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Another Great Idea From Ron Paul

July 4th, 2011 Posted in Uncategorized

Jul, 04 2011

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Congressman Ron Paul is one of the few original thinkers on Capitol Hill. Sometimes he has great ideas, although at other times he might sound a little daft. He recently grabbed some headlines by expressing the view that the United States “should declare bankruptcy”. A June 28 CNN report focused on Paul’s agreement with the contention that if bankruptcy is the cure for Greece, it is also the cure for the United States. However, as most economists will point out, the situation in Greece is not at all relevant to our situation because the United States issues its own currency and Greece is stuck with the euro, under the regime of the European Central Bank. Anyone who can’t grasp that concept should read this posting by Cullen Roche at the Seeking Alpha website.

Nevertheless, economist Dean Baker picked up on one of Congressman Paul’s points, which – if followed through to its logical conclusion – could actually solve the debt ceiling impasse. The remark by Ron Paul which inspired Dean Baker was a gripe about the $1.6 trillion in Treasury securities that the Federal Reserve now holds as a result of two quantitative easing programs:

“We owe, like, $1.6 trillion because the Federal Reserve bought that debt, so we have to work hard to pay the interest to the Federal Reserve,” Paul said. “We don’t, I mean, they’re nobody; why do we have to pay them off?”

In an article for The New Republic, Dr. Baker commended Dr. Paul for his creativity and agreed that having the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds as a result of quantitative easing “is actually a very reasonable way to deal with the crisis”. Baker provided this explanation:

Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself.

Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs.

Unfortunately, the next passage of Dr. Baker’s essay exposed the reason why this simple, logical solution would never become implemented:

As it stands now, the Fed plans to sell off its bond holdings over the next few years. This means that the interest paid on these bonds would go to banks, corporations, pension funds, and individual investors who purchase them from the Fed.

And therein lies the rub: The infamous “too-big-to-fail” banks could buy those bonds with money borrowed from the Fed at a fractional interest rate, and then collect the yield on those bonds – entirely at the expense of American taxpayers! Not only would the American people lose money by loaning the bond purchase money to the banks almost free of charge – we would lose even more money by paying those banks interest on the money we just loaned to those same banks – nearly free of charge. (This is nothing new. It’s been ongoing since the inception of “zero interest rate policy” or ZIRP on December 16, 2008.) President Obama would never allow his patrons on Wall Street to have such an opportunity “stolen” from them by the American taxpayers. Banking industry lobbyists would start swarming all over Capitol Hill carrying briefcases filled with money if any serious effort to undertake such a plan reached the discussion stage. At this point, you might suspect that the grifters on the Hill could have a scheme underway: Make a few noises about following Baker’s suggestion and wait for the lobbyists to start sharing the love.

In the mean time, the rest of us will be left to suffer the consequences of our government’s failure to raise the debt ceiling.

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Widespread Disappointment With Financial Reform

June 30th, 2011 Posted in Uncategorized

Jun, 30 2011

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Exactly one year ago, I wrote a piece entitled, “Financial Reform Bill Exposed As Hoax” wherein I expressed my outrage that the financial reform effort had become a charade. The final product resulting from all of the grandstanding and backroom deals – the Dodd–Frank bill – had become nothing more than a hoax on the American public. My essay included the reactions of five commentators, who were similarly dismayed. I concluded the posting with this remark:

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

During the year since that posting, I felt a bit less misanthropic each time someone spoke out, wrote an article or made a presentation demonstrating that our government’s “financial reform” effort was nothing more than political theater. Last July, Rich Miller of Bloomberg News reported that according to a Bloomberg National Poll, almost eighty percent of those surveyed expressed “just a little or no confidence” that the financial reform bill would make their financial assets more secure. Forty-seven percent believed that the bill would do more to protect the financial industry than consumers. The American public is not as dumb as most people claim!

This past week brought us three great perspectives on the worthlessness of our government’s financial reform facade. I was surprised that the most impressive presentation came from a Fed-head! Thomas M. Hoenig, President and CEO of the Kansas City Federal Reserve Bank, gave a speech at New York University’s Stern School of Business, concerning the future of “systemically important financial institutions” or “SIFIs” and the Dodd-Frank Act. (Bill Black prefers to call them “systemically dangerous institutions” or “SDIs”.) After a great discussion of the threat these entities pose to our financial system and the moral hazard resulting from the taxpayer-financed “safety net”, which allows creditors of the SIFIs to avoid accountability for risks taken, Tom Hoenig focused on Dodd-Frank:

Following this financial crisis, Congress and the administration turned to the work of repair and reform. Once again, the American public got the standard remedies – more and increasingly complex regulation and supervision. The Dodd-Frank reforms have all been introduced before, but financial markets skirted them. Supervisory authority existed, but it was used lightly because of political pressure and the misperceptions that free markets, with generous public support, could self-regulate.

Dodd-Frank adds new layers of these same tools, but it fails to employ one remedy used in the past to assure a more stable financial system – simplification of our financial structure through Glass-Steagall-type boundaries. To this end, there are two principles that should guide our efforts to restore such boundaries. First, institutions that have access to the safety net should be restricted to certain core activities that the safety net was intended to protect – making loans and taking deposits – and related activities consistent with the presence of the safety net.

Second, the shadow banking system should be reformed in its use of money market funds and short-term repurchase agreements – the repo market. This step will better assure that the safety net is not ultimately called upon to bail them out in crisis.

Another engaging perspective on financial reform efforts came from Phil Angelides, who served as chairman of the Financial Crisis Inquiry Commission, which conducted televised hearings concerning the causes of the financial crisis and issued its final report in January. On June 27, Angelides wrote an article for The Washington Post wherein he discussed what caused the financial crisis, the current efforts to “revise the historical narrative” of what led to the economic catastrophe, as well as the efforts to undermine, subvert and repeal the meager reforms Dodd-Frank authorized. Angelides didn’t pull any punches when he upbraided Congressional Republicans for conduct which the Democrats have been too timid (or complicit) to criticize:

If you are Rep. Paul Ryan, you ignore the fact that our federal budget deficit has ballooned more than $10 trillion annually since the financial collapse. You disregard the reality that two-thirds of the deficit increase is directly attributable to the economic downturn and bipartisan fiscal measures adopted to bolster the economy. Instead of focusing on the real cause of the deficit, you conflate today’s budgetary disaster with the long-term challenges of Medicare so you can shred the social safety net.

* * *

If you are most congressional Republicans, you turn a blind eye to the sad history of widespread lending abuses that savaged communities across the country and pledge to block the appointment of anyone to head the new Consumer Financial Protection Bureau unless its authority is weakened. You ignore the evidence of pervasive excess that wrecked our financial markets and attempt to cut funding for the regulators charged with curbing it. Across the board, you refuse to acknowledge what went wrong and then try to stop efforts to make it right.

David Sirota wrote a great essay for Salon entitled, “America’s unique hatred of finance reform”. Sirota illustrated how bipartisan efforts to undermine financial reform are turning America into – what The Daily Show with Jon Stewart called – “Sweden’s Mexico”:

On one hand, Europe’s politics of finance seem to be gradually moving in the direction of Sweden — that is, in the direction of growth and stability. As the Washington Post reports, that Scandinavian country — the very kind American Tea Party types write off with “socialist” epithets — has the kind of economy the U.S. can now “only dream of: growing rapidly, creating jobs and gaining a competitive edge (as) the banks are lending, the housing market booming (and) the budget is balanced.” It has accomplished this in part by seriously regulating its banking sector after it collapsed in the 1990s.

* * *

After passing an embarrassingly weak financial “reform” bill that primarily cemented the status quo, the U.S. government is now delaying even the most minimal new rules that were included in the legislation. At the same time, Senate Republicans are touting their plans to defund any new financial regulatory agencies; the chairman of the House Financial Services Committee has declared that “Washington and the regulators are there to serve the banks” — not the other way around; and the Obama administration is now trying to force potential economic partners to accept financial deregulation as a consequence of bilateral trade deals.

Meanwhile, the presidential campaign already looks like a contest between two factions of the same financial elite — a dynamic that threatens to make the 2012 extravaganza a contest to see which party can more aggressively suck up to the banks.

Any qualified, Independent political candidate, who is willing to step up for the American middle class and set out a plan of action to fight the financial industry as well as its lobbyists, would be well-positioned for a 2012 election victory.

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Tinfoil Hat Session

June 16th, 2011 Posted in Uncategorized

Jun, 16 2011

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I must admit – I often enjoy a good conspiracy theory. That’s just one of the reasons why I wrote a posting back on January 28, 2010 entitled, “The Conspiracy Against Conspiracy Theories”. That particular piece concerned President Obama’s appointment of Cass Sunstein to the position of Administrator of the Office of Information and Regulatory Affairs (OIRA). My beef about Sunstein was a reaction to an article written on January 12, 2010 by Daniel Tencer of The Raw Story website. Dan Tencer pointed out that Mr. Sunstein co-authored a paper with Adrian Vermule, published in the Journal of Political Philosophy in 2008 entitled, “Conspiracy Theories: Causes and Cures”. In the published paper, Sunstein and Vermule advocated for a government program to target “conspiracy groups”. I concluded my posting with this statement:

A program to conspire against conspiracy groups could serve no other purpose but to validate the claims made by those groups.

(As an aside, for a recent update on the antics of Cass Sunstein, read this essay by Dan Froomkin of the Huffington Post. It exposes Sunstein’s true function as the Obama administration’s saboteur of financial and environmental regulations, which somehow made it through Congress, despite the boatloads of ~~payoffs~~ “campaign contributions” from lobbyists. Obama’s use of Sunstein, as well as his appointment of Jacob “Jack” Lew, who replaced his fellow Citigroup tool, Peter Orszag, as Director of the Office of Management and Budget – the subject of this rant – will likely alienate a large number of former Obama supporters.)

The latest event, which has motivated me to don my tinfoil hat, concerned the mainstream news media silence concerning the Level 4 Emergency, which began on June 6, 2011 at the Fort Calhoun nuclear reactor, located 20 miles north of Omaha, Nebraska. The situation resulted from the Missouri River flood. The event involved an electrical fire, requiring plant evacuation because the fire evaporated some of the cooling water from the reactor’s spent fuel pool. As a result of the Fukushima disaster, most of us know what happens when the pool containing spent fuel rods loses its water. On the other hand, most of us don’t know that this event happened at the Fort Calhoun reactor last week. I found out about it when I read this piece at The Business Insider website.

As of this writing, the only “mainstream news” article I could find from a Google search on the subject was this item from The Washington Post. The short, “nothing to see here – move along” article began with this statement:

A small fire briefly knocked out the cooling system for used fuel at a nuclear power plant in Nebraska, but temperatures never exceeded safe levels and power was quickly restored, federal officials said Wednesday.

To learn just how dangerous the Fort Calhoun situation really was, listen to this 40-minute, WBAI Radio interview with Arnie Gundersen of Fairewinds Associates. (A review of the Fairewinds Associates website reveals that Mr. Gundersen is a respected authority in the field of nuclear power engineering, who is no stranger to CNN.) During the WBAI Radio interview, Mr. Gundersen made a number of points, which made me wonder about the caliber of chuckleheads we have working at the NRC, who are supposed to be protecting us from radiation hazards. Worse yet, I began to wonder what decision the NRC might reach in considering the Tennessee Valley Authority’s request to reactivate “the zombie reactor” – Bellefonte 1 – in Hollywood, Alabama. Scary stuff!

Pondering the question of why the Fort Calhoun reactor incident was “spiked” by most mainstream news outlets might lead many to suspect that the “big media” are out to protect the nuclear power industry – a big advertiser. My own theory is focused on the possibility that there is a good deal of “self-censorship” taking place with respect to the subject of nuclear power plant hazards, out of fear that terrorists might somehow attempt to exploit those vulnerabilities. This would be yet another area where the reaction to the September 11 attacks could end up causing more harm to Americans. The pretext of “not educating the terrorists” is used to keep the American public in the dark – about how regulatory capture can compromise public safety. I was reminded of what Dan Rather said about media “self-censorship” in a BBC interview during the early days of the “war on terror”, back in May of 2002:

Rather says: “It is an obscene comparison – you know I am not sure I like it – but you know there was a time in South Africa that people would put flaming tyres around people’s necks if they dissented. And in some ways the fear is that you will be necklaced here, you will have a flaming tyre of lack of patriotism put around your neck. Now it is that fear that keeps journalists from asking the toughest of the tough questions, and to continue to bore in on the tough questions so often. And again, I am humbled to say, I do not except myself from this criticism.”

Rather admits self-censorship: “What we are talking about here – whether one wants to recognise it or not, or call it by its proper name or not – is a form of self-censorship. It starts with a feeling of patriotism within oneself. It carries through with a certain knowledge that the country as a whole – and for all the right reasons – felt and continues to feel this surge of patriotism within themselves. And one finds oneself saying: ‘I know the right question, but you know what? This is not exactly the right time to ask it’.”

For the mainstream media, it’s never the “right time” to ask the tough questions. That’s why so many people primarily rely on internet-based sources for the news.

June 18 Update: The Bulletin of the Atomic Scientists published an article on June 16 entitled, “Rising water, falling journalism”, which characterized the news coverage of the Fort Calhoun situation as a “failure of the fourth estate”:

Newspapers and websites all over the country have reported on the flooding and fire at Fort Calhoun, but most articles simply paraphrase and regurgitate information from the NRC and OPPD (Omaha Public Power District) press releases, which aggregators and bloggers then, in turn, simply cut and paste.

* * *

Admittedly, it’s not easy finding information about Fort Calhoun, even if you’re a local reporter without a tight deadline. OPPD press releases and the company’s online newsroom do not provide details about the plant’s layout and components. Some of that information was available before 9/11 but was removed because of concerns about terrorism. In protecting ourselves from enemies, we have also hidden vital information from ourselves.

Meanwhile, Arnie Gundersen has disclosed some disturbing information about the ongoing Fukushima crisis. Did an American news outlet run the story? Nope. You can read the bad news at Al Jazeera. This raises the question of why the American news media might believe that they have the power to determine whether terrorists could gain access to this type of information

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Obama On The Ropes

June 13th, 2011 Posted in Uncategorized

Jun, 13 2011

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You’ve been reading it everywhere and hearing it from scores of TV pundits: The ongoing economic crisis could destroy President Obama’s hopes for a second term. In a recent interview with Alexander Bolton of The Hill, former Democratic National Committee chairman, Howard Dean warned that the economy is so bad that even Sarah Palin could defeat Barack Obama in 2012. Dean’s statement was unequivocal: “I think she could win.”

I no longer feel guilty about writing so many “I told you so” pieces about Obama’s failure to heed sane economic advice since the beginning of his term in the White House. A chorus of commentators has begun singing that same tune. In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I predicted that our new President would realize that his economic stimulus program was inadequate because he followed the advice from the wrong people. After quoting the criticisms of a few economists who warned (in January and February of 2009) that the proposed stimulus would be insufficient, I said this:

Despite all these warnings, as well as a Bloomberg survey conducted in early February, revealing the opinions of economists that the stimulus would be inadequate to avert a two-percent economic contraction in 2009, the President stuck with the $787 billion plan. He is now in the uncomfortable position of figuring out how and when he can roll out a second stimulus proposal.

President Obama should have done it right the first time. His penchant for compromise – simply for the sake of compromise itself – is bound to bite him in the ass on this issue, as it surely will on health care reform – should he abandon the “public option”. The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return. The voting public will perceive this as weak leadership.

Stephanie Kelton recently provided us with an interesting reminiscence of that fateful time, in a piece she published on William Black’s New Economic Perspectives website:

Some of us saw this coming. For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery. Anything shy of that, they worried, would fail to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.

* * *

In July 2009, I wrote a post entitled, “Gift-Wrapping the White House for the GOP.” In it, I said:

“If President Obama wants a second term, he must join the growing chorus of voices calling for another stimulus and press forward with an ambitious program to create jobs and halt the foreclosure crisis.”

With the recent announcement of Austan Goolsbee’s planned departure from his brief stint as chairman of the Council of Economic Advisers, much has been written about Obama’s constant rejection of the “dissenting opinions” voiced by members of the President’s economics team, such as those expressed by Goolsbee and his predecessor, Christina Romer. Obama chose, instead, to paint himself into a corner by following the misguided advice of Larry Summers and “Turbo” Tim Geithner. Ezra Klein of The Washington Post recently published some excerpts from a speech (pdf) delivered by Professor Romer at Stanford University in May of 2011. At one point, she provided a glimpse of the acrimony, which often arose at meetings of the President’s economics team:

Like the Federal Reserve, the Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery. I remember that fall of 2009 as a very frustrating one. It was very clear to me that the economy was still struggling, but the will to do more to help it had died.

There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit. A number of us tried to make the case that more action was desperately needed and would be effective. Normally, meetings with the President were very friendly and free-wheeling. He likes to hear both sides of an issue argued passionately. But, about the fourth time we had the same argument over more stimulus in front of him, he had clearly had enough. As luck would have it, the next day, a reporter asked him if he ever lost his temper. He replied, “Yes, I let my economics team have it just yesterday.”

By May of 2010, even Larry Summers was discussing the need for further economic stimulus measures, which I discussed in a piece entitled, “I Knew This Would Happen”. Unfortunately, most of the remedies suggested at that time were never enacted – and those that were undertaken, fell short of the desired goal. Nevertheless, Larry Summers is back at it again, proposing a new round of stimulus measures, likely due to concern that Obama’s adherence to Summers’ failed economic policies could lead to the President’s defeat in 2012. Jeff Mason and Caren Bohan of Reuters reported that Summers has proposed a $200 billion payroll tax program and a $100 billion infrastructure spending program, which would take place over the next few years. The Reuters piece also supported the contention that by 2010, Summers had turned away from the Dark Side and aligned himself with Romer in opposing Peter Orszag (who eventually took that controversial spin through the “revolving door” to join Citigroup):

During much of 2010, Obama’s economic advisers wrestled with a debate over whether to shift toward deficit reduction or pursue further fiscal stimulus.

Summers and former White House economist Christina Romer were in the camp arguing that the recession that followed the financial markets meltdown of 2008-2009 was a unique event that required aggressive stimulus to avoid a long period of stagnation similar to Japan’s “lost decade” of the 1990s.

Former White House budget director Peter Orszag was among those who cautioned against a further big stimulus, warning of the need to be mindful of ballooning budget deficits.

By the time voters head to the polls for the next Presidential election, we will be in Year Four of our own “lost decade”. Accordingly, President Obama’s new “Jobs Czar” – General Electric CEO, Jeffrey Immelt – is busy discussing new plans, which will be destined to go up in smoke when Congressional Republicans exploit the opportunity to maintain the dismal status quo until the day arrives when disgruntled voters can elect President Palin. Barack Obama is probably suffering from some awful nightmares about that possibility.

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Obama And The TARP

June 2nd, 2011 Posted in Uncategorized

Jun, 02 2011

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I always enjoy it when a commentator appearing on a talk show reminds us that President Obama has become a “tool” for the Wall Street bankers. This theme is usually rebutted with the claim that the TARP bailout happened before Obama took office and that he can’t be blamed for rewarding the miscreants who destroyed our economy. Nevertheless, this claim is not entirely true. President Bush withheld distribution of one-half of the $700 billion in TARP bailout funds, deferring to his successor’s assessment of the extent to which the government should intervene in the banking crisis. As it turned out, during the final weeks of the Bush Presidency, Hank Paulson’s Treasury Department declared that there was no longer an “urgent need” for the TARP bailouts to continue. Despite that development, Obama made it clear that anyone on Capitol Hill intending to get between the banksters and that $350 billion was going to have a fight on their hands. Let’s jump into the time machine and take a look at my posting from January 19, 2009 – the day before Obama assumed office:

On January 18, Salon.com featured an article by David Sirota entitled: “Obama Sells Out to Wall Street”. Mr. Sirota expressed his concern over Obama’s accelerated push to have immediate authority to dispense the remaining $350 billion available under the TARP (Troubled Asset Relief Program) bailout:

Somehow, immediately releasing more bailout funds is being portrayed as a self-evident necessity, even though the New York Times reported this week that “the Treasury says there is no urgent need” for additional money. Somehow, forcing average $40,000-aires to keep giving their tax dollars to Manhattan millionaires is depicted as the only “serious” course of action. Somehow, few ask whether that money could better help the economy by being spent on healthcare or public infrastructure. Somehow, the burden of proof is on bailout opponents who make these points, not on those who want to cut another blank check.

Discomfort about another hasty dispersal of the remaining TARP funds was shared by a few prominent Democratic Senators who, on Thursday, voted against authorizing the immediate release of the remaining $350 billion. They included Senators Russ Feingold (Wisconsin), Jeanne Shaheen (New Hampshire), Evan Bayh (Indiana) and Maria Cantwell (Washington). The vote actually concerned a “resolution of disapproval” to block distribution of the TARP money, so that those voting in favor of the resolution were actually voting against releasing the funds. Earlier last week, Obama had threatened to veto this resolution if it passed. The resolution was defeated with 52 votes (contrasted with 42 votes in favor of it). At this juncture, Obama is engaged in a game of “trust me”, assuring those in doubt that the next $350 billion will not be squandered in the same undocumented manner as the first $350 billion. As Jeremy Pelofsky reported for Reuters on January 15:

To win approval, Obama and his team made extensive promises to Democrats and Republicans that the funds would be used to better address the deepening mortgage foreclosure crisis and that tighter accounting standards would be enforced.

“My pledge is to change the way this plan is implemented and keep faith with the American taxpayer by placing strict conditions on CEO pay and providing more loans to small businesses,” Obama said in a statement, adding there would be more transparency and “more sensible regulations.”

Of course, we all know how that worked out . . . another Obama promise bit the dust.

The new President’s efforts to enrich the Wall Street banks at taxpayer expense didn’t end with TARP. By mid-April of 2009, the administration’s “special treatment” of those “too big to fail” banks was getting plenty of criticism. As I wrote on April 16 of that year:

Criticism continues to abound concerning the plan by Turbo Tim and Larry Summers for getting the infamous “toxic assets” off the balance sheets of our nation’s banks. It’s known as the Public-Private Investment Program (a/k/a: PPIP or “pee-pip”).

* * *

One of the harshest critics of the PPIP is William Black, an Economics professor at the University of Missouri. Professor Black gained recognition during the 1980s while he was deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC).

* * *

I particularly enjoyed Black’s characterization of the PPIP’s use of government (i.e. taxpayer) money to back private purchases of the toxic assets:

It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty. That is what’s so appalling — numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy resolution of insolvencies. He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything. He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.

Although President Obama’s hunt for Osama bin Laden was a success, his 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 – became Obama’s own “Tora Bora moment”, at which point he allowed economic recovery to continue on its elusive path away from us. Economist Steve Keen recently posted this video, explaining how Obama’s failure to promote an effective stimulus program has guaranteed us something worse than a “double-dip” recession: a quadruple-dip recession.

Many commentators are currently discussing efforts by Republicans to make sure that the economy is in dismal shape for the 2012 elections so that voters will blame Obama and elect the GOP alternative. If Professor Keen is correct about where our economy is headed, I can only hope there is a decent Independent candidate in the race. Otherwise, our own “lost decade” could last much longer than ten years.

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Why Au-scare-ity Still Has Traction

May 16th, 2011 Posted in Uncategorized

May, 16 2011

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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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Time For Another Victory Lap

May 9th, 2011 Posted in Uncategorized

May, 09 2011

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I’m no cheerleader for President Obama. Since he first became our Disappointer-In-Chief, I have vigorously voiced my complaints about his decisions. At the end of President Obama’s first month in office, I expressed concern that his following the advice of “Turbo” Tim Geithner and Larry Summers was putting the welfare (pun intended) of the Wall Street banks ahead of the livelihoods of those who voted for him. I lamented that this path would lead us to a ten-year, Japanese-style recession. By September of 2010, it was obvious that those early decisions by the new President would prove disastrous for the Democrats at the mid-term elections. At that point, I repeated my belief that Obama had been listening to the wrong people when he decided to limit spending on the economic stimulus package to approximately half of what was necessary to end the economic crisis:

Even before the stimulus bill was signed into law, the administration had been warned, by way of an article in Bloomberg News, that a survey of fifty economists revealed that the proposed $787 billion stimulus package would be inadequate.

Last week, I was about to write a piece, describing that decision as “Obama’s Tora Bora moment”. When I sat down at my computer just after 11 p.m. on Sunday, I realized that the timing wouldn’t have been appropriate for such a metaphor. The President was about to make his historic speech, announcing that Osama Bin Laden had been killed. Just as many have criticized the Obama administration’s handling of the disaster in the Gulf of Corexit as “Obama’s Katrina Moment”, I believe that the President’s decision to “punt” on the stimulus – 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. The consequences have been enormously expensive (simply adding the $600 billion cost of QE 2 alone to a better-planned stimulus program would have reduced our current unemployment level to approximately 5%). Beyond that, the advocates of “Austerian” economics have scared everyone in Washington into the belief that the British approach is somehow the right idea – despite the fact that their economy is tanking. Never mind the fact Australia’s stimulus program was successful and ended the recession in that country.

The Fox Ministry of Truth has brainwashed a good number of people into believing that Obama’s stimulus program (a/k/a the American Recovery and Reinvestment Act of 2009) was a complete failure. You will never hear the Fox Ministry of Truth admit that prominent Republican economist Keith Hennessey, the former director of the National Economic Council under President George W. Bush, pointed out that the 2009 stimulus “increased economic growth above what it otherwise would have been”. The Truth Ministry is not likely to concede that John Makin of the conservative think-tank, the American Enterprise Institute, published this statement at the AEI website:

Absent temporary fiscal stimulus and inventory rebuilding, which taken together added about 4 percentage points to U.S. growth, the economy would have contracted at about a 1 percent annual rate during the second half of 2009.

On the other hand, count me among those who are skeptical that the Federal Reserve’s monetary policy can have any impact on our current unemployment crisis (it hasn’t yet).

Many of Obama’s critics have complained that the Presidential appearance at Ground Zero was an inappropriate “victory lap” – despite the fact that George W. Bush was invited to the event (although he declined). Not only was that victory lap appropriate – Obama is actually entitled to run another. As E.J. Dionne pointed out, the controversial “nationalization” of the American auto industry (what should have been done to the Wall Street banks) has become a huge success:

The actual headlines make the point. “Demand for fuel-efficient cars helps GM to $3.2 billion profit,” declared The Washington Post. “GM Reports Earnings Tripled in First Quarter, as Revenue Jumped 15 Percent,” reported The New York Times.

* * *

“Having the federal government involved in every aspect of the private sector is very dangerous,” Rep. Dan Burton, R-Ind., told Fox News in December 2008. “In the long term it could cause us to become a quasi-socialist country.” I don’t see any evidence that we have become a “quasi-socialist country,” just big profits.

Rep. Lamar Smith, R-Texas, called the bailout “the leading edge of the Obama administration’s war on capitalism,” while other members of Congress derided the president’s auto industry task force. “Of course we know that nobody on the task force has any experience in the auto business, and we heard at the hearing many of them don’t even own cars,” declared Rep. Louie Gohmert, R-Texas, after a hearing on the bailout in May 2009. “And they’re dictating the auto industry for our future? What’s wrong with this picture?”

* * *

In the case of the car industry, allowing the market to operate without any intervention by government would have wiped out a large part of the business that is based in Midwestern states. This irreversible decision would have damaged the economy, many communities and tens of thousands of families.

And contrary to the predictions of the critics, government officials were quite capable of working with the market in restructuring the industry. Government didn’t overturn capitalism. It tempered the market at a moment when its “natural” forces were pushing toward catastrophe. Government had the resources to buy the industry time.

In fairness, President Obama has finally earned some bragging rights, after punting on health care, the stimulus and financial “reform”. He knows his Republican opponents will never criticize him for his own “Tora Bora moment” – because to do so would require an admission that a more expensive economic stimulus was necessary in 2009. As a result, it will be up to an Independent candidate or a Democratic challenger to Obama (less likely these days) to explain that the persistent economic crisis – our own “lost decade” – lingers on as a result of Obama’s “Tora Bora moment”.

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Crazy Like Fox

April 18th, 2011 Posted in Uncategorized

Apr, 18 2011

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Donald Trump has enjoyed a good deal of publicity during the past few weeks, since he jumped on the “birther” bandwagon, voicing skepticism as to whether Barack Obama was really born in the United States. Many of Trump’s critics insist that The Donald is not a serious Presidential candidate and that his newfound “birther” agenda demonstrates that his Presidential campaign is nothing more than a flimflam publicity stunt.

I have a different theory. I believe that Trump is running a “decoy” campaign. Keep in mind that Trump is currently the #2 contender for the Republican nomination. Remember also that the Republican Presidential primaries for 11 states (and the District of Columbia) are conducted on a “winner-take-all” basis – meaning that when a candidate wins a state primary, that candidate wins all of the delegates who will represent that state at the Republican National Convention. If Trump can win a few of those states, he could amass an impressive amount of “pledged” delegates. I suspect that Trump’s goal is to win the support from the extreme right wing of the Republican Party and “hijack” those delegates who would have been otherwise pledged to candidates acceptable to the Tea Party. Bill O’Reilly’s intervention to defuse the “birther” controversy (at which point he insisted that Trump has not been seriously seeking the nomination) was apparently motivated by the fact that the candidates most likely to be eliminated from contention because of Trump’s presence – Michele Bachmann and Sarah Palin – are both darlings of Fox News. In fact, Palin is a Fox News contributor.

At the 2012 Republican Convention in Tampa, Trump could step aside and support Willard Romney, who is despised my many Tea Party activists for having created what is now known as “Obamacare”. Trump’s elimination of the Tea Party favorites before the convention would solve Romney’s problem with that voting bloc. Romney can be expected to have an equally difficult time winning the support of dog lovers, as a result of his decision to strap the family dog, Seamus, to the car roof for a 12-hour family vacation drive to Ontario. Despite his “Presidential” appearance, this Homer Simpson-esque episode from Romney’s life has already impaired efforts to portray him as a potentially effective Commander-In-Chief.

Meanwhile, President Obama is busy trumpeting his newly-minted, false campaign promises. Gallup reported that on April 15, Obama’s approval rating had tied its all-time low of 41%. More interestingly, his approval rating among African-American and Hispanic voters is beginning to slip from its enormously-high levels:

Though majorities of blacks (85%) and Hispanics (54%) continue to approve of the job Barack Obama is doing as president, his ratings among these groups slipped in March and have set or tied new lows.

* * *

Obama, elected to office with strong support from minority voters, has averaged better than 90% approval among blacks, and 65% among Hispanics, during his term. Prior to March, Obama’s lowest monthly average among blacks was 88% in July 2010 and December 2010. The president’s 54% March job approval rating among Hispanics ties the low from July and August 2010.

Despite the efforts of Republican commentators, such as Peggy Noonan, to create a narrative to the effect that Obama’s waning popularity – as well as the losses sustained by the Democrats in the 2010 elections – resulted from voter concern about government spending and the deficit, I suspect that Americans have simply become alienated by the failure of Obama and his party to deliver on their 2008 promises. Worse yet, the capitulation to the interests of Wall Street by Democrats who promised “reform” has reinforced voter apathy – the real factor in the 2010 Democratic setbacks.

Cord Jefferson of Good provided this graphic of what Congress would look like if it truly represented America. The failure of Democrats to win the support of Independent and centrist voters is readily apparent. You can blame gerrymandering all you want, but as long as the Democrats fail to provide alternatives to Republican policies, they will continue to lose. I believe it was William Black who said:

Under America’s two-party system, we have one party that is owned by big business and another party that sells out to big business.

I was pleased to see my own sentiments shared and articulated quite well by Mike Kimel of the Presimetrics Blog, in his recent posting entitled, “Why I Will Not be Voting for Obama in 2012”. Although Mr. Kimel doesn’t have an alternative candidate in mind, the very reason for his disillusionment with Obama is that – with respect to the nation’s most significant problems – our current President has proposed no alternative policies to those of his predecessor:

And yes, there are a handful of things Obama did that GW might not do, but let’s be realistic – this has looked from the very beginning like GW’s third term.

Which leaves just one question – if the policies of the Republicans are even worse than Obama’s – and they tend to support anti-growth tax policies (calling them pro-growth doesn’t change the data), what should a rational person do? I don’t know. But I think if I’m going to see Republican policies enacted, I’d prefer to see them run under a Republican label. See, Democratic policies may not be very good, but historically they have tended to produce better results than Republican policies. (BTW – Michael Kanell and I have an entire book called Presimetrics looking at how Presidents performed on a wide range of topics.) Another four years spent bringing the feeble Democratic brand down to the levels of the even more feeble Republican brand will cause lasting damage.

Obama will never re-ignite the enthusiasm of 2008 by presenting himself to the voters as “the devil you know” or “the lesser of two evils”. What America’s middle class really needs is an honest, Independent candidate to make a run for The White House in 2012.

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Federal Reserve Bailout Records Provoke Limited Outrage

April 14th, 2011 Posted in Uncategorized

Apr, 14 2011

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On December 3, 2009 I wrote a piece entitled, “The Legacy of Mark Pittman”. Mark Pittman was the reporter at Bloomberg News whose work was responsible for the lawsuit, brought under the Freedom of Information Act, against the Federal Reserve, seeking disclosure of the identities of those financial firms benefiting from the Fed’s eleven emergency lending programs.

The suit, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, (U.S. District Court, Southern District of New York) resulted in a ruling in August of 2009 by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions (which sought loans at the Fed’s discount window) to compete for business. The suit also sought disclosure of the amounts loaned to those institutions as well as the assets put up as collateral under the Fed’s eleven lending programs, created in response to the financial crisis. The Federal Reserve appealed Judge Preska’s decision, taking the matter before the United States Court of Appeals for the Second Circuit. The Fed’s appeal was based on Exemption 4 of the Freedom of Information Act, which exempts trade secrets and confidential business information from mandatory disclosure. The Second Circuit affirmed Judge Preska’s decision on the basis that the records sought were neither trade secrets nor confidential business information because Bloomberg requested only records generated by the Fed concerning loans that were actually made, rather than applications or confidential information provided by persons, firms or other organizations in attempt to obtain loans. Although the Fed did not attempt to appeal the Second Circuit’s decision to the United States Supreme Court, a petition was filed with the Supreme Court by Clearing House Association LLC, a coalition of banks that received bailout funds. The petition was denied by the Supreme Court on March 21.

Bob Ivry of Bloomberg News had this to say about the documents produced by the Fed as a result of the suit:

The 29,000 pages of documents, which the Fed released in pdf format on a CD-ROM, revealed that foreign banks accounted for at least 70 percent of the Fed’s lending at its October, 2008 peak of $110.7 billion. Arab Banking Corp., a lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the window in the 18 months after Lehman Brothers Holdings Inc. collapsed.

As government officials and news reporters continue to review the documents, a restrained degree of outrage is developing. Ron Paul is the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy. He is also a longtime adversary of the Federal Reserve, and author of the book, End The Fed. A recent report by Peter Barnes of FoxBusiness.com said this about Congressman Paul:

.   .   .   he plans to hold hearings in May on disclosures that the Fed made billions — perhaps trillions — in secret emergency loans to almost every major bank in the U.S. and overseas during the financial crisis.

*   *   *

“I am, even with all my cynicism, still shocked at the amount this is and of course shocked, but not completely surprised, [that] much [of] this money went to help foreign banks,” said Rep. Ron Paul (R-TX), .   .   . “I don’t have [any] plan [for] legislation … It will take awhile to dissect that out, to find out exactly who benefitted and why.”

In light of the fact that Congressman Paul is considering another run for the Presidency, we can expect some exciting hearings starring Ben Bernanke.

Senator Bernie Sanders of Vermont became an unlikely ally of Ron Paul in their battle to include an “Audit the Fed” provision in the financial reform bill. Senator Sanders was among the many Americans who were stunned to learn that Arab Banking Corporation used a New York branch to get 73 loans from the Fed during the 18 months after the collapse of Lehman Brothers. The infuriating factoid in this scenario is apparent in the following passage from the Bloomberg report by Bob Ivry and Donal Griffin:

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion — while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday. In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Ivry and Griffin provided this reaction from Bernie Sanders:

“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” Senator Bernard Sanders of Vermont, an independent who caucuses with Democrats, wrote in a letter to Fed and U.S. officials.

The best critique of the Fed’s bailout antics came from Rolling Stone’s Matt Taibbi. He began his report this way:

After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size – a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

As Matt Taibbi began discussing what the documents produced by the Fed revealed, he shared this reaction from a staffer, tasked to review the records for Senator Sanders:

“Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. “Every one of these transactions is outrageous.”

In case you are wondering just how “outrageous” these transactions were, Mr. Taibbi provided an outrageously entertaining chronicle of a venture named “Waterfall TALF Opportunity”, whose principal investors were Christy Mack and Susan Karches. Susan Karches is the widow of Peter Karches, former president of Morgan Stanley’s investment banking operations. Christy Mack is the wife of John Mack, the chairman of Morgan Stanley. Matt Taibbi described Christy Mack as “thin, blond and rich – a sort of still-awake Sunny von Bulow with hobbies”. Here is how he described Waterfall TALF:

The technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility. But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called “giving already stinking rich people gobs of money for no fucking reason at all.” If you want to learn how the shadow budget works, follow along. This is what welfare for the rich looks like.

The venture would have been more aptly-named, “TALF Exploitation Windfall Opportunity”. Think about it: the Mack-Karches entity was contrived for the specific purpose of cashing-in on a bailout program, which was ostensibly created for the purpose of preventing a consumer credit freeze.

I was anticipating that the documents withheld by the Federal Reserve were being suppressed because – if the public ever saw them – they would provoke an uncontrollable degree of public outrage. So far, the amount of attention these revelations have received from the mainstream media has been surprisingly minimal. When one compares the massive amounts squandered by the Fed on Crony Corporate Welfare Queens such as Christy Mack and Susan Karches ($220 million loaned at a fraction of a percentage point) along with the multibillion-dollar giveaways (e.g. $13 billion to Goldman Sachs by way of Maiden Lane III) the fighting over items in the 2012 budget seems trivial.

The Fed’s defense of its lending to foreign banks was explained on the New York Fed’s spiffy new Liberty Street blog:

Discount window lending to U.S. branches of foreign banks and dollar funding by branches to parent banks helped to mitigate the economic impact of the crisis in the United States and abroad by containing financial market disruptions, supporting loan availability for companies, and maintaining foreign investment flows into U.S. companies and assets.

Without the backstop liquidity provided by the discount window, foreign banks that faced large and fluctuating demand for dollar funding would have further driven up the level and volatility of money market interest rates, including the critical federal funds rate, the Eurodollar rate, and Libor (the London interbank offered rate). Higher rates and volatility would have increased distress for U.S. financial firms and U.S. businesses that depend on money market funding. These pressures would have been reflected in higher interest rates and reduced bank lending, bank credit lines, and commercial paper in the United States. Moreover, further volatility in dollar funding markets could have disrupted the Federal Reserve’s ability to implement monetary policy, which requires stabilizing the federal funds rate at the policy target set by the Federal Open Market Committee.

In other words: Failure by the Fed to provide loans to foreign banks would have made quantitative easing impossible. There would have been no POMO auctions. As a result, there would have been no supply of freshly printed-up money to be used by the proprietary trading desks of the primary dealers to ramp-up the stock market for those “late-day rallies”. This process was described as the “POMO effect” in a 2009 paper by Precision Capital Management entitled, “A Grand Unified Theory of Market Manipulation”.

Thanks for the explanation, Mr. Dudley.

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License To Steal

February 28th, 2011 Posted in Uncategorized

Feb, 28 2011

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People are finally beginning to understand how our elected officials are benefiting from a system of “legalized graft” in the form of campaign contributions. Voters have seen so many politicians breach their campaign promises while providing new meaning to the expression “follow the money”, that there now seems to be a resigned acceptance that political payoffs are an uncomfortable fact of life. Worse yet, most people aren’t aware of another loophole in the law allowing Congress-cretins to make real money.

On January 26, 2009, Congressman Brian Baird introduced H.R.682, the “Stop Trading on Congressional Knowledge Act” (STOCK Act). The bill was intended to resolve the situation concerning one of the more sleazy “perks” of serving in Congress. As it presently stands, the law prohibiting “insider trading” (e.g. acting on confidential corporate information when making a transaction involving that company’s publicly-traded stock) does not apply to members of Congress. Remember how Martha Stewart went to prison? Well, if she had been representing Connecticut in Congress, she might have been able to interpose the defense that she was inspired to sell her ImClone stock based on information she acquired in the exercise of her official duties. In that scenario, Ms. Stewart’s sale of the ImClone stock would have been entirely legal. That’s because the laws which apply to you and I do not apply to those in Congress. Needless to say, within six months of its introduction, H.R.682 was referred to the Subcommittee on the Constitution, Civil Rights, and Civil Liberties where it died of neglect. Since that time, there have been no further efforts to propose similar legislation.

Here is a summary of the most important provisions of the “Stop Trading on Congressional Knowledge Act”:

Amends the Securities Exchange Act of 1934 and the Commodities Exchange Act to direct both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to prohibit purchase or sale of either securities or commodities for future delivery by a person in possession of material nonpublic information regarding pending or prospective legislative action if the information was obtained: (1) knowingly from a Member or employee of Congress; (2) by reason of being a Member or employee of Congress; and (3) other federal employees.

Amends the Code of Official Conduct of the Rules of the House of Representatives to prohibit designated House personnel from disclosing material nonpublic information relating to any pending or prospective legislative action relating to either securities of a publicly-traded company or a commodity if such personnel has reason to believe that the information will be used to buy or sell the securities or commodity based on such information.

Back in September of 2009, a report by American Public Media’s Steve Henn discussed the investment transactions made by some Senators in September of 2008, after having been informed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, that our financial system was on the verge of a meltdown. After quoting then GOP House Minority Leader John Boehner’s public acknowledgement that:

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

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

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

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

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

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

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

* * *

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

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

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

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

CRAIG HOLMAN: It’s called political intelligence.

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

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

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

BAGLEY: So information is a commodity in Washington.

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

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

Take a look at the list below from opensecrets.org concerning the wealthiest members of Congress. In light of the fact that these knaves are able to trade on “inside information” you now have the answer to the following question from the opensecrets website:

Congressional members’ personal wealth keeps expanding year after year, typically at rates well beyond inflation and any tax increases. The same cannot be said for most Americans. Are your representatives getting rich in Congress and, if so, how?

Here is the Top Ten List of the Richest Members of Congress from opensecrets.org:

NAME               MINIMUM NET WORTH   AVERAGE   MAXIMUM NET WORTH

Darrell Issa (R-Calif) $156,050,022      $303,575,011    $451,100,000

Jane Harman (D-Calif) $151,480,522    $293,454,761 $435,429,001

John Kerry (D-Mass)    $182,755,534     $238,812,296 $294,869,059

Mark Warner (D-Va)     $65,692,210      $174,385,102   $283,077,995

Jared Polis (D-Colo)     $36,694,140       $160,909,068   $285,123,996

Herb Kohl (D-Wis)        $89,358,027           $160,302,011   $231,245,995

Vernon Buchanan (R-Fla)$-69,434,661    $148,373,160 $366,180,982

Michael McCaul (R-Texas) $73,685,086 $137,611,043 $201,537,000

Jay Rockefeller (D-WVa) $61,446,018      $98,832,010   $136,218,002

Dianne Feinstein (D-Calif) $46,055,250    $77,082,134   $108,109,018

Jay Rockefeller’s position on the list is easy to understand, given the fact that he is the great-grandson of John D. Rockefeller. How the first eight people on the list were able to become more wealthy than Jay Rockefeller should be matter of interest to the voting public. In the case of #10 — California Senator Dianne Feinstein — we have an interesting situation. As chair of the Senate Military Construction Appropriations subcommittee, she helped her husband, Iraq war profiteer Richard C. Blum, benefit from decisions she made as chair of that subcommittee. In an article for bohemian.com, Peter Byrne discussed how Senator Feinstein was routinely informed about specific federal projects coming before her in which one of her husband’s businesses had a stake. As Byrne’s article explained, the inside information Feinstein received was intended to help the senator avoid conflicts of interest, although it had the effect of exacerbating such conflicts.

“Inside information” empowers the party in possession of that knowledge with something known as “information asymmetry”, allowing that person to take advantage of (or steal from) the less-informed person on the other side of the trade. Because membership in Congress includes a license to steal, can we ever expect those same individuals to surrender those licenses? Well, if they were honest . . .

American Public Media, Americans, bank capitol requirements, bankers, Ben Bernanke, bohemian com, Brian Baird, campaign contributions, campaign promises, CFTC, Code of Official Conduct, commodities, Commodities Exchange Act, commodity, Commodity Futures Trading Commission, confidential corporate information, conflicts of interest, Congress, Congress-cretins, Congressional perks, Congressman Brian Baird, Connecticut, consumer watchdog, corporate insiders, Craig Holman, Darrell Issa, data mining, Dianne Feinstein, Dick Durbin, elected officials, Federal Reserve Chairman, financial crisis, follow the money, Hank Paulson, hedge funds, Herb Kohl, House of Representatives, HR 682, ImClone stock, inflation rate, information asymmetry, inside information, insider information, insider trading, investment transactions, Iraq war profiteer, Jane Harman, Jared Polis, Jay Rockefeller, John Boehner, John D Rockefeller, John Kerry, lawyers, legalized graft, legislation, License To Steal, lobbyists, loophole in the law, Mark Warner, Martha Stewart, material nonpublic information, members of Congress, Michael Bagley, Michael McCaul, Military Construction Appropriations subcommittee, non-public information, non-public knowledge, nonpublic information, OpenSecrets org, OSINT Group, pending or prospective legislation, Peter Byrne, political intelligence, political intelligence firms, political payoffs, politicians, Public Citizen, publicly-traded company, publicly-traded stock, purchase or sale, Richard C Blum, Richest Members of Congress, Rules of the House of Representatives, SEC, securities, Securities and Exchange Commission, Securities Exchange Act, Senator Feinstein, Senators, September of 2008, Steve Henn, STOCK Act, stock tips, Stop Trading on Congressional Knowledge Act, Subcommittee on the Constitution, Treasury Secretary, Vernon Buchanan, voters, Wall Street, Wall Street professionals, Warren Buffett, Washington, wealthiest members of Congress

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