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Grasping Reality With The Opinions Of Others

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In the course of attempting to explain or criticize complex economic and financial issues, it usually becomes necessary to quote from the experts – often at length – to provide an understandable commentary.  Nevertheless, it was with great pleasure that I read about a dust-up involving Megan McArdle’s use of a published interview conducted by Bruce Bigelow of Xconomy, without attribution.  The incident was recently discussed by Brad DeLong.  (If you are a regular reader of Professor DeLong’s blog, you might recognize the title of this posting as a variant on the name of his website.)  Before I move on, it will be necessary to expand this moment of schadenfreude, due to the ironic timing of the controversy.  On March 7, Time published a list of “The 25 Best Financial Blogs”, with McArdle’s blog as number 15.  Aside from the fact that many worthy bloggers were overlooked by Time (including Mish and Simon Johnson) the list drew plenty of criticism for its inclusion of McArdle’s blog.  Here are just some of the comments to that effect, which appeared on the Naked Capitalism website:

duffolonious says:

Megan McArdle?  Seriously?  I’ve seen so many people rip her to shreds that I’ve completely ignored her.

Is she another example of nepotism?  Like Bill Kristol.

Procopius says:

Basically yes, although not quite as blatant.  Her old man was an inspector of contracting in New York City.  He got surprisingly rich.  From that he went to starting his own contracting business.  He got surprisingly rich.  Then he went back to New York City in an even higher level supervisory job.  He got surprisingly rich.  So Megan went to good schools and had her daddy’s network of influential “friends” to help her with her “job search” when she graduated.  Of course, she’s no dummy, and did a professional job of networking with all the “right” people she met at school, too.

For my part, in order to discuss the proposed settlement resulting from the investigation of the five largest banks and mortgage servicers conducted by state attorneys general and federal officials (including the Justice Department, the Treasury and the newly-formed Consumer Financial Protection Bureau) I will rely on the commentary from some of my favorite financial bloggers.  The investigating officials submitted this 27-page proposal as the starting point for what is expected to be a weeks-long negotiation process, possibly resulting in some loan modifications as well as remedies for those who faced foreclosures expedited by the use of “robo-signers” and other questionable practices.

Yves Smith of Naked Capitalism criticized the settlement proposal as “Bailout as Reward for Institutionalized Fraud”:

The argument defenders of the deal make are twofold:  this really is a good deal (hello?) and it’s as far as the Obama Administration is willing to push the banks, so we have to put a lot of lipstick on this pig and resign ourselves to political necessities.  And the reason the Obama camp is trying to declare victory and go home is that it is afraid that any serious effort to deal with the mortgage mess will reveal the insolvency of the banks.

Team Obama had put on a full court press since March 2009 to present the banks as fundamentally sound, and to the extent they needed more dough, the stress tests and resulting capital raising took care of any remaining problems.  Timothy Geithner was even doing victory laps last month in Europe.  To reverse course now and expose the fact that writedowns on second mortgages held by the four biggest banks and plus the true cost of legal liabilities from the mortgage crisis (putbacks, servicer fraud, chain of title issues) would blow a big hole in the banks’ balance sheets and fatally undermine whatever credibility the officialdom still has.

But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs.  But these losses exist already.  The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist.

The perspective taken by Edward Harrison of Credit Writedowns focused on the extent to which we can find the fingerprints of Treasury Secretary Tim Geithner on the settlement proposal.  Ed Harrison emphasized the significance of Geithner’s final remarks from an interview conducted last year by Daniel Gross for Slate:

The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.

From there, Ed Harrison illustrated how Geithner’s roadmap has been based on the willingness to follow that logic:

More than ever, Tim Geithner runs the show for economic policy. He is the last man standing of the Old Obama team.  Volcker, Summers, Orszag, and Romer are all gone.  So Geithner’s vision of bailouts and settlements is the one that carries the most weight.

What is Geithner saying with his policies?

  • The financial system was on the verge of collapse.  We all know that now – about US banks and European ones too.  Fed Chair Ben Bernanke has said so as has Bank of England head Mervyn King.  The WikiLeaks cables affirmed systemic insolvency as the real issue most demonstrably.
  • When presented with a choice of Japan or Sweden as the model for crisis resolution, the US felt the Japan banking crisis response was the best historical precedent.  It is still unclear whether this was a political or an economic decision.
  • The most difficult political aspect of the banking crisis response was socialising bank lossesAll banking crisis bailouts involve some form of loss socialisation and this is a policy which citizens find abhorrent.  That’s what Geithner meant most directly about ‘deeply unpopular, deeply hard to understand’.
  • Using pro-inflationary monetary policy and fiscal stimulus, the U.S. can put this crisis in the rear view mirror.  Low interest rates and a steep yield curve combined with bailouts, stress tests, dividend reductions and private capital will allow time to heal all wounds.  That is the Geithner view.
  • Once the system is healthy again, it should expand.  The reason you need to bail the banks out is that they have expansion opportunities abroad.  As emerging markets develop more sophisticated financial markets, the Treasury secretary believes American banks are well positioned to profit.  American finance can’t profit if you break up the banks.

I would argue that Tim Geithner believes we are almost at that final stage where the banks are now healthy enough to get bigger and take share in emerging markets.  His view is that a more robust regulatory environment will keep things in check and prevent another financial crisis.

I hope this helps to explain why the Obama Administration is keen to get this $20 billion mortgage settlement done.  The prevailing view in the Administration is that the U.S. is in a fragile but sustainable recovery.  With emerging markets leading the economic recovery and U.S. banks on sounder footing, now is the time to resume the expansion of U.S. financial services.  I should also add that given the balance sheet recession in the U.S., the only way banks can expand is via an expansion abroad.

I strongly disagree with this vision of America’s future economic development.  But this is the road we are on.

Will those of us who refuse to believe in Tinkerbelle face the blame for the next financial crisis?


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An Army Of Lobbyists For The Middle Class

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Federal Reserve Chairman, Ben Bernanke appeared before the Senate Banking Committee this week to testify about the Fed’s monetary policy.  Scot Kersgaard of The American Independent focused our attention on a five-minute exchange between Colorado Senator Michael Bennett and The Ben Bernank, with an embedded video clip.  Senator Bennett asked Bernanke to share his opinions concerning the recommendations made by President Obama’s bipartisan deficit commission.  Bernanke initially attempted to dodge the question with the disclaimer that the Fed’s authority extends to only monetary policy rather than fiscal policy – such as the work conducted by the deficit commission.  If Congressman Ron Paul had been watching the hearing take place, I’m sure he had a good, hard laugh at that statement.  Nevertheless, Bernanke couldn’t restrain himself from concurring with the effort to place the cost of Wall Street’s larceny on the backs of middle-class taxpayers.

The chant for “entitlement reform” continues to reverberate throughout the mainstream media as it has for the past year.  Last May, economist Dean Baker exposed this latest effort toward upward wealth redistribution:

Emboldened by the fact that none of them have gone to jail for their role in the financial crisis, the Wall Street gang is now gunning for Social Security and Medicare, the country’s most important safety net programs. Led by investment banker Pete Peterson, this crew is spending more than a billion dollars to convince the public that slashing these programs is the only way to protect our children and grandchildren from poverty.

A key propaganda tactic used by the “entitlement reform” crusaders is to characterize Social Security as an “entitlement” even though it is not (as I discussed here).  Phil Davis, avowed capitalist and self-described “serial entrepreneur”, wrote a great essay, which refuted the claim that Social Security is “broken” while explaining why it is not an “entitlement”.  Unfortunately, there are very few politicians who are willing to step forward to provide the simple explanation that Social Security is not an entitlement.  Senator Richard Blumenthal (D-Conn.) recently made a statement to that effect before a senior citizens’ group in East Haven, Connecticut – without really providing an explanation why it is not an entitlement.  Susan Feiner wrote a great commentary on the subject last fall for womensenews.org.  Here is some of what she said:

Moreover, Social Security is not an entitlement program as it’s paid for entirely by payroll taxes.  It is an insurance program, not an entitlement. Not one penny of anyone’s Social Security comes out of the federal government’s general fund.

Social Security is, by law, wholly self-financing.  It has no legal authority to borrow, so it never has.

If this incredibly successful and direly needed program hasn’t ever borrowed a dime, why is the president and his hand-picked commissioners putting Social Security cuts (and/or increases in the retirement age) in the same sentence as deficit reduction?

The attempt to mischaracterize Social Security as an “entitlement” is not a “Right vs. Left” dispute —  It’s a class warfare issue.  There have been commentaries from across the political spectrum emphasizing the same fact:  Social Security is not an “entitlement”.  The assertion has appeared on the conservative patriotsteaparty.net website, the DailyKos on the Left and in a piece by independent commentator, Marti Oakley.

The battle for “entitlement reform” is just one front in the larger war being waged by Wall Street against the middle class.  Kevin Drum discussed this conflict in a recent posting at his Plutocracy Now blog for Mother Jones:

It’s about the loss of a countervailing power robust enough to stand up to the influence of business interests and the rich on equal terms.  With that gone, the response to every new crisis and every new change in the economic landscape has inevitably pointed in the same direction.  And after three decades, the cumulative effect of all those individual responses is an economy focused almost exclusively on the demands of business and finance.  In theory, that’s supposed to produce rapid economic growth that serves us all, and 30 years of free-market evangelism have convinced nearly everyone — even middle-class voters who keep getting the short end of the economic stick — that the policy preferences of the business community are good for everyone.  But in practice, the benefits have gone almost entirely to the very wealthy.

One of my favorite commentators, Paul Farrell of MarketWatch made this observation on March 1:

Wall Street’s corrupt banks have lost their moral compass … their insatiable greed has become a deadly virus destroying its host nation … their campaign billions buy senate votes, stop regulators’ actions, manipulate presidential decisions.  Wall Street money controls voters, runs America, both parties.  Yes, Wall Street is bankrupting America.

Wake up America, listen:

  • “Our country is bankrupt.  It’s not bankrupt in 30 years or five years,” warns economist Larry Kotlikoff, “it’s bankrupt today.”
  • Economist Peter Morici:  “Capitalism is broken, America’s government is two bankrupt political parties bankrupting the country.”
  • David Stockman, Reagan’s budget director:  “If there were such a thing as Chapter 11 for politicians” the “tax cuts would amount to a bankruptcy filing.”
  • BusinessWeek recently asked analyst Mary Meeker to run the numbers.  How bad is it? America really is bankrupt, with a “net worth of a negative $44 trillion.” Bankrupt.

And it will get worse.  Unfortunately, nothing can stop America’s self-destructive Wall Street bankers.  They simply do not care that their “doomsday capitalism” is destroying themselves from within, and is bankrupting America too.

On February 21, I quoted a statement made by bond guru Bill Gross of PIMCO, which included this thought:

America requires more than a makeover or a facelift.  It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system.  It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola.

That essay by Bill Gross became the subject of an article by Terrence Keeley of Bloomberg News.  Mr. Keeley’s reaction to the suggestions made by Bill Gross was this:

To redeem Wall Street’s soul, radical solutions are clearly needed, but advocating the eradication of profit-based markets that have served humanity well on balance without a viable replacement is fanciful. Gross deserves an “A” for intent — but something more practical than a “heart transplant” is required to restore trust and efficacy to our banking system.

*   *   *

But an economy based on something other than profit risks misery and injustice of another sort.  The antibodies now needed aren’t those that negate profitability.  Rather, they are the ones that bind financial engineering to value creation and advancement of society.

Perhaps the most constructive solution to the problem is my suggestion from February 10:  Recruit and employ an army of lobbyists to represent and advance the interests of the middle class on Capitol Hill.  Some type of non-partisan, “citizens’ lobby” could be created as an online community.  Once its lobbying goals are developed and articulated, an online funding drive would begin.  The basic mission would be to defend middle-class taxpayers from the tyranny of the plutocracy that is destroying not just the middle class – but the entire nation.  Fight lobbyists with lobbyists!


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Troublesome Creatures

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A recent piece by Glynnis MacNicol of The Business Insider website led me to the conclusion that Shepard Smith deserves an award.  You might recognize Shep Smith as The Normal Guy at Fox News.  In case you haven’t heard about it yet, a controversy has erupted over a 20-minute crank telephone call made to Wisconsin Governor Scott Walker by a man who identified himself as David Koch, one of two billionaire brothers, famous for bankrolling Republican politicians.  The caller was actually blogger Ian Murphy, who goes by the name, Buffalo Beast.  In a televised discussion with Juan Williams concerning the controversy surrounding Wisconsin Governor Walker, Shep Smith focused on the ugly truth that the Koch brothers are out to “bust labor”.  Here are Smith’s remarks as they appeared at The Wire blog:

It’s all political isn’t it?  Isn’t it just 100% politics? … Have you looked at the list of the top 10 donors to political campaigns?  Seven of those 10 donate to Republicans.  The other three that remain of those top 10, they all donate to Democrats and they are all unions.  Bust the unions, it’s over … . And this started when?  It started with the Koch brothers.  The Koch brothers were organizing…

*   *   *

I’m not taking a side on this, I’m telling you what’s going on … The facts!  But people don’t want to hear the facts … let them get angry, facts are troublesome creatures from time to time.  The Koch brothers, and others, were organized to bust labor, it’s what big business wants to do … this isn’t a new concept.  So they gave a bunch of money to the governor’s campaign.  The governor’s campaign is over.  Now, away we go!  We’re going to try to bust this union up, and that’s what they’re doing … this is political and everyone in the middle is a pawn.

Those “troublesome creatures” called facts have been finding their way into the news to a refreshing degree lately.  Emotional rhetoric has replaced news reporting to such an extreme level that most people seem to have accepted the premise that facts are relative to one’s perception of reality.  The lyrics to “Crosseyed and Painless” by the Talking Heads (written more than 30 years ago) seem to have been a prescient commentary about this situation:

Facts all come with points of view
Facts don’t do what I want them to
Facts just twist the truth around
Facts are living turned inside out

Budgetary disputes are now resolved on an emotional battlefield where facts usually take a back seat to ideology.  Despite this trend, there are occasional commentaries focused on fact-based themes.  One recent example came from David Leonhardt of The New York Times, entitled “Why Budget Cuts Don’t Bring Prosperity”.  The article began with the observation that because so many in Congress believe that budget cuts are the path to national prosperity, the only remaining question concerns how deeply spending should be cut this year.  Mr. Leonhardt provided those misled “leaders” with the facts:

The fundamental problem after a financial crisis is that businesses and households stop spending money, and they remain skittish for years afterward.  Consider that new-vehicle sales, which peaked at 17 million in 2005, recovered to only 12 million last year.  Single-family home sales, which peaked at 7.5 million in 2005, continued falling last year, to 4.6 million.  No wonder so many businesses are uncertain about the future.

Without the government spending of the last two years — including tax cuts — the economy would be in vastly worse shape.  Likewise, if the federal government begins laying off tens of thousands of workers now, the economy will clearly suffer.

That’s the historical lesson of postcrisis austerity movements.  The history is a rich one, too, because people understandably react to a bubble’s excesses by calling for the reverse.  When Franklin Roosevelt was running for president in 1932, he repeatedly called for a balanced budget.

But no matter how morally satisfying austerity may be, it’s the wrong answer.

Leonhardt’s  objective analysis drew this response from Yves Smith of Naked Capitalism:

Did a memo go out?   Leonhardt almost always hews to neoclassical orthodoxy.  This is a big change for him.

Those “troublesome creatures” called facts became the subject of an opinion piece about the budget, written by Bill Schneider for Politico.  While dissecting the emotional motivation responsible for “a dangerous political arms race where the stakes keep escalating”, Schneider set about isolating the fact-based signal from the emotional noise clouding the budget debate:

Many of the programs targeted for big cuts by the House Republicans have a suspiciously ideological tinge:  Planned Parenthood, the Environmental Protection Agency, funds to implement the new health care reform law, National Public Radio, the Corporation for Public Broadcasting, President Bill Clinton’s AmeriCorps program, money for a White House climate change czar.  The Washington Post calls the House budget “an assault on bedrock Democratic priorities.’’

The public is certainly worried about the deficit.  But do people believe the deficit is a crisis demanding immediate and radical action?  That’s not so clear.

In a Pew Research Center poll taken this month, the public was split over whether the federal government’s priority should be reducing the deficit (49 percent) or spending to help the economic recovery (46 percent).  What economic issue worries people the most? Jobs tops the list (44 percent). Fewer than half that say the deficit (19 percent).

Yes, there is an economic crisis in the country.  The crisis is jobs.  So Republicans have to argue that spending cuts will create jobs — an argument that mystifies many economists.

Let’s hope that those “troublesome creatures” keep turning up at debates, “town hall” meetings and in commentaries.  If they cause widespread allergic reactions, let nature run its course.


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No Justice For The Wicked

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Although the drumbeat continues, I remain skeptical as to whether any of the criminals responsible for causing the financial crisis will ever be brought to justice.  In the weeks before President Obama’s Inauguration, the foremost question on my mind was whether the new administration would take the necessary steps to change the culture of corruption on Wall Street:

As we approach the eve of the Obama Administration’s first day, across America the new President’s supporters have visions of “change we can believe in” dancing in their heads.  For some, this change means the long overdue realization of health care reform.  For those active in the Democratic campaigns of 2006, “change” means an end to the Iraq war.  Many Americans are hoping that the new administration will crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis.

On December 15, Stephen Labaton wrote an article for the New York Times, examining the recent failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitates such breakdowns.

At that time, I also focused on the point made in a commentary by Michael Lewis and David Einhorn, which appeared in the January 3 New York Times:

It’s not hard to see why the S.E.C. behaves as it does.  If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

I concluded that piece with a rhetorical question:

Let’s hope our new President, the Congress and others pay serious attention to what Lewis and Einhorn have said.  Cleaning up Wall Street is going to be a dirty job.  Will those responsible for accomplishing this task be up to doing it?

By March 23, 2009, it had become obvious that our new President was more concerned about the “welfare” (pun intended) of the Wall Street banks than the well-being of the American economy.  I began my posting of that date with this statement:

We the people, who voted for Barack Obama, are about to get ripped off by our favorite Hope dealer.

On August 27 of that year, I wrote another piece expressing my disappointment with how things had (not) progressed.  My October 1, 2009 posting focused on the fact that H. David Kotz, Inspector General of the Securities and Exchange Commission, issued two reports, recommending 58 changes to improve the way the agency investigates and enforces violations of securities laws, as a result of the SEC’s failure to investigate the Bernie Madoff Ponzi scheme.  The reports exposed a shocking degree of ineptitude at the SEC.

After the release of the report by bankruptcy examiner Anton Valukas, pinpointing the causes of the collapse of Lehman Brothers, I lamented the fact that the mainstream media hadn’t shown much concern about the matter, despite the terrible fraud exposed in the report.  Nevertheless, by the next day, I was able to highlight some great commentaries on the Valukas Report and I felt optimistic enough to conclude the piece with this thought:

We can only hope that a continued investigation into the Lehman scandal will result in a very bright light directed on those privileged plutocrats who consider themselves above the law.

If only  . . .

By the eve of the mid-term elections, I had an answer to the question I had posed on January 5, 2009 as to whether our new President and Congress would be up to the task of cleaning up Wall Street:

One common theme voiced by many critics of the Obama administration has been its lack of interest in prosecuting those responsible for causing the financial crisis.  Don’t hold your breath waiting for Attorney General Eric Hold-harmless to initiate any criminal proceedings against such noteworthy individuals as Countrywide’s Angelo Mozilo or Dick Fuld of Lehman Brothers.  On October 23, Frank Rich of The New York Times mentioned both of those individuals while lamenting the administration’s failure to prosecute the “financial crimes that devastated the nation”:

The Obama administration seems not to have a prosecutorial gene.   It’s shy about calling a fraud a fraud when it occurs in high finance.
*   *   *
Since Obama has neither aggressively pursued the crash’s con men nor compellingly explained how they gamed the system, he sometimes looks as if he’s fronting for the industry even if he’s not.

The special treatment afforded to the perpetrators of the frauds that helped create the financial crisis wasn’t the only gift to Wall Street from the Democratically-controlled White House, Senate and Congress.  The financial “reform” bill was so badly compromised (by the Administration and Senate Democrats, themselves) as it worked its way through the legislative process, that it is now commonly regarded as nothing more than a hoax.

By the close of 2010, I noted that an expanding number of commentators shared my outrage over the likelihood that we would never see any prosecutions result from the crimes that brought about the financial crisis:

A recent article written by former New York Mayor Ed Koch began with the grim observation that no criminal charges have been brought against any of the malefactors responsible for causing the financial crisis:

Looking back on 2010 and the Great Recession, I continue to be enraged by the lack of accountability for those who wrecked our economy and brought the U.S. to its knees.  The shocking truth is that those who did the damage are still in charge.  Many who ran Wall Street before and during the debacle are either still there making millions, if not billions, of dollars, or are in charge of our country’s economic policies which led to the debacle.

Most recently, Matt Taibbi has written another great article for Rolling Stone entitled, “Why Isn’t Wall Street in Jail?”.  It’s nice to know that the drumbeat for justice continues.  Taibbi’s essay provided a great history of the crisis, with a particular emphasis on how whistleblowers were ignored, just as Harry Markopolos was ignored when (in May of 2000) he tried to alert the SEC to the fact that Bernie Madoff’s hedge fund was a multi-billion-dollar Ponzi scheme.  Here is a great passage from Matt Taibbi’s essay:

In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type.  Last year, the government deported 393,000 people, at a cost of $5 billion.  Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent.  In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would “demean the seriousness” of the offenses.

So there you have it.  Illegal immigrants:  393,000.  Lying moms:  one.  Bankers:  zero.  The math makes sense only because the politics are so obvious.  You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players.  But for stealing a billion dollars?  For fraud that puts a million people into foreclosure?  Pass.  It’s not a crime.  Prison is too harsh.  Get them to say they’re sorry, and move on.  Oh, wait — let’s not even make them say they’re sorry.  That’s too mean; let’s just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead.  But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year.  What’s next?  Taxpayer-funded massages for every Wall Street executive guilty of fraud?

Wouldn’t it be nice if public opinion meant more to the Obama administration than campaign contributions from Wall Street banksters?




Two Years Too Late

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October 11, 2010

Greg Gordon recently wrote a fantastic article for the McClatchy Newspapers, in which he discussed how former Treasury Secretary Hank Paulson failed to take any action to curb risky mortgage lending.  It should come as no surprise that Paulson’s nonfeasance in this area worked to the benefit of Goldman Sachs, where Paulson had presided as CEO for the eight years prior to his taking office as Treasury Secretary on July 10, 2006.  Greg Gordon’s article provided an interesting timeline to illustrate Paulson’s role in facilitating the subprime mortgage crisis:

In his eight years as Goldman’s chief executive, Paulson had presided over the firm’s plunge into the business of buying up subprime mortgages to marginal borrowers and then repackaging them into securities, overseeing the firm’s huge positions in what became a fraud-infested market.

During Paulson’s first 15 months as the treasury secretary and chief presidential economic adviser, Goldman unloaded more than $30 billion in dicey residential mortgage securities to pension funds, foreign banks and other investors and became the only major Wall Street firm to dramatically cut its losses and exit the housing market safely.  Goldman also racked up billions of dollars in profits by secretly betting on a downturn in home mortgage securities.

By now, the rest of that painful story has become a burden for everyone in America and beyond.  Paulson tried to undo the damage to Goldman and the other insolvent, “too big to fail” banks at taxpayer expense with the TARP bailouts.  When President Obama assumed office in January of 2009, his first order of business was to ignore the advice of Adam Posen (“Temporary Nationalization Is Needed to Save the U.S. Banking System”) and Professor Matthew Richardson.  The consequences of Obama’s failure to put those “zombie banks” through temporary receivership were explained by Karen Maley of the Business Spectator website:

Ireland has at least faced up to the consequences of the reckless lending, unlike the United States.  The Obama administration has adopted a muddle-through approach, hoping that a recovery in housing prices might mean that the big US banks can avoid recognising crippling property losses.

*   *   *

Leading US bank analyst, Chris Whalen, co-founder of Institutional Risk Analytics, has warned that the banks are struggling to cope with the mountain of problem home loans and delinquent commercial property loans.  Whalen estimates that the big US banks have restructured less than a quarter of their delinquent commercial and residential real estate loans, and the backlog of problem loans is growing.

This is eroding bank profitability, because they are no longer collecting interest on a huge chunk of their loan book.  At the same time, they also face higher administration and legal costs as they deal with the problem property loans.

Banks nursing huge portfolios of problem loans become reluctant to make new loans, which chokes off economic activity.

Ultimately, Whalen warns, the US government will have to bow to the inevitable and restructure some of the major US banks.  At that point the US banking system will have to recognise hundreds of billions of dollars in losses from the deflation of the US mortgage bubble.

If Whalen is right, Ireland is a template of what lies ahead for the US.

Chris Whalen’s recent presentation, “Pictures of Deflation” is downright scary and I’m amazed that it has not been receiving the attention it deserves.  Surprisingly — and ironically – one of the only news sources discussing Whalen’s outlook has been that peerless font of stock market bullishness:  CNBC.   Whalen was interviewed on CNBC’s Fast Money program on October 8.  You can see the video here.  The Whalen interview begins at 7 minutes into the clip.  John Carney (formerly of The Business Insider website) now runs the NetNet blog for CNBC, which featured this interview by Lori Ann LoRocco with Chris Whalen and Jim Rickards, Senior Managing Director of Market Intelligence at Omnis, Inc.  Here are some tidbits from this must-read interview:

LL:  Chris, when are you expecting the storm to hit?

CW:  When the too big to fail banks can no longer fudge the cost of restructuring their real estate exposures, on and off balance sheet. Q3 earnings may be the catalyst

LL:  What banks are most exposed to this tsunami?

CW:  Bank of America, Wells Fargo, JPMorgan, Citigroup among the top four.  GMAC.  Why do we still refer to the ugly girls — Bank of America, JPMorgan and Wells Fargo in particular — as zombies?  Because the avalanche of foreclosures and claims against the too-big-too-fail banks has not even crested.

*   *   *

LL:  How many banks to expect to fail next year because of this?

CW:  The better question is how we will deal with the process of restructuring.  My view is that the government/FDIC can act as receiver in a government led restructuring of top-four banks.  It is time for PIMCO, BlackRock and their bond holder clients to contribute to the restructuring process.

Of course, this restructuring could have and should have been done two years earlier — in February of 2009.  Once the dust settles, you can be sure that someone will calculate the cost of kicking this can down the road — especially if it involves another round of bank bailouts.  As the saying goes:  “He who hesitates is lost.”  In this case, President Obama hesitated and we lost.  We lost big.



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We Took The Wrong Turn

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October 7, 2010

The ugly truth has raised its head once again.  We did it wrong and Australia did it right.  It was just over a year ago – on September 21, 2009 – when I wrote a piece entitled, “The Broken Promise”.  I concluded that posting with this statement:

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.

I focused that piece on a fantastic report by Australian economist Steve Keen, who explained how the “money multiplier” myth, fed to Obama by the very people who caused the financial crisis, was the wrong paradigm to be starting from in attempting to save the economy.

The trouble began immediately after President Obama assumed office.  I wasn’t the only one pulling out my hair in February of 2009, when our new President decided to follow the advice of Larry Summers and “Turbo” Tim Geithner.  That decision resulted in a breach of Obama’s now-infamous campaign promise of “no more trickle-down economics”.  Obama decided to do 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.  At the Calculated Risk website, Bill McBride lamented Obama’s strident posturing in an interview conducted by Terry Moran of ABC News, when the President actually laughed off the idea of implementing the so-called “Swedish solution” of putting those insolvent banks through temporary receivership.

With the passing of time, it has become painfully obvious that President Obama took the country down the wrong path.  The Australian professor (Steve Keen) was right and Team Obama was wrong.  Economist Joseph Stiglitz made this observation on August 5, 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.

Fast-forward to October 6, 2010.  Michael Heath of Bloomberg BusinessWeek provided the latest chapter in the story of how America did it wrong while Australia did it right:

Australian Employers Added 49,500 Jobs in September

Australian employers in September added the most workers in eight months, driving the country’s currency toward a record and bolstering the case for the central bank to resume raising interest rates.

The number of people employed rose 49,500 from August, the seventh straight gain, the statistics bureau said in Sydney today.  The figure was more than double the median estimate of a 20,000 increase in a Bloomberg News survey of 25 economists.  The jobless rate held at 5.1 percent.

Meanwhile — back in the States — on October 6, ADP released its National Employment Report for September, 2010.  It should come as no surprise that our fate is 180 degrees away from that of Australia:  Private sector employment in the U.S. decreased by 39,000 from August to September on a seasonally adjusted basis, according to the ADP report.   Beyond that, October 6 brought us a gloomy forecast from Jan Hatzius, chief U.S. economist for the ever-popular Goldman Sachs Group.  Wes Goodman of Bloomberg News quoted Hatzius as predicting that the United States’ economy will be “fairly bad” or “very bad” over the next six to nine months:

“We see two main scenarios,” analysts led by Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients.  “A fairly bad one in which the economy grows at a 1 1/2 percent to 2 percent rate through the middle of next year and the unemployment rate rises moderately to 10 percent, and a very bad one in which the economy returns to an outright recession.”

Aren’t we lucky!  How wise of President Obama to rely on Larry Summers to the exclusion of most other economists!

Charles Ferguson, director of the new documentary film, Inside Job, recently offered this analysis of the milieu that facilitated the opportunity for Larry Summers to inflict his painful legacy upon us:

Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge of coordinating U.S. economic policy, deftly marginalizing others who challenged him.  Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations — quite a feat.  Never once has Summers publicly apologized or admitted any responsibility for causing the crisis.  And now Harvard is welcoming him back.

Summers is unique but not alone.  By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government.  What few Americans realize is that the revolving door is now a three-way intersection.  Summers’ career is the result of an extraordinary and underappreciated scandal in American society:  the convergence of academic economics, Wall Street, and political power.

*     *     *

Now, however, as the national recovery is faltering, Summers is being eased out while Harvard is welcoming him back.  How will the academic world receive him?  The simple answer:  Better than he deserves.

Australia is looking better than ever  —  especially when you consider that their spring season is just beginning right now     .   .   .




Party Out Of Bounds

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October 4, 2010

It’s refreshing to witness the expansion in the number of people looking forward to the demise of our two-party political system.  Tom Friedman of The New York Times recently gushed with enthusiasm about the idea of  “a serious third party”, capable of rising to the challenge of enacting important, urgently-needed legislation without offending the far left, the far right or “coal state Democrats”.  Friedman is only half-right.  We need a third, a fourth, a fifth and a sixth party, as well.  Placing all of one’s hope in THE Third Party is a formula for more disappointment.

I frequently complain that we no longer have two distinct political parties running America.  We are currently stuck under the regime of the Republi-cratic Corporatist Party.  The widely-expressed disappointment resulting from President Obama’s failure to keep his campaign promises was discussed in my previous four postings.

Salena Zito of the Pittsburgh Tribune-Review wrote a great article about her year of traveling 6,609 miles to interview 432 people identifying themselves as Democrats.  Here’s what she learned:

In coffee shops, on streetcorners and farms, at factories, the narrative was always the same:  How could such great promise have let the country down so much, so quickly?

Ms. Zito reached the conclusion that the man elected President by these voters was really no improvement from the 2004 candidate, John Kerry:

Obama is no less out of touch than the Kerry whom America watched windsurf  before the 2004 election — the same man who said last week that one reason Democrats will lose this year is that “we have an electorate that doesn’t always pay that much attention to what’s going on, so people are influenced by a simple slogan rather than the facts or the truth or what’s happening.”

Here’s where Kerry and Obama are both wrong:  The electorate that was influenced by a simple slogan – “Yes, we can” — in 2008 actually is very well-informed.

This time, that electorate isn’t voting for a dream, but for its pocketbook.

Throughout the current election cycle, the Democratic establishment has avoided the sort of challenge experienced by the Republican establishment in the form of the Tea Party movement.  That will change after November 2, at which point disgruntled Democrats will feel more comfortable jumping ship.  It took consecutive humiliations at the polls in 2006 and 2008 before the Tea Partiers were motivated to break ranks with the Republican powers that be and undertake campaigns to challenge Republican incumbents.  Their efforts paid off so well, many Tea Partiers have become enthused about having a distinct party from the Republican organization.  After the 2010 elections are concluded, we can expect to see splinter groups breaking away from the Democratic Party.

Back on April 22, Mark Willen, Senior Political Editor of The Kiplinger Letter, wrote an interesting piece, lamenting the disadvantage experienced by moderate candidates because the political primary process facilitates victory for the choices of extremist voters as a result of the enthusiasm gap.  (Extremists are more motivated to vote in primaries than moderate voters, who don’t consider themselves crusaders for a particular agenda.)  Willen sees the two parties being pushed to ideological extremes, despite the fact that most Americans consider themselves to be in the center of the political spectrum.  Another important point from that piece concerns the fact that info-tainment programs presenting extremist views get better ratings than programs featuring commentary that really is “fair and balanced”.  As a result, cable television audiences are regularly exposed to a bombardment of caustic rhetoric.

The 2012 elections could bring us a significant increase in the number of  “independent” candidates, as well as nominees from new political parties.  A change of that nature could close future mid-term enthusiasm gaps, occurring in the November elections (such as the one expected for this year).  The prospects for a larger, more diverse group of political parties are looking better with each passing day.



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Fighting The Old War

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September 30, 2010

The New York Times recently ran a story about Mayor Michael Bloomberg’s efforts to support the campaigns of centrist Republicans out of concern that the election of “Tea Party” –  backed candidates was pushing the Republican Party to the extreme right.  The article by Michael Barbaro began this way:

In an election year when anger and mistrust have upended races across the country, toppling moderates and elevating white-hot partisans, Mayor Michael R. Bloomberg is trying to pull politics back to the middle, injecting himself into marquee contests and helping candidates fend off the Tea Party.

Although it’s nice to see Mayor Bloomberg take a stand in support of centrism, I believe he is going about it the wrong way.  There are almost as many different motives driving people to the Tea Party movement as there are attendees at any given Tea Party event.  Although the movement is usually described as a far-right-wing fringe phenomenon, reporters who have attended the rallies and talked to the people found a more diverse group.  Consider the observations made by True Slant’s David Masciotra, who attended a Tea Party rally in Valparaiso, Indiana back on April 14:

The populist anger of the Northwest Indiana tea partiers could be moved to a left-wing protest rally without much discernible difference.

As much as the NWI Patriots seemed to hate Obama and health care reform, they also hate large corporations and the favorable treatment they are given by Washington.

*   *   *

They have largely legitimate concerns and grievances about the quality of their lives and future of their children’s lives that are not being addressed in Washington by either party.  Their wages have stagnated, while the cost of raising a family has crushingly increased.

My pet theory is that the rise of the Tea Party movement is just the first signal indicating the demise of the so-called “two-party system”.  I expect this to happen as voters begin to face up to the fact that the differences between Democratic and Republican policies are subtle when compared to the parties’ united front with lobbyists and corporations in trampling the interests of individual citizens.  On July 26, I wrote a piece entitled, “The War On YOU”, discussing the battle waged by “our one-party system, controlled by the Republi-cratic Corporatist Party”.   On August 30, I made note of a recent essay at the Zero Hedge website, written 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.

Barry Ritholtz, publisher of The Big Picture website, recently wrote a piece focused on how the old Left vs. Right paradigm has become obsolete.  He explained that the current power struggle taking place in Washington (and everywhere else) is the battle of corporations against individuals:

We now live in an era defined by increasing Corporate influence and authority over the individual.  These two “interest groups” – I can barely suppress snorting derisively over that phrase – have been on a headlong collision course for decades, which came to a head with the financial collapse and bailouts.  Where there are massive concentrations of wealth and influence, there will be abuse of power.  The Individual has been supplanted in the political process nearly entirely by corporate money, legislative influence, campaign contributions, even free speech rights.

*   *   *

For those of you who are stuck in the old Left/Right debate, you are missing the bigger picture.  Consider this about the Bailouts:  It was a right-winger who bailed out all of the big banks, Fannie Mae, and AIG in the first place; then his left winger successor continued to pour more money into the fire pit.

What difference did the Left/Right dynamic make?   Almost none whatsoever.

*   *   *

There is some pushback already taking place against the concentration of corporate power:  Mainstream corporate media has been increasingly replaced with user created content – YouTube and Blogs are increasingly important to news consumers (especially younger users).  Independent voters are an increasingly larger share of the US electorate. And I suspect that much of the pushback against the Elizabeth Warren’s concept of a Financial Consumer Protection Agency plays directly into this Corporate vs. Individual fight.

But the battle lines between the two groups have barely been drawn.  I expect this fight will define American politics over the next decade.

Keynes vs Hayek?  Friedman vs Krugman?  Those are the wrong intellectual debates.  It’s you vs. Tony Hayward, BP CEO,  You vs. Lloyd Blankfein, Goldman Sachs CEO.   And you are losing    . . .

Barry Ritholtz concluded with the statement:

If you see the world in terms of Left & Right, you really aren’t seeing the world at all  . . .

I couldn’t agree more.  Beyond that, I believe that politicians who continue to champion the old Left vs. Right war will find themselves in the dust as those leaders representing the interests of human citizens  rather than corporate interests win the support and enthusiasm of the electorate.   Similarly, those news and commentary outlets failing to adapt to this changing milieu will no longer have a significant following.  It will be interesting to see who adjusts. 




Where Obama Went Wrong

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September 27, 2010

One could write an 800-page book on this subject.  During the past week, we’ve been bombarded with explanations from across the political spectrum, concerning how President Obama has gone from wildly-popular cult hero to radioactive force on the 2010 campaign trail.  For many Democrats facing re-election bids in November, the presence of Obama at one of their campaign rallies could be reminiscent of the appearance of William Macy’s character from the movie, The Cooler.  Wikipedia’s discussion of the film provided this definition:

In gambling parlance, a “cooler” is an unlucky individual whose presence at the tables results in a streak of bad luck for the other players.

Barack Obama was elected on a wave of emotion, under the banners of  “Hope” and “Change”.  These days, the emotion consensus has turned against Obama as voters feel more hopeless as a result of Obama’s failure to change anything.  His ardent supporters feel as though they have been duped.  Instead of having been tricked into voting for a “secret Muslim”, they feel they have elected a “secret Republican”.  At the Salon.com website, Glenn Greenwald has documented no less than fifteen examples of Obama’s continuation of the policies of George W. Bush, in breach of his own campaign promises.

One key area of well-deserved outrage against President Obama’s performance concerns the economy.  The disappointment about this issue was widely articulated in December of 2009, as I pointed out here.  At that time, Matt Taibbi had written an essay for Rolling Stone entitled, “Obama’s Big Sellout”, which inspired such commentators as Edward Harrison of Credit Writedowns to write this and this.  Beyond the justified criticism, polling by Pew Research has revealed that 46% of Democrats and 50% of Republicans incorrectly believe that the TARP bank bailout was signed into law by Barack Obama rather than George W. Bush.  President Obama invited this confusion with his nomination of “Turbo” Tim Geithner to the position of Treasury Secretary.  As President of the Federal Reserve of New York, Geithner oversaw the $13 billion gift Goldman Sachs received by way of Maiden Lane III.

The emotional battleground of the 2010 elections provided some fun for conservative pundit, Peggy Noonan this week as a result of the highly-publicized moment at the CNBC town hall meeting on September 20.  Velma Hart’s question to the President was emblematic of the plight experienced by many 2008 Obama supporters.  Noonan’s article, “The Enraged vs. The Exhausted” characterized the 2010 elections as a battle between those two emotional factions.  The “Velma Moment” exposed Obama’s political vulnerability as an aloof leader, lacking the ability to emotionally connect with his supporters:

The president looked relieved when she stood.  Perhaps he thought she might lob a sympathetic question that would allow him to hit a reply out of the park.  Instead, and in the nicest possible way, Velma Hart lobbed a hand grenade.

“I’m a mother. I’m a wife.  I’m an American veteran, and I’m one of your middle-class Americans.  And quite frankly I’m exhausted.  I’m exhausted of defending you, defending your administration, defending the mantle of change that I voted for, and deeply disappointed with where we are.”  She said, “The financial recession has taken an enormous toll on my family.”  She said, “My husband and I have joked for years that we thought we were well beyond the hot-dogs-and-beans era of our lives.  But, quite frankly, it is starting to knock on our door and ring true that that might be where we are headed.”

What a testimony.  And this is the president’s base.  He got that look public figures adopt when they know they just took one right in the chops on national TV and cannot show their dismay.  He could have responded with an engagement and conviction equal to the moment.  But this was our president  — calm, detached, even-keeled to the point of insensate.  He offered a recital of his administration’s achievements: tuition assistance, health care.  It seemed so off point.  Like his first two years.

Kirsten Powers of The Daily Beast provided the best analysis of how the “Velma Moment” illustrated Obama’s lack of empathy.  Where Bill Clinton is The Sorcerer, Barack Obama is The Apprentice:

Does Barack Obama suffer from an “empathy deficit?” Ironically, it was Obama who used the phrase in a 2008 speech when he diagnosed the United States as suffering from the disorder.  In a plea for unity, candidate Obama said lack of empathy was “the essential deficit that exists in this country.”  He defined it as “an inability to recognize ourselves in one another; to understand that we are our brother’s keeper; we are our sister’s keeper; that, in the words of Dr. King, we are all tied together in a single garment of destiny.”

*   *   *

And at a 2008 rally in Westerville, Ohio, Obama said, “One of the values that I think men in particular have to pass on is the value of empathy.  Not sympathy, empathy.  And what that means is standing in somebody else’s shoes, being able to look through their eyes.  You know, sometimes we get so caught up in ‘us’ that it’s hard to see that there are other people and that your behavior has an impact on them.”

Yes, President Obama, sometimes that does happen.  Take a look in the mirror.  Nothing brought this problem into relief like the two Obama supporters who confronted the president at a recent town hall meeting expressing total despair over their economic situation and hopelessness about the future.  Rather than expressing empathy, Obama seemed annoyed and proceeded with one of his unhelpful lectures.

*   *   *

One former Emoter-in-Chief, Bill Clinton, told Politico last week, “[Obama’s] being criticized for being too disengaged, for not caring.  So he needs to turn into it.  I may be one of the few people that think it’s not bad that that lady said she was getting tired of defending him.  He needs to hear it.  You need to hear. Embrace people’s anger, including their disappointment at you.  And just ask ‘em to not let the anger cloud their judgment.  Let it concentrate their judgment.  And then make your case.”

Then the kicker:  “[Obama has] got to realize that, in the end, it’s not about him. It’s about the American people, and they’re hurting.”

The American people are hurting because their President sold them out immediately after he was elected.  When faced with the choice of bailing out the zombie banks or putting those banks through temporary receivership (the “Swedish approach” – wherein the bank shareholders and bondholders would take financial “haircuts”) Obama chose to bail out the banks at taxpayer expense.  So here we are  . . .  in a Japanese-style “lost decade”.  In case you don’t remember the debate from early 2009 – peruse this February 10, 2009 posting from the Calculated Risk website.  After reading that, try not to cry after looking at this recent piece by Barry Ritholtz of The Big Picture entitled, “We Should Have Gone Swedish  . . .” :

The result of the Swedish method?  They spent 4% of GDP ($18.3 billion in today’s dollars), to rescue their banks.  That is far less than the $trillions we have spent — somewhere between 15-20% of GDP.

Final cost to the Swedes?  Less than 2% of G.D.P.  (Some officials believe it was closer to zero, depending on how certain rates of return are calculated).

In the US, the final tally is years away from being calculated — and its likely to be many times what Sweden paid in GDP % terms.

It has become apparent that the story of  “Where Obama Went Wrong” began during the first month of his Presidency.  Whoever undertakes the task of writing that book will be busy for a long time.




A Shocking Decision

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September 23, 2010

Nobody seems too surprised about the resignation of Larry Summers from his position as Director of the National Economic Council.  Although each commentator seems to have a unique theory for Summers’ departure, the event is unanimously described as “expected”.

When Peter Orszag resigned from his post as Director of the Office of Management and Budget, the gossip mill focused on his rather complicated love life.  According to The New York Post, the nerdy-looking number cruncher announced his engagement to Bianna Golodryga of ABC News just six weeks after his ex-girlfriend, shipping heiress Claire Milonas, gave birth to their love child, Tatiana.  That news was so surprising, few publications could resist having some fun with it.  Politics Daily ran a story entitled, “Peter Orszag:  Good with Budgets, Good with Babes”.  Mark Leibovich of The New York Times pointed out that the event “gave birth” to a fan blog called Orszagasm.com.  Mr. Leibovich posed a rhetorical question at the end of the piece that was apparently answered with Orszag’s resignation:

This goes to another obvious — and recurring — question:  whether someone whose personal life has become so complicated is really fit to tackle one of the most demanding, important and stressful jobs in the universe. “Frankly I don’t see how Orszag can balance three families and the national budget,” wrote Joel Achenbach of The Washington Post.

The shocking nature of the Orszag love triangle was dwarfed by President Obama’s nomination of Orszag’s replacement:  Jacob “Jack” Lew.  Lew is a retread from the Clinton administration, at which point (May 1998 – January 2001) he held that same position:  OMB Director.  That crucial time frame brought us two important laws that deregulated the financial industry:  the Financial Services Modernization Act of 1999 (which legalized proprietary trading by the Wall Street banks) and the Commodity Futures Modernization Act of 2000, which completely deregulated derivatives trading, eventually giving rise to such “financial weapons of mass destruction” as naked credit default swaps.  Accordingly, it should come as no surprise that Lew does not believe that deregulation of the financial industry was a proximate cause of  the 2008 financial crisis.  Lew’s testimony at his September 16 confirmation hearing before the Senate Budget Committee was discussed by Shahien Nasiripour  of The Huffington Post:

Lew, a former OMB chief for President Bill Clinton, told the panel that “the problems in the financial industry preceded deregulation,” and after discussing those issues, added that he didn’t “personally know the extent to which deregulation drove it, but I don’t believe that deregulation was the proximate cause.”

Experts and policymakers, including U.S. Senators, commissioners at the Securities and Exchange Commission, top leaders in Congress, former financial regulators and even Obama himself have pointed to the deregulatory zeal of the Clinton and George W. Bush administrations as a major cause of the worst financial crisis since the Great Depression.

During 2009, Lew was working for Citigroup, a TARP beneficiary.  Between the TARP bailout and the Federal Reserve’s purchase of mortgage-backed securities from that zombie bank, Citi was able to give Mr. Lew a fat bonus of $950,000 – in addition to the other millions he made there from 2006 until January of 2009 (at which point Hillary Clinton found a place for him in her State Department).

The sabotage capabilities Lew will enjoy as OMB Director become apparent when revisiting my June 28 piece, “Financial Reform Bill Exposed As Hoax”:

Another victory for the lobbyists came in their sabotage of the prohibition on proprietary trading (when banks trade with their own money, for their own benefit).  The bill provides that federal financial regulators shall study the measure, then issue rules implementing it, based on the results of that study.  The rules might ultimately ban proprietary trading or they may allow for what Jim Jubak of MSN calls the “de minimus” (trading with minimal amounts) exemption to the ban.  Jubak considers the use of the de minimus exemption to the so-called ban as the likely outcome.  Many commentators failed to realize how the lobbyists worked their magic here, reporting that the prop trading ban (referred to as the “Volcker rule”) survived reconciliation intact.  Jim Jubak exposed the strategy employed by the lobbyists:

But lobbying Congress is only part of the game.  Congress writes the laws, but it leaves it up to regulators to write the rules.  In a mid-June review of the text of the financial-reform legislation, the Chamber of Commerce counted 399 rule-makings and 47 studies required by lawmakers.

Each one of these, like the proposed de minimus exemption of the Volcker rule, would be settled by regulators operating by and large out of the public eye and with minimal public input.  But the financial-industry lobbyists who once worked at the Federal Reserve, the Treasury, the Securities and Exchange Commission, the Commodities Futures Trading Commission or the Federal Deposit Insurance Corp. know how to put in a word with those writing the rules.  Need help understanding a complex issue?  A regulator has the name of a former colleague now working as a lobbyist in an e-mail address book.  Want to share an industry point of view with a rule-maker?  Odds are a lobbyist knows whom to call to get a few minutes of face time.

You have one guess as to what agency will be authorized to make sure those new rules comport with the intent of the financial “reform” bill   .   .   .   Yep:  the OMB (see OIRA).

President Obama’s nomination of Jacob Lew is just the latest example of a decision-making process that seems incomprehensible to his former supporters as well as his critics.  Yves Smith of Naked Capitalism refuses to let Obama’s antics go unnoticed:

The Obama Administration, again and again, has taken the side of the financial services industry, with the occasional sops to unhappy taxpayers and some infrequent scolding of the industry to improve the optics.

Ms. Smith has developed some keen insight about the leadership style of our President:

The last thing Obama, who has been astonishingly accommodating to corporate interests, needs to do is signal weakness.  But he has made the cardinal mistake of trying to please everyone and has succeeded in having no one happy with his policies.  Past Presidents whose policies rankled special interests, such as Roosevelt, Johnson, and Reagan, were tenacious and not ruffled by noise.  Obama, by contrast, announces bold-sounding initiatives, and any real change will break eggs and alienate some parties, then retreats.  So he creates opponents, yet fails to deliver for his allies.

Yes, the Disappointer-In-Chief has failed to deliver for his allies once again – reinforcing my belief that he has no intention of running for a second term.