanup crews who have died, and he suffers from sinus and throat problems.  Former shrimper Margaret Curole‘s healthy 31-year-old son worked two months on the cleanup and became so sick from dispersant exposure that he lost 52 pounds and is now unable to walk without a cane. “Most of the seafood is dead or toxic.  I wouldn’t feed it to my cat,” said her husband Kevin Curole, a fifth-generation shrimper who, like Blanchard, had friends who died from Corexit exposure.  “I used to be a surfer but I won’t go in the water anymore,” he said.  “The last time I did my eyes and lips were burning.”

EcoWatch warned us that the movie can be emotionally upsetting:

When you watch how the the Gulf residents captured in The Big Fix have been affected by Corexit and the spill, beware, it is both heart wrenching and frightening.  When you see Gulf residents driven to tears by this environmental tragedy, you want to cry with them. Rebecca, herself, was seriously sickened by Corexit during their filming in the Gulf.

When you listen to eco-activist, Jean-Michel Cousteau, son of champion of the seas Jacques-Yves Cousteau, state so emotionally in the film, “We’re being lied to,” you realize the truth about the Gulf oil spill is being covered up.

The most informative essay about The Big Fix was written by Jerry Cope for The Huffington Post.  The “official trailer” for the film can be seen here.

Ernest Hardy of LA Weekly emphasized how the film hammered away at the mainstream media complicity in the cover-up:

Josh Tickell, a Louisiana native, had two questions he wanted answered when he set out to make his documentary:  What were we not told by the media in the days and weeks immediately following the April 2010 British Petroleum oil spill in the Gulf of Mexico, and what haven’t we been told since the story faded from the news cycle?  If The Big Fix had simply tackled those questions, the story uncovered would be maddening:  BP’s repeated flaunting of safety codes; their blatant disregard for the lives of individuals and communities devastated by the spill; collusion among the U.S. government (from local to the White House), the media, and BP to hide the damage and avoid holding anyone accountable.  The film’s scope is staggering, including its detailed outlining of BP’s origins and fingerprints across decades of unrest in Iran.  By doing smart, covert reporting that shames our news media, by interviewing uncensored journalists, by speaking with locals whose health has been destroyed, and by interviewing scientists who haven’t been bought by BP (many have, as the film illustrates), Fix stretches into a mandatory-viewing critique of widespread government corruption, with one of the film’s talking heads remarking, “I don’t have any long-term hope for us [as a country] unless we find a way to control campaign financing.”  And yes, the Koch brothers are major players in the fuckery.

The theme of regulatory capture played a role in Anthony Kaufman’s critique of The Big Fix for The Wall Street Journal’s “online magazine” – Speakeasy:

Tickell says that U.S. politicians, both in the Democratic and Republican parties, are too closely tied to the oil and gas industries to regulate them effectively.  “Even if these people come in with good intentions, and what to do good for their community, in order to achieve that level of leadership, they have to seek money from oil and gas,” he says.

While the film promises to take a crack at BP, Tickell says the company is more held up as a “universal example, in the way that resource extraction companies have a certain set of operating paradigms which have lead us to a situation where we have Gulf oil spills and tar sands.”

I felt that my conspiracy theory concerning this tragedy was validated after reading a review of the movie in AZGreen Magazine:

The Big Fix makes clear that the Deepwater Horizon disaster is far from over.  Filmmakers Josh and Rebecca Tickell (makers of groundbreaking films Fuel and Freedom) courageously shine the spotlight on serious aspects of the BP oil spill that were never addressed by mainstream media.  Central to the story is the corporate deception that guided both media coverage and political action on the environmental damage (and ongoing human health consequences) caused by long-term exposure to Corexit, the highly toxic dispersant that was spewed into the Gulf of Mexico by millions of gallons.   The Big Fix drills deeply beyond media reports to demystify the massive corporate cover-up surrounding the Gulf oil spill, and BP’s egregious disregard for human and environmental health.  The film exposes collusion of oil producers, chemical manufacturers, politicians and their campaign funders that resulted in excessive use of Corexit to mask the significance of the oil, and thereby reduce the penalties paid by BP.

Reading all of this makes me wonder what happened to the people, who were discussed in my July 2010 posting, “NOAA Uses Human Canaries to Test Gulf Fish”.

The movie received a standing ovation at the Cannes Film Festival, as it did in its initial screenings in the United States.  Once audiences have a deeper look at the venal nature of the Obama Administration, it will be interesting to watch for any impact on the President’s approval ratings.


 

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Why Au-scare-ity Still Has Traction

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Many economists have been watching Britain’s experiment with austerity for quite a while.  Britain has been following a course of using cuts in government programs along with mass layoffs of public sector workers in attempt to stimulate economic growth.  Back in February, economist Dean Baker made this observation:

Three months ago, I noted that the United States might benefit from the pain being suffered by the citizens of the United Kingdom.  The reason was the new coalition government’s commitment to prosperity through austerity.  As predicted, this looks very much like a path to pain and stagnation, not healthy growth.

That’s bad news for the citizens of the United Kingdom.  They will be forced to suffer through years of unnecessarily high unemployment.  They will also have to endure cutbacks in support for important public services like healthcare and education.

But the pain for the people in England could provide a useful example for the United States.

*   *   *

Prior to this episode, there was already a solid economic case that large public deficits were necessary to support the economy in the period following the collapse of an asset bubble. The point is simply that the private sector is not prepared to make up the demand gap, at least in the short term.  Both short-term and long-term interest rates are pretty much as low as they can be.

*   *   *

From this side of the pond, though, the goal is simply to encourage people to pay attention.  The UK might be home to 60 million people, but from the standpoint of US economic policy, it is simply exhibit A:  it is the country that did what our deficit hawks want to do in the US.

The takeaway lesson should be “austerity does not work; don’t go there.”  Unfortunately, in the land of faith-based economics, evidence does not count for much.  The UK may pursue a disastrous austerity path and those of us in the United States may still have to follow the same road anyhow.

After discussing the above-quoted commentary by Dean Baker, economist Mark Thoma added this:

Yes — it’s not about evidence, it’s about finding an excuse to implement an ideology.  The recession got in the way of those efforts until the idea that austerity is stimulative came along. Thus, “austerity is stimulative” is being used very much like “tax cuts increase revenues.”  It’s a means of claiming that ideological goals are good for the economy so that supporters in Congress and elsewhere have a means of rationalizing the policies they want to put in place.  It’s the idea that matters, and contrary evidence is brushed aside.

There seems to be an effort in many quarters to deny that the financial crisis ever happened.  Although it will eventually become absolutely imperative to get deficits under control, most sober economists emphasize that attempting to do so before the economy begins to recover and before the unemployment crisis is even addressed – would destroy any chance of economic recovery.  Barack Obama’s opponents know that the easiest route toward subverting the success of his re-election campaign involves undermining any efforts toward improving the economy to any degree by November of 2012.  Beyond that, the fast-track implementation of a British-style austerity program could guarantee a double-dip recession, which could prove disastrous to Obama’s re-election hopes.  As a result, the pressure is on to initiate some significant austerity measures as quickly as possible.  The propaganda employed to expedite this effort involves scaring the sheeple into believing that the horrifying budget deficit is about to bite them in the ass right now.  There is a rapidly increasing drumbeat to crank-up the scare factor.

Of course, the existence of this situation is the result of Obama’s own blunder.  Although he did manage to defeat Osama bin Laden, President Obama’s February, 2009 decision to “punt” on the economic stimulus program – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  In his own “Tora Bora moment”, President Obama decided to rely on the advice of the very people who helped cause the financial crisis, by doing more for the zombie banks of Wall Street and less for Main Street – by sparing the banks from temporary receivership (also referred to as “temporary nationalization”) while spending less on financial stimulus.  Obama ignored the 50 economists surveyed by Bloomberg News, who warned that an $800 billion stimulus package would be inadequate.  In April of 2009, Obama chose to parrot the discredited “money multiplier” myth, fed to him by Larry Summers and “Turbo” Tim Geithner, in order to justify continuous corporate welfare for the megabanks.  If Obama had followed the right course, by pushing a stronger, more infrastructure-based stimulus program through the Democrat-controlled Senate and House, we would be enjoying a more healthy economy right now.  A significant number of the nearly fifteen million people currently unemployed could have found jobs from which they would now be paying income taxes, which reduce the deficit.  But that didn’t happen.  President Obama has no one else to blame for that error.  His opponents are now attempting to “snowball” that mistake into a disaster that could make him a one-term President.

Former Labor Secretary Robert Reich saw this coming back in March:

House Majority Leader Eric Cantor recently stated the Republican view succinctly:  “Less government spending equals more private sector jobs.”

In the past I’ve often wondered whether they’re knaves or fools.  Now I’m sure.  Republicans wouldn’t mind a double-dip recession between now and Election Day 2012.

They figure it’s the one sure way to unseat Obama.  They know that when the economy is heading downward, voters always fire the boss.  Call them knaves.

What about the Democrats?  Most know how fragile the economy is but they’re afraid to say it because the White House wants to paint a more positive picture.

And most of them are afraid of calling for what must be done because it runs so counter to the dominant deficit-cutting theme in our nation’s capital that they fear being marginalized.  So they’re reduced to mumbling “don’t cut so much.”  Call them fools.

Professor Simon Johnson, former Chief Economist of the International Monetary Fund, recently brought the focus of the current economic debate back to where it belongs:

In the nation’s latest fiscal mood swing, the mainstream consensus has swung from “we must extend the Bush tax cuts” (in December 2010) towards “we must immediately cut the budget deficit.”  The prevailing assumption, increasingly heard from both left and right, is that we already have far too much government debt – and any further significant increase will likely ruin us all.

This way of framing the debate is misleading – and very much at odds with US fiscal history.  It masks the deeper and important issues here, which are much more about distribution, in particular how much are relatively wealthy Americans willing to transfer to relatively poor Americans?

*   *   *

The real budget debate is not about a few billion here or there – for example in the context of when the government’s “debt ceiling” will be raised.  And it is not particularly about the last decade’s jump in government debt level – although this has grabbed the headlines, this is something that we can grow out of (unless the political elite decides to keep cutting taxes).

The real issue is how much relatively rich people are willing to pay and on what basis in the form of transfers to relatively poor people – and how rising healthcare costs should affect those transfers.

As the Tea Partiers flock to movie theaters to watch Atlas Shrugged, perhaps it’s time for a porno send-up, based on a steamy encounter between Ayn Rand and Gordon Gekko called, Greed Feels Good.


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Bad Timing By The Dimon Dog At Davos

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Last week’s World Economic Forum in Davos, Switzerland turned out to be a bad time for The Dimon Dog to stage a “righteous indignation” fit.  One would expect an investment banker to have a better sense of timing than what was demonstrated by the CEO of JPMorgan Chase.  Vito Racanelli provided this report for Barron’s:

The Davos panel, called “The Next Shock, Are We Better Prepared?” proceeded at a typically low emotional decibel level until Dimon was asked about what he thought of Americans who had directed their anger against the banks for the bailout.

Dimon visibly turned more animated, replying that “it’s not fair to lump all banks together.”  The TARP program was forced on some banks, and not all of them needed it, he said.  A number of banks helped stabilize things, noting that his bank bought the failed Bear Stearns.  The idea that all banks would have failed without government intervention isn’t right, he said defensively

Dimon clearly felt aggrieved by the question and the negative banker headlines, and went on for a while.

“I don’t lump all media together… .  There’s good and there’s bad.  There’s irresponsible and ignorant and there’s really smart media.  Well, not all bankers are the same.  I just think this constant refrain [of] ‘bankers, bankers, bankers,’ – it’s just a really unproductive and unfair way of treating people…  People should just stop doing that.”

The immediate response expressed by a number of commentators was to focus on Dimon’s efforts to obstruct financial reform.  Although Dimon had frequently paid lip service to the idea that no single institution should pose a risk to the entire financial system in the event of its own collapse, he did all he could to make sure that the Dodd-Frank “financial reform” bill did nothing to overturn the “too big to fail” doctrine.  Beyond that, the post-crisis elimination of the Financial Accounting Standards Board requirement that a bank’s assets should be “marked to market” values, was the only crutch that kept JPMorgan Chase from falling into the same scrap heap of insolvent banks as the other Federal Reserve welfare queens.

Simon Johnson (former chief economist at the International Monetary Fund) obviously had some fun writing a retort – published in the Economix blog at The New York Times to The Dimon Dog’s diatribe.  Johnson began by addressing the threat voiced by Dimon and Diamond (Robert E. Diamond of Barclay’s Bank):

The newly standard line from big global banks has two components  .  .  .

First, if you regulate us, we’ll move to other countries.  And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries.

This rhetoric is misleading at best.  At worst it represents a blatant attempt to shake down the public purse.

*   *   *

As we discussed at length during the Senate hearing, it is therefore not possible to discuss bringing the budget deficit under control in the foreseeable future without measuring and confronting the risks still posed by our financial system.

Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, put it well in his latest quarterly report, which appeared last week: perhaps TARP’s most significant legacy is “the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’ ”

*   *   *

In this context, the idea that megabanks would move to other countries is simply ludicrous.  These behemoths need a public balance sheet to back them up, or they will not be able to borrow anywhere near their current amounts.

Whatever you think of places like Grand Cayman, the Bahamas or San Marino as offshore financial centers, there is no way that a JPMorgan Chase or a Barclays could consider moving there.  Poorly run casinos with completely messed-up incentives, these megabanks need a deep-pocketed and somewhat dumb sovereign to back them.

After Dimon’s temper tantrum, a pile-on by commentators immediately ensued.  Elinor Comlay and Matthew Goldstein of Reuters wrote an extensive report, documenting Dimon’s lobbying record and debunking a good number of public relations myths concerning Dimon’s stewardship of JPMorgan Chase:

Still, with hindsight it’s clear that Dimon’s approach to risk didn’t help him entirely avoid the financial crisis.  Even as the first rumblings of the crisis were sounding in the distance, he aggressively sought to boost Chase’s share of the U.S. mortgage business.

At the end of 2007, after JPMorgan had taken a $1.3 billion write-down on leveraged loans, Dimon told analysts the bank was planning to add as much as $20 billion in mortgages from riskier borrowers.  “We think we’d get very good spreads and … it will be a drop in the bucket for our capital ratios.”

By mid-2008, JPMorgan Chase had $95.1 billion exposure to home equity loans, almost $15 billion in subprime mortgages and a $76 billion credit card book.  Banks were not required to mark those loans at market prices, but if the loans were accounted for that way, losses could have been as painful for JPMorgan as credit derivatives were for AIG, according to former investment bank executives.

What was particularly bad about The Dimon Dog’s timing of his Davos diatribe concerned the fact that since December 2, 2010 a $6.4 billion lawsuit has been pending against JPMorgan Chase, brought by Irving H. Picard, the bankruptcy trustee responsible for recovering the losses sustained by Bernie Madoff’s Ponzi scam victims.  Did Dimon believe that the complaint would remain under seal forever?  On February 3, the complaint was unsealed by agreement of the parties, with the additional stipulation that the identities of several bank employees would remain confidential.  The New York Times provided us with some hints about how these employees were expected to testify:

On June 15, 2007, an evidently high-level risk management officer for Chase’s investment bank sent a lunchtime e-mail to colleagues to report that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.”

Even before that, a top private banking executive had been consistently steering clients away from investments linked to Mr. Madoff because his “Oz-like signals” were “too difficult to ignore.”  And the first Chase risk analyst to look at a Madoff feeder fund, in February 2006, reported to his superiors that its returns did not make sense because it did far better than the securities that were supposedly in its portfolio.

At The Daily Beast, Allan Dodds Frank began his report on the suit with questions that had to be fresh on everyone’s mind in the wake of the scrutiny The Dimon Dog had invited at Davos:

How much did JPMorgan CEO and Chairman Jamie Dimon know about his bank’s valued customer Bernie Madoff, and when did he know it?

These two crucial questions have been lingering below the surface for more than two years, even as the JPMorgan Chase leader cemented his reputation as the nation’s most important, most upright, and most highly regarded banker.

Not everyone at Davos was so impressed with The Dimon Dog.  Count me among those who were especially inspired by the upbraiding Dimon received from French President Nicolas Sarkozy:

“Don’t be accusatory of us,” Sarkozy snapped at Dimon at the World Economic Forum in Davos, Switzerland.

“The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything.”

*   *   *
“We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense,” the Frenchman said.  “That’s what happened.”

Sarkozy also took direct aim at the bloated bonuses many bankers got despite the damage they did.

“When things don’t work, you can never find anyone responsible,” Sarkozy said.  “Those who got bumper bonuses for seven years should have made losses in 2008 when things collapsed.”

Why don’t we have a President like that?


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