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© 2008 – 2017 John T. Burke, Jr.

Manifesto

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For the past few years, a central mission of this blog has been to focus on Washington’s unending efforts to protect, pamper and bail out the Wall Street megabanks at taxpayer expense.  From Maiden Lane III to TARP and through countless “backdoor bailouts”, the Federal Reserve and the Treasury Department have been pumping money into businesses which should have gone bankrupt in 2008.  Worse yet, President Obama and Attorney General Eric Hold-harmless have expressed no interest in bringing charges against those miscreants responsible for causing the financial crisis.  The Federal Reserve’s latest update to its Survey of Consumer Finances for 2010 revealed that during the period of 2007-2010, the median family net worth declined by a whopping thirty-eight percent.  Despite the massive extent of wealth destruction caused by the financial crisis, our government is doing nothing about it.

I have always been a fan of economist John Hussman of the Hussman Funds, whose Weekly Market Comment essays are frequently referenced on this website.  Professor Hussman’s most recent piece, “The Heart of the Matter” serves as a manifesto of how the financial crisis was caused, why nothing was done about it and why it is happening again both in the United States and in Europe.  Beyond that, Professor Hussman offers some suggestions for remedying this unaddressed and unresolved set of circumstances.  It is difficult to single out a passage to quote because every word of Hussman’s latest Market Comment is precious.  Be sure to read it.  What I present here are some hints as to the significance of this important essay:

The ongoing debate about the economy continues along largely partisan lines, with conservatives arguing that taxes just aren’t low enough, and the economy should be freed of regulations, while liberals argue that the economy needs larger government programs and grand stimulus initiatives.

Lost in this debate is any recognition of the problem that lies at the heart of the matter:  a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.

Specifically, over the past 15 years, the global financial system – encouraged by misguided policy and short-sighted monetary interventions – has lost its function of directing scarce capital toward projects that enhance the world’s standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.

*   *   *

By our analysis, the U.S. economy is presently entering a recession.  Not next year; not later this year; but now.  We expect this to become increasingly evident in the coming months, but through a constant process of denial in which every deterioration is dismissed as transitory, and every positive outlier is celebrated as a resumption of growth.  To a large extent, this downturn is a “boomerang” from the credit crisis we experienced several years ago.  The chain of events is as follows:

Financial deregulation and monetary negligence -> Housing bubble -> Credit crisis marked by failure to restructure bad debt -> Global recession -> Government deficits in U.S. and globally -> Conflict between single currency and disparate fiscal policies in Europe -> Austerity -> European recession and credit strains -> Global recession.

In effect, we’re going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks.  Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable.

*   *   *

Every major bank is funded partially by depositors, but those deposits typically represent only about 60% of the funding.  The rest is debt to the bank’s own bondholders, and equity of its stockholders.  When a country like Spain goes in to save a failing bank like Bankia – and does so by buying stock in the bank – the government is putting its citizens in a “first loss” position that protects the bondholders at public expense.  This has been called “nationalization” because Spain now owns most of the stock, but the rescue has no element of restructuring at all.  All of the bank’s liabilities – even to its own bondholders – are protected at public expense.  So in order to defend bank bondholders, Spain is increasing the public debt burden of its own citizens.  This approach is madness, because Spain’s citizens will ultimately suffer the consequences by eventual budget austerity or risk of government debt default.

The way to restructure a bank is to take it into receivership, write down the bad assets, wipe out the stockholders and much of the subordinated debt, and then recapitalize the remaining entity by selling it back into the private market.  Depositors don’t lose a dime.  While the U.S. appropriately restructured General Motors – wiping out stock, renegotiating contracts, and subjecting bondholders to haircuts – the banking system was largely untouched.

*   *   *

If it seems as if the global economy has learned nothing, it is because evidently the global economy has learned nothing.  The right thing to do, again, is to take receivership of insolvent banks and wipe out the stock and subordinated debt, using the borrowed funds to protect depositors in the event that the losses run deep enough to eat through the intervening layers of liabilities (which is doubtful), and otherwise using the borrowed funds to stimulate the economy after the restructuring occurs.  We’re going to keep having crises until global leaders recognize that short of creating hyperinflation (which also subordinates the public, in this case by destroying the value of currency), there is no substitute for debt restructuring.

For some insight as to why the American megabanks were never taken into temporary receivership, it is useful to look back to February of 2010 when Michael Shedlock (a/k/a“Mish”) provided us with a handy summary of the 224-page Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky).  My favorite comment from Mish appeared near the conclusion of his summary:

Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.

My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so.  This was done to bail out the banks at any and all cost to the taxpayers.

Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense?  Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.

On January 29 2010, David Reilly wrote an article for Bloomberg BusinessWeek concerning the previous week’s hearing before the House Committee on Oversight and Government Reform.  After quoting from Reilly’s article, Mish made this observation:

Most know I am not a big believer in conspiracies.  I regularly dismiss them.  However, this one was clear from the beginning and like all massive conspiracies, it is now in the light of day.

David Reilly began the Bloomberg Business Week piece this way:

The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter.  After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner.  David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:

By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking.  This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

At least in the Eurozone there is fear that the taxpayers will never submit to enhanced economic austerity measures, which would force the citizenry into an impoverished existence so that their increased tax burden could pay off the debts incurred by irresponsible bankers.  In the United States there is no such concern.  The public is much more compliant.  Whether that will change is anyone’s guess.


 

More Great Thoughts from Jeremy Grantham

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I always look forward to Jeremy Grantham’s Quarterly Letter.  Grantham is the Co-founder and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), an investment management firm, entrusted to oversee approximately $97 billion in client assets.

Unlike many asset managers, Jeremy Grantham has a social conscience.  As a result, during the past few years we have seen him direct some sharp criticism at President Obama, Tim Geithner, Ben Bernanke and – of course – Goldman Sachs.  Grantham fell behind schedule when his Third Quarter 2011 Letter was delayed by over a month.  As a result, Grantham’s Fourth Quarter 2011 Letter was just released a few days ago.  At 15 pages, it earned the title “The Longest Quarterly Letter Ever”.  As usual, Grantham has provided us with some great investment insights – along with some pointed criticism of our ignorant legislators and mercenary corporate managers.  What follows are some selected passages.  Be sure to read the entire letter here (when you have time).

To leave it to capitalism to get us out of this fix by maximizing its short-term profits is dangerously naïve and misses the point: capitalism and corporations have absolutely no mechanism for dealing with these problems, and seen through a corporate discount rate lens, our grandchildren really do have no value.

To move from the problem of long time horizons to the short-term common good, it is quickly apparent that capitalism in general has no sense of ethics or conscience.  Whatever the Supreme Court may think, it is not a person.  Why would a company give up a penny for the common good if it is not required to by enforced regulation or unless it looked like that penny might be returned with profit in the future because having a good image might be good for business?  Ethical CEOs can drag a company along for a while, but this is an undependable and temporary fix.  Ethical humans can also impose their will on corporations singly or en masse by withholding purchases or bestowing them, and companies can anticipate this and even influence it through clever brand advertising, “clean coal” being my favorite.  But that is quite different from corporate altruism. Thus, we can roast our planet and firms may offer marvelous and profitable energy-saving equipment, but it will be for profit today, not planet saving tomorrow.

It gets worse, for what capitalism has always had is money with which to try to buy influence.  Today’s version of U.S. capitalism has died and gone to heaven on this issue. A company is now free to spend money to influence political outcomes and need tell no one, least of all its own shareholders, the technical owners.  So, rich industries can exert so much political influence that they now have a dangerous degree of influence over Congress.  And the issues they most influence are precisely the ones that matter most, the ones that are most important to society’s long-term well-being, indeed its very existence.  Thus, taking huge benefits from Nature and damaging it in return is completely free and all attempts at government control are fought with costly lobbying and advertising.  And one of the first victims in this campaign has been the truth.  If scientific evidence suggests costs and limits be imposed on industry to protect the long-term environment, then science will be opposed by clever disinformation.

*   *   *

Capitalism certainly acts as if it believes that rapid growth in physical wealth can go on forever.  It appears to be hooked on high growth and avoids any suggestion that it might be slowed down by limits.  Thus, it exhibits horror at the thought (and occasional reality) of declining population when in fact such a decline is an absolute necessity in order for us to end up gracefully, rather than painfully, at a fully sustainable world economy.  Similarly with natural resources, capitalism wants to eat into these precious, limited resources at an accelerating rate with the subtext that everyone on the planet has the right to live like the wasteful polluting developed countries do today.  You don’t have to be a PhD mathematician to work out that if the average Chinese and Indian were to catch up with (the theoretically moving target of) the average American, then our planet’s goose is cooked, along with most other things.  Indeed, scientists calculate that if they caught up, we would need at least three planets to be fully sustainable.  But few listen to scientists these days.  So, do you know how many economic theories treat resources as if they are finite?  Well, the researchers at the O.E.C.D say “none” – that no such theory exists.  Economic theory either ignores this little problem or assumes you reach out and take the needed resources given the normal workings of supply and demand and you can do it indefinitely.  This is a lack of common sense on a par with “rational expectations,” that elegant theory that encouraged the ludicrous faith in deregulation and the wisdom of free markets, which brought us our recent financial fiascos.  But this failure in economic theory – ignoring natural limits – risks far more dangerous outcomes than temporary financial crashes.

*   *   *

As described above, the current U.S. capitalist system appears to contain some potentially fatal flaws.  Therefore, we should ask what it would take for our system to evolve in time to save our bacon.  Clearly, a better balance with regulations would be a help. This requires reasonably enlightened regulations, which are unlikely to be produced until big money’s influence in Congress, and particularly in elections, decreases.  This would necessitate legal changes all the way up to the Supreme Court.  It’s a long haul, but a handful of other democratic countries in northern Europe have been successful, and with the stakes so high we have little alternative but to change our ways.

*   *   *

Capitalism, by ignoring the finite nature of resources and by neglecting the long-term well-being of the planet and its potentially crucial biodiversity, threatens our existence.  Fifty and one-hundred-year horizons are important despite the “tyranny of the discount rate,” and grandchildren do have value. My conclusion is that capitalism does admittedly do a thousand things better than other systems:  it only currently fails in two or three.  Unfortunately for us all, even a single one of these failings may bring capitalism down and us with it.

Keep in mind that the foregoing passages were just from Part II of the Quarterly Letter.  Part III is focused on “Investment Observations for the New Year”.  Be sure to check it out – it’s not as bearish as you might expect.  Enjoy!



 

Psychopaths Caused The Financial Crisis

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Two months ago, Barry Ritholtz wrote a piece for The Washington Post in rebuttal to New York Mayor Michael Bloomberg’s parroting of what has become The Big Lie of our time.  In response to a question about Occupy Wall Street, Mayor Bloomberg said this:

“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”

Ritholtz then proceeded to list and discuss the true causes of the financial crisis.  Among those causes were Alan Greenspan’s Federal Reserve monetary policy – wherein interest rates were reduced to 1 percent; the deregulation of derivatives trading by way of the Commodity Futures Modernization Act; the Securities and Exchange Commission’s “Bear Stearns exemption” – allowing Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns to boost their leverage as high as 40-to-1; as well as the “bundling” of sub-prime mortgages with higher-quality mortgages into sleazy “investment” products known as collateralized debt obligations (CDOs).

After The Washington Post published the Ritholtz piece, a good deal of supportive commentary emerged – as observed by Ritholtz himself:

Since then, both Bloomberg.com and Reuters each have picked up the Big Lie theme. (Columbia Journalism Review as well).  In today’s NYT, Joe Nocera does too, once again calling out those who are pushing the false narrative for political or ideological reasons in a column simply called “The Big Lie“.

Purveyors of The Big Lie are also big on advancing the claim that the “too big to fail” beneficiaries of the TARP bailout repaid the money they were loaned, at a profit to the taxpayers.  Immediately after her arrival at CNN, former Goldman Sachs employee, Erin Burnett made a point of interviewing a young, Occupy Wall Street protester, asking him if he was aware that the government actually made a profit on the TARP.  Unfortunately, the fiancée of Citigroup executive David Rubulotta didn’t direct her question to Steve Randy Waldman – who debunked that propaganda at his Interfluidity website:

Substantially all of the TARP funds advanced to banks have been paid back, with interest and sometimes even with a profit from sales of warrants.  Most of the (much larger) extraordinary liquidity facilities advanced by the Fed have also been wound down without credit losses.  So there really was no bailout, right?  The banks took loans and paid them back.

Bullshit.

*   *   *

During the run-up to the financial crisis, bank managers, shareholders, and creditors paid themselves hundreds of billions of dollars in dividends, buybacks, bonuses and interest.  Had the state intervened less generously, a substantial fraction of those payouts might have been recovered (albeit from different cohorts of stakeholders, as many recipients of past payouts had already taken their money and ran).  The market cap of the 19 TARP banks that received more than a billion dollars each in assistance is about 550B dollars today (even after several of those banks’ share prices have collapsed over fears of Eurocontagion).  The uninsured debt of those banks is and was a large multiple of their market caps.  Had the government resolved the weakest of the banks, writing off equity and haircutting creditors, had it insisted on retaining upside commensurate with the fraction of risk it was bearing on behalf of stronger banks, the taxpayer savings would have run from hundreds of billions to a trillion dollars.  We can get into all kinds of arguments over what would have been practical and legal. Regardless of whether the government could or could not have abstained from making the transfers that it made, it did make huge transfers.  Bank stakeholders retain hundreds of billions of dollars against taxpayer losses of the same, relative to any scenario in which the government received remotely adequate compensation first for the risk it assumed, and then for quietly moving Heaven and Earth to obscure and (partially) neutralize that risk.

The banks were bailed out.  Big time.

Another overlooked cause of the financial crisis was the fact that there were too many psychopaths managing the most privileged Wall Street institutions.  Not only had the lunatics taken over the asylum – they had taken control of the world’s largest, government-backed casino, as well.  William D. Cohan of Bloomberg News gave us a peek at the recent work of Clive R. Boddy:

It took a relatively obscure former British academic to propagate a theory of the financial crisis that would confirm what many people suspected all along:  The “corporate psychopaths” at the helm of our financial institutions are to blame.

Clive R. Boddy, most recently a professor at the Nottingham Business School at Nottingham Trent University, says psychopaths are the 1 percent of “people who, perhaps due to physical factors to do with abnormal brain connectivity and chemistry” lack a “conscience, have few emotions and display an inability to have any feelings, sympathy or empathy for other people.”

As a result, Boddy argues in a recent issue of the Journal of Business Ethics, such people are “extraordinarily cold, much more calculating and ruthless towards others than most people are and therefore a menace to the companies they work for and to society.”

Professor Boddy wrote a book on the subject – entitled, Corporate Psychopaths.  The book’s publisher, Macmillan, provided this description of the $90 opus:

Psychopaths are little understood outside of the criminal image.  However, as the recent global financial crisis highlighted, the behavior of a small group of managers can potentially bring down the entire western system of business.  This book investigates who they are, why they do what they do and what the consequences of their presence are.

Matt Taibbi provided a less-expensive explanation of this mindset in a recent article for Rolling Stone:

Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors.  It’s called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here.  Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.

But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India.  They defraud the pension funds of state workers into buying billions of their crap mortgage assets.  They take zero-interest loans from the state and then lend that same money back to us at interest.  Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.

Do you think that Mayor Bloomberg learned his lesson  .  .  .  that spreading pro-bankster propaganda can provoke the infusion of an overwhelming dose of truth into the mainstream news?   Nawwww  .  .  .


 

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2011 Jackass Of The Year

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There were so many contenders for TheCenterLane.com’s 2011 Jackass Of The Year award, I was ready to give up on making a decision.  Former Congressman Anthony Weiner (who never even “got lucky” with any of the women who received his “Peter Tweets”) was certainly a contender.  Another runner-up was Arnold Schwarzenegger, who chose to have an affair with his unattractive housekeeper – apparently just because she was there.

This year’s winner is Jon S. Corzine, the former Senator and Governor of New Jersey – in addition to having been the former CEO of Goldman Sachs.  Most infamously, Corzine was named chairman and CEO of MF Global in March of 2010.  It took Corzine only 20 months to drive the firm into bankruptcy.  As Stephen Foley of The Independent reported, Corzine gambled $6 billion of the firm’s money on his belief that Italy would not default on its government bonds.  When that wager was exposed, MF Global’s clients and trading partners stopped doing business with the firm.  Within a few days, MF Global went belly-up, in what became one of the ten biggest bankruptcies in American history.

On Halloween, the Deal Book blog at The New York Times discussed what happened after a discovery by federal regulators that hundreds of millions of dollars (perhaps 950) in MF Global customers’ money had gone missing:

The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm.  MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.

Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse.

One of those customers was a gentleman named Gerald Celente.  On December 17, Mr. Celente appeared on Max Keiser’s television program, On the Edge to describe what happened with his contract (placed through MF Global in April) to purchase an undisclosed quantity of December gold for an amount slightly in excess of $1,400 per ounce.  Celente skewered more individuals than Jon Corzine while describing a travesty which exposed even more of the ways by which the Commodity Futures Modernization Act has been destroying America.  Be sure to watch the interview.

On the same day as the Celente interview, The Washington Post published a piece by Barry Ritholtz, which focused on six astonishing elements of the MF Global story.  Let’s take a look at a few of those elements:

3.  As a result of MF Global’s lobbying, key rules were deregulated.  This allowed the firm to use client money to buy risky sovereign debt.

4.  In 2010, someone from the Commodities Futures Trading Commission recognized these prior deregulations had dramatically ramped clients’ exposure to risk and proposed changing those rules. Jon Corzine, MF Global’s chief executive, successfully prevented the tightening of these regulations.  Had the regulations been tightened, it would have prevented the kind of bets that lost MF Global’s segregated client monies.

5.  None of MF Global’s Canadian clients lost any money thanks to tighter regulations there.

One would think that someone in Jon Corzine’s position would have learned something from the mistakes (such as excessive leveraging and risky bets) which contributed to the financial crisis.  He didn’t.  That’s why Jon S. Corzine is the winner of TheCenterLane.com’s 2011 Jackass Of The Year award.  Congratulations, Jackass!


 

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Giving Centrism A Bad Name

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It seems as though every time some venal politician breaches a campaign promise while attempting to grab a payoff from a lobbyist, the excuse is always the same:  “I’ve decided to tack toward the center on this issue.”  “The Center” has become stigmatized as the dwelling place of those politicians who lack a moral compass.

I get particularly annoyed by those who persist in characterizing Barack Obama as a “centrist”, who is mimicking Bill Clinton’s “triangulation” strategy.  During his campaign and throughout the early days of his Presidency, Obama successfully posed as a centrist.  Nevertheless, his track record now demonstrates a policy of what Marshall Auerback described as “gutting the Democratic Party of its core social legacy.”   I particularly enjoyed reading the comments to Auerback’s above-quoted piece about Obama entitled, “Worse Than Hoover”.  Most of the commentators expressed the opinion that Auerback went way too easy on Obama.  Here are some examples:

Sandra:

We have to stop comparing Obama to these iconic American figures. Obama is an opportunistic corporatist. There is no there there.

Rex:

I’m beginning to wonder if we are still giving Obummer too much credit.  Common view seems to be trending toward he’s a manipulative scumbag.

Wasabi:

He’s very useful to the plutocracy.  A Repub president could never persuade Dems to cut SS, Medicare, and Medicaid and all sorts of other essential programs.

Z:

He got the glory and the thrill of winning the election to become the 1st black president and I suspect that’s all the narcissio-path ever really wanted as far as the presidency is concerned.  He certainly doesn’t look like he’s enjoying himself right now.  I think he’s ready to cash out and is trying to create a scenario where he becomes an untenable candidate.  He also wants to maintain his celebrity appeal so he’s going to try to posture as the adult of adults that was just too good for dc …

Steelhead23:

From a more technocratic perspective, I tend to see Obama as a consummate politician – able to inspire – but sadly lacking in intellectual curiosity and overflowing with ego, thus unable to quench his ignorance.  This leaves him extremely susceptible to “experts” whom he parrots with enthusiasm.  It was experts who helped him pick his advisers and now his expert advisers are misleading him and making him complicit in this quest toward neo-feudalism.

Keep in mind that those comments were not posted at Fox News or some right-wing website.  They were posted at Naked Capitalism, where the publisher – Yves Smith – offered a comment of her own in reaction to Marshall Auerback’s “Worse Than Hoover” posting.

Yves Smith:

Obama is an authoritarian narcissist, an ugly combination.

He also seems unaware of the limits of his knowledge.  That can render many otherwise intelligent people stupid in their decisions and actions in their blind spots.

Obama’s foremost critic from the Left is Glenn Greenwald of Salon.  Mr. Greenwald has frequently opined that “… Obama wants to be attacked by liberals because of the perception that it politically benefits him by making him look centrist, non-partisan and independent . . .   It’s not merely that he lacks a fear of liberal dissatisfaction; it’s that he affirmatively craves it.”  Greenwald emphasized the foolishness of following such a course:

But that’s a dangerous strategy.  U.S. presidential elections are very closely decided affairs, and alienating the Left even to some degree can be lethal for a national Democratic campaign; shouldn’t the 2000 election, along with 2010, have cemented that lesson forever?

I doubt that Obama is attempting to follow anything similar to Bill Clinton’s “triangulation” strategy.  If Obama had been attempting such a plan, it has already backfired to an embarrassing degree, causing irreparable damage to the incumbent’s reelection prospects.  Barack Obama has lost his credibility – and in the eyes of the electorate, there is no greater failing.

To get an appreciation for how much damage Obama has caused to his own “brand”, consider this article written by Columbia University economist Jeffrey Sachs for the Huffington Post:

Thus, at every crucial opportunity, Obama has failed to stand up for the poor and middle class.  He refused to tax the banks and hedge funds properly on their outlandish profits; he refused to limit in a serious way the bankers’ mega-bonuses even when the bonuses were financed by taxpayer bailouts; and he even refused to stand up against extending the Bush tax cuts for the rich last December, though 60 percent of the electorate repeatedly and consistently demanded that the Bush tax cuts at the top should be ended.  It’s not hard to understand why.  Obama and Democratic Party politicians rely on Wall Street and the super-rich for campaign contributions the same way that the Republicans rely on oil and coal.  In America today, only the rich have political power.

*   *   *

America is more militarily engaged under Obama than even under Bush.  Amazing but true.

*   *   *

The stimulus legislation, pushed by Obama at the start of his term on the basis of antiquated economic theories, wasted the public’s money and also did something much worse.  It discredited the vital role of public spending in solving real and long-term problems.  Rather than thinking ahead and planning for long-term solutions, he simply spent money on short-term schemes.

Obama’s embrace of “shovel-ready” infrastructure, for example, left America with an economy based on shovels while China’s long-term strategy has given that country an economy based on 21st-century Maglev trains.  Now that the resort to mega-deficits has run its course, Obama is on the verge of abandoning the poor and middle class, by agreeing with the plutocrats in Congress to cut spending on Medicaid, Medicare, Social Security, and discretionary civilian spending, while protecting the military and the low tax rates on the rich (if not lowering those top tax rates further according to the secret machinations of the Gang of Six, now endorsed by the president!)

*   *   *

America needs a third-party movement to break the hammerlock of the financial elites.  Until that happens, the political class and the media conglomerates will continue to spew lies, American militarism will continue to destabilize a growing swath of the world, and the country will continue its economic decline.

The urgent need for a third-party movement was also the subject of this recent piece at The Economic Populist:

If the country had a legitimate third party to vote for, the Democrats and Republicans would be in serious trouble.  Of course, the political system is geared to prevent third parties from emerging, so the country flounders about, looking for leadership from pusillanimous Democrats or ideological Republicans who consider raising taxes a mortal sin.  The voters are probably a few steps away from concluding what is meant to be hidden but by now should be obvious:  American democracy doesn’t exist, and the political system in Washington is beyond repair.  What is worse: there are people and organizations who like things just the way they are and will fight any attempts at reform.

*   *   *

None of this suggests that Barack Obama is even considering abandoning his servitude to corporate interests.  He’s merrily going along from one fundraiser to the next, raising millions of dollars each week from hedge fund managers and corporate lobbyists, so that he can get reelected as a “centrist” and bipartisan deal maker.  This is based on his reading of what The People want – an end to the divisiveness in Washington – but Obama is fundamentally misreading the problem in Washington.  It isn’t the rancor, name-calling, and petulance that is constantly on display which worries the American people.  It is the backroom deals, the hidden bailouts, the tax evasions, the deregulation initiatives, the lack of prosecution for criminal behavior, that is more than frustrating Americans, because the beneficiaries of all this are wealthy people and corporations who have shifted power and money to themselves.  Voters want this system overthrown – even the Tea Party voters, who keep searching for Republicans who will finally say no to corporate money.

In the mean time, we are stuck witnessing America’s demise.  If you think that Obama’s critics from the Left are the only people voicing a dispirited attitude about our country’s future, be sure to read this essay at Counterpunch, “An Economy Destroyed”, written by Paul Craig Roberts – Assistant Secretary of the Treasury during the Reagan Administration and the co-creator of Reaganomics:

Recently, the bond rating agencies that gave junk derivatives triple-A ratings threatened to downgrade US Treasury bonds if the White House and Congress did not reach a deficit reduction deal and debt ceiling increase.  The downgrade threat is not credible, and neither is the default threat.  Both are make-believe crises that are being hyped in order to force cutbacks in Medicare, Medicaid, and Social Security.

*   *   *

The US economy is driven by consumer demand, but with 22.3 per cent unemployment, stagnant and declining wages and salaries, and consumer debt burdens so high that consumers cannot borrow to spend, there is nothing to drive the economy.

Washington’s response to this dilemma is to increase the austerity!  Cutting back Medicare, Medicaid, and Social Security, forcing down wages by destroying unions and offshoring jobs (which results in a labor surplus and lower wages), and driving up the prices of food and energy by depreciating the dollar further erodes consumer purchasing power.  The Federal Reserve can print money to rescue the crooked financial institutions, but it cannot rescue the American consumer.

As a final point, confront the fact that you are even lied to about “deficit reduction.”  Even if Obama gets his $4 trillion “deficit reduction” over the next decade, it does not mean that the current national debt will be $4 trillion less than it currently is.  The “reduction” merely means that the growth in the national debt will be $4 trillion less than otherwise.  Regardless of any “deficit reduction,” the national debt ten years from now will be much higher than it presently is.

The longer you think about it – the more obvious it becomes:  We really need to sweep all of those bastards out of Washington as quickly as possible and replace them with intelligent, honest individuals who are willing to represent this country’s human inhabitants – rather than its corporations, lobbies and “special interests”.


 

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Wisconsin Bogeymen Could Save Democrats From Themselves

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Until this week, it was beginning to appear as though November 6, 2012 would be the day when Barack Obama and the entire Democratic Party would fall victim to their incurable case of The Smug.  I discussed this syndrome back on December 2:

The Democratic Party is suffering from a case of terminal smugness. Democrats ignored the warning back in 2006, when the South Park television series ran the episode, “Smug Alert”.

*   *   *

In the 2008 Democratic Primary elections, voters chose “change” rather than another Clinton administration.  Nevertheless, what the voters got was another Clinton administration.  After establishing an economic advisory team consisting of retreads from the Clinton White House, President Obama has persisted in approaching the 2010 economy as though it were the 1996 economy.  Obama’s creation of a bipartisan deficit commission has been widely criticized as an inept fallback to the obsolete Bill Clinton playbook.  Robert Reich, Labor Secretary for the original Clinton administration recently upbraided President Obama for this wrongheaded approach:

Bill Clinton had a rapidly expanding economy to fall back on, so his appeasement of Republicans didn’t legitimize the Republican world view.  Obama doesn’t have that luxury.  The American public is still hurting and they want to know why.

More recently, Robert Scheer lamented how President Obama’s economic team of recycled Clinton advisors shared the blame with Republicans in helping bring about the financial crisis and the ever-worsening income inequality between the “haves” and the “have nots”.  Mr. Scheer reminded us that the Democrats who promised “change” have been no less corrupted by lobbyists than their Republican counterparts:

The lobbyists are deliberately bipartisan in their bribery, and the authors of our demise are equally marked as Democrats and Republicans.  Ronald Reagan first effectively sang the siren song of ending government’s role in corporate crime prevention, but it was Democrat Bill Clinton who accomplished much of that goal.  It is the enduring conceit of the top Democratic leaders that they are valiantly holding back the forces of evil when they actually have continuously been complicit.

*   *   *

Thanks to President Clinton’s deregulation and the save-the-rich policies of George W. Bush, the situation deteriorated further from 2002 to 2006, a period in which the top 1 percent increased its income 11 percent annually while the rest of Americans had a truly paltry gain of 1 percent per year.

And that was before the meltdown that wiped out the jobs and home values of so many tens of millions of American families.

Thanks to Wisconsin Governor Scott Walker and Wisconsin Congressman Paul Ryan, the Democrats now have two bogeymen, who can personify the “reverse Robin Hood” crusade of the modern Republican Party.  E.J. Dionne of The Washington Post recently placed the burden on centrists to prevent the draconian budget proposal introduced by Representative Ryan, from finding its way to the President’s desk (probably because it would be signed if it got there):

Ryan’s truly outrageous proposal, built on heaping sacrifice onto the poor, slashing scholarship aid to college students and bestowing benefits on the rich, ought to force middle-of-the-roaders to take sides.  No one who is even remotely moderate can possibly support what Ryan has in mind.

Mr. Dionne then focused his attack more directly on two “middle-of-the-road” political figures:

Erskine Bowles and Alan Simpson, the co-chairs of the deficit commission and the heroes of the budget-cutting center, put out a statement saying some nice things about the idea of the Ryan budget.  They called it “serious, honest, straightforward,” even though there is much about its accounting that is none of those.

What Mr. Dionne conveniently ignores is that it was President Obama who appointed Erskine Bowles and Alan Simpson as co-chairs of the deficit commission.  Those guys were never my heroes.  Last December, when I criticized Obama’s elevation of Alan Simpson and a Clinton retread to leadership of his own deficit commission, I incorporated some pointed observations by Cullen Roche of Pragmatic Capitalism.  The platitudinous insistence by Erskine Bowles (Clinton’s former Chief of Staff) that it’s time for an “adult conversation about the dangers of this debt” drew this blistering retort from Cullen Roche:

Yes.  America has a debt problem.  We have a very serious household, municipality and state debt crisis that is in many ways similar to what is going on in Europe.   What we absolutely don’t have is a federal government debt problem.  After all, a nation with monopoly supply of currency in a floating exchange rate system never really has “debt” unless that debt is denominated in a foreign currency.  He says this conversation is the:

“exact same conversation every family, every single business, every single state and every single municipality has been having these last few years.”

There is only one problem with this remark.  The federal government is NOTHING like a household, state or municipality.   These entities are all revenue constrained.  The Federal government has no such constraint.  We don’t need China to lend us money.  We don’t need to raise taxes to spend money.  When the US government wants to spend money it sends men and women into a room where they mark up accounts in a computer system.   They don’t call China first or check their tax revenues.   They just spend the money.

*   *   *
Mr. Bowles finished his press conference by saying that the American people get it:

“There is one thing I am absolutely sure of.  If nothing else, I know deep down the American people get it.   They know this is the moment of truth”

The American people most certainly don’t get it.  And how can you blame them?  When a supposed financial expert like Mr. Bowles can’t grasp these concepts how could we ever expect the average American to understand it?  It’s time for an adult conversation to begin before this misguided conversation regarding the future bankruptcy of America sends us towards our own “moment of truth” – a 1937 moment.

We centrists actually know better than to take Simpson and Bowles seriously.  Unfortunately, E.J. Dionne’s hero – Barack Obama – doesn’t.

Wisconsin Governor Scott Walker has become the second bogeyman for the Democrats to spotlight in their efforts to cleanse their own tarnished images after selling out to Wall Street lobbyists.  As Amanda Terkel reported for The Huffington Post:

A divisive budget battle between labor unions and Gov. Scott Walker (R-Wis.) turned a state Supreme Court race into a nationally watched bellwether on the electorate’s mood heading into a recall campaign and the 2012 elections.

Nearly 1.5 million people turned out to vote, representing 33.5 percent of voting-age adults — 68 percent higher than the 20 percent turnout officials had expected.  JoAnne Kloppenburg has already declared victory, with the vote tallies showing her beating incumbent David Prosser by just a couple hundred votes.  The race is expected to head to a recount.

*   *   *

There were no party affiliations on the ballot, but Kloppenburg was heavily backed by Democrats and Prosser by Republicans, making it a fierce proxy battle for the two parties.

Will the Wisconsin Bogeymen provide the Democrats with the inspiration and motivation they need to put the interests of the American middle class ahead of the goals of the Plutocracy?  Don’t bet on it.


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How States Can Save Billions

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We’ve been reading a lot about fallout lately.  The Fukushima power plant disaster is now providing a lasting legacy all over the world.  This animation from the French national meteorological service, Météo-France, illustrates how the spread of the Fukushima fallout is migrating.

For the past three years, we have been living with the fallout from a financial “meltdown”, which resulted from deregulation, greed and the culture of “pervasive permissiveness” at the Federal Reserve, as discussed in the Financial Crisis Inquiry Report.  The fallout from the financial meltdown has also spread across the entire world.  Different countries have employed different approaches for coping with the situation.  In Ireland, the banks were bailed out at taxpayer expense, crippling that nation’s economy for generations to come.  As a result, the Irish citizens fought back, went to the polls and ousted the perfidious politicians who helped the banks avoid responsibility for their transgressions.   On the other hand, in Portugal, the government refused to impose austerity measures on the citizens, who should not be expected to pay the price for the financial mischief that gave rise to the current economic predicament.  Given the additional fact that Portugal, as a nation, was not a “player” in the risky games that nearly brought down the world economy, the recent decision by the Portuguese parliament is easy to understand.

In our own country, the various states have found it quite difficult to balance their budgets.  High unemployment, which refuses to abate, and depressed real estate valuation have devastated each state’s revenue base.  Because the states cannot print money, as the Federal Reserve does in order to pay the federal government’s bills, it has become necessary for the states to rely on creative gimmicks to reverse their misfortunes.  Most states had previously deployed numerous “economic development projects” over the years.  Such projects are taxpayer-funded subsidies to attract corporations and entice them to establish local operations.  Rex Nutting of MarketWatch recently took a critical look at those programs:

And yet, study after study show that these subsidies create few, if any, net jobs.  For instance, California’s Enterprise Zone program – which is supposed to boost business in 42 economically distressed communities – has cost the taxpayers $3.6 billion over 27 years, but to no avail.  A legislative analyst report in 2005 found that “EZs have little if any impact on the creation of new economic activity or employment.” Read more from the legislative analyst report.

California Gov. Jerry Brown has proposed to kill the EZ program and the even-more expensive redevelopment agency program, but he faces an uphill fight in the Legislature.  Such subsidies are popular with the legislators who receive boatloads of campaign contributions from businesses lucky enough to find a government teat to latch on to.

Nationwide, such giveaways from state and municipal governments amounted to more than $70 billion in 2010, according to Kenneth Thomas, a political scientist at the University of Missouri at St. Louis, who has specialized in studying these subsidies.  That’s more than the states collect in corporate income taxes in a good year.  Read about Thomas’s book: “Investment Incentives and the Global Competition for Capital”

And that $70 billion is twice as much money as would be required to fully fund the pensions owed to state and local government workers, the very same pensions that budget-cutting politicians across the country claim are responsible for the fiscal hole we’re in.

What Rex Nutting has suggested amounts to the elimination of a significant number of corporate welfare programs.  He has also dared to challenge the corporatist mantra that corporate welfare “creates jobs”.  We are supposed to believe that the only way states can balance their budgets is through the imposition of draconian austerity programs, designed to force the “little people” to – once again – pay the tab for Wall Street’s binge.  Because the voters have no lobbyists to protect their own interests, venal state and local politicians have set about slashing public safety expenditures (through mass layoffs of police and firefighters), closing parks and libraries, as well as under-funding public school systems.

Never mind that state and local governments could save $70 billion by cutting just one form of corporate welfare.  They would rather let you watch your house burn down.  You can’t afford that house anyway.


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Some Quick Takes On The Financial Crisis Inquiry Report

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The official Financial Crisis Inquiry Report by the Financial Crisis Inquiry Commission (FCIC) has become the subject of many turgid commentaries since its January 27 release date.  The Report itself is 633 pages long.  Nevertheless, if you hope to avoid all that reading by relying on reviews of the document, you could easily end up reading 633 pages of commentary about it.  By that point, you might be left with enough questions or curiosity to give up and actually read the whole, damned thing.  (Here it is.)  If you are content with reading the 14 pages of the Commission’s Conclusions, you can find those here.  What follows is my favorite passage from that section:

We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves.  More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe.  This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets.  In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor.

In order to help save you some time and trouble, I will provide you with a brief roadmap to some of the commentary that is readily available:

Gretchen Morgenson of The New York Times introduced her own 1,257-word discourse in this way:

For those who might find the report’s 633 pages a bit daunting for a weekend read, we offer a Cliffs Notes version.

Let’s begin with the Federal Reserve, the most powerful of financial regulators.  The report’s most important public service comes in its recitation of how top Fed officials, both in Washington and in New York, fiddled while the financial system smoldered and then burned.  It is disturbing indeed that this institution, defiantly inert and uninterested in reining in the mortgage mania, received even greater regulatory powers under the Dodd-Frank law that was supposed to reform our system.

(I find it disturbing that Ms. Morgenson is still fixated on “mortgage mania” as a cause of the crisis after having been upbraided by Barry Ritholtztwice – for “pushing the Fannie-Freddie CRA meme”.)

At her Naked Capitalism blog, Yves Smith focused more intently on what the FCIC Report didn’t say, as opposed to what it actually said:

The FCIC has also been unduly close-lipped about their criminal referrals, refusing to say how many they made or giving a high-level description of the type of activities they encouraged prosecutors to investigate.  By contrast, the Valukas report on the Lehman bankruptcy discussed in some detail whether it thought civil or criminal charges could be brought against Lehman CEO Richard Fuld and chief financial officers chiefs Chris O’Meara, Erin Callan and Ian I Lowitt, and accounting firm Ernst & Young.  If a report prepared in a private sector action can discuss liability and name names, why is the public not entitled to at least some general disclosure on possible criminal actions coming out of a taxpayer funded effort?  Or is it that the referrals were merely to burnish the image of the report, and are expected to die a speedy death?

At his Calculated Risk blog, Bill McBride corroborated one of the Report’s Conclusions, by recounting his own experience.  After quoting some of the language supporting the point that the crisis could have been avoided if the warning signs had not been ignored, due to the “pervasive permissiveness” at the Federal Reserve, McBride recalled a specific example:

This is absolutely correct.  In 2005 I was calling regulators and I was told they were very concerned – and several people told me confidentially that the political appointees were blocking all efforts to tighten standards – and one person told me “Greenspan is throwing his body in front of all efforts to tighten standards”.

The dissenting views that discount this willful lack of regulation are absurd and an embarrassment for the authors.

William Black wrote an essay criticizing the dissenters themselves – based on their experience in developing the climate of financial deregulation that facilitated the crisis:

The Commission is correct.  Absent the crisis was avoidable.  The scandal of the Republican commissioners’ apologia for their failed anti-regulatory policies was also avoidable.  The Republican Congressional leadership should have ensured that it did not appoint individuals who would be in the impossible position of judging themselves.  Even if the leadership failed to do so and proposed such appointments, the appointees to the Commission should have recognized the inherent conflict of interest and displayed the integrity to decline appointment.  There were many Republicans available with expertise in, for example, investigating elite white-collar criminals regardless of party affiliation.  That was the most relevant expertise needed on the Commission.

At this point, the important question is whether the efforts of the Financial Crisis Inquiry Commission will result in any changes that could help us avoid another disaster.  I’m not feeling too hopeful.


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Democrats Share The Blame

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January 21 brought us Episode 199 of HBO’s Real Time with Bill Maher.  At the end of the program, Bill went through his popular “New Rules” segment.  On this occasion, he wound it up with a rant about how the Republicans were exclusively at fault for the financial crisis.  Aside from the fact that this claim was historically inaccurate, it was not at all fair to David Stockman (a guest on that night’s show) who had to sit through Maher’s diatribe without an opportunity to point out the errors.  (On the other hand, I was fine with watching Stephen Moore twist in the wind as Maher went through that tirade.)

That incident underscored the obvious need for Bill Maher to invite William Black as a guest on the show in order to clarify this issue.  Prior to that episode, Black had written an essay, which appeared on The Big Picture website.  Although the theme of that piece was to debunk the “mantra of the Republican Party” that “regulation is a job killer”, Black emphasized that Democrats had a role in “deregulation, desupervision, and de facto decriminalization (the three ‘des’)” which created the “criminogenic environment” precipitating the financial crisis:

The Great Recession was triggered by the collapse of the real estate bubble epidemic of mortgage fraud by lenders that hyper-inflated that bubble.  That epidemic could not have happened without the appointment of anti-regulators to key leadership positions.  The epidemic of mortgage fraud was centered on loans that the lending industry (behind closed doors) referred to as “liar’s” loans — so any regulatory leader who was not an anti-regulatory ideologue would (as we did in the early 1990s during the first wave of liar’s loans in California) have ordered banks not to make these pervasively fraudulent loans.

*   *   *

From roughly 1999 to the present, three administrations have displayed hostility to vigorous regulation and have appointed regulatory leaders largely on the basis of their opposition to vigorous regulation.  When these administrations occasionally blundered and appointed, or inherited, regulatory leaders that believed in regulating, the administration attacked the regulators.  In the financial regulatory sphere, recent examples include Arthur Levitt and William Donaldson (SEC), Brooksley Born (CFTC), and Sheila Bair (FDIC).

Similarly, the bankers used Congress to extort the Financial Accounting Standards Board (FASB) into trashing the accounting rules so that the banks no longer had to recognize their losses.  The twin purposes of that bit of successful thuggery were to evade the mandate of the Prompt Corrective Action (PCA) law and to allow banks to pretend that they were solvent and profitable so that they could continue to pay enormous bonuses to their senior officials based on the fictional “income” and “net worth” produced by the scam accounting.  (Not recognizing one’s losses increases dollar-for-dollar reported, but fictional, net worth and gross income.)

When members of Congress (mostly Democrats) sought to intimidate us into not taking enforcement actions against the fraudulent S&Ls we blew the whistle.

President Obama’s January 18 opinion piece for The Wall Street Journal prompted a retort from Bill Black.  The President announced that he had signed an executive order requiring “a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive”.  Obama’s focus on “regulations that stifle job creation” seemed to exemplify what Black had just discussed one day earlier.  Accordingly, Bill Black wrote an essay for The Huffington Post on January 19, which began this way:

I get President Obama’s “regulatory review” plan, I really do.  His game plan is a straight steal from President Clinton’s strategy after the Republican’s 1994 congressional triumph. Clinton’s strategy was to steal the Republican Party’s play book.  I know that Clinton’s strategy was considered brilliant politics (particularly by the Clintonites), but the Republican financial playbook produces recurrent, intensifying fraud epidemics and financial crises.  Rubin and Summers were Clinton’s offensive coordinators.  They planned and implemented the Republican game plan on finance.  Rubin and Summers were good choices for this role because they were, and remain, reflexively anti-regulatory.  They led the deregulation and attack on supervision that began to create the criminogenic environment that produced the financial crisis.

Bill Clinton’s role in facilitating the financial crisis would have surely become an issue in the 2008 Presidential election campaign, had Hillary Clinton been the Democratic nominee.  Instead, the Democrats got behind a “Trojan horse” candidate, disguised in the trappings of  “Change” who, once elected, re-installed the very people who implemented the crucial deregulatory changes which caused the financial crisis.  Bill Black provided this explanation:

The zeal, crude threats, and arrogance they displayed in leading the attacks on SEC Chair Levitt and CFTC Chair Born’s efforts to adopt regulations that would have reduced the risks of fraud and financial crises were exceptional.  Just one problem — they were wrong and Levitt and Born were right.  Rubin and Summers weren’t slightly wrong; they put us on the path to the Great Recession.  Obama knows that Clinton’s brilliant political strategy, stealing the Republican play book, was a disaster for the nation, but he has picked politics over substance.

*   *   *

Obama’s proposal and the accompanying OMB releases do not mention the word or the concept of fraud.  Despite an “epidemic” of fraud led by the bank CEOs (which caused the greatest crisis of his life), Obama cannot bring itself to use the “f” word. The administration wants the banks’ senior officers to fund its reelection campaign.  I’ve never raised political contributions, but I’m certain that pointing out that a large number of senior bank officers were frauds would make fundraising from them awkward.

Black targeted Obama’s lame gesture toward acknowledgement of some need for regulation, encapsulated in the statement that “(w)here necessary, we won’t shy away from addressing obvious gaps …”:

Huh?  The vital task is to find the non-obvious gaps.  Why, two years into his presidency, has the administration failed to address “obvious gaps”?  The administration does not need Republican approval to fill obvious gaps in regulation.  Even when Obama finds “obvious gaps” in regulatory protection he does not promise to act.  He will act only “where necessary.”  We know that Summers, Rubin, and Geithner rarely believe that financial regulation is “necessary.”  Even if Obama decides it is “necessary” to act he only promises to “address” “obvious gaps” — not “end” or “fill” them.

At the conclusion of his Huffington Post essay, Black provided his own list of  “obvious gaps” described as the “Dirty Dozen”  —  “. . .  obvious gaps in financial regulation which have persisted and grown during this, Obama’s first two years in office.”

Bill Black is just one of many commentators to annotate the complicity of Democrats in causing the financial crisis.  Beyond that, Black has illustrated how President Obama has preserved – and possibly enhanced — the “criminogenic” milieu which could bring about another financial crisis.

The first step toward implementing “bipartisan solutions” to our nation’s ills should involve acknowledging the extent to which the fault for those problems is bipartisan.


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A Preemptive Strike By Tools Of The Plutocracy

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The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009.   The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry.  As I pointed out on April 15, more than a few commentators had been expressing their disappointment with the FCIC.  Section (5)(h)(1) of  the FERA established a deadline for the FCIC to submit its report:

On December 15, 2010, the Commission shall submit to the President and to the Congress a report containing the findings and conclusions of the Commission on the causes of the current financial and economic crisis in the United States.

In light of the fact that it took the FCIC eight months to conduct its first hearing, one shouldn’t be too surprised to learn that their report had not been completed by December 15.  The FCIC expects to have the report finalized in approximately one month.  This article by Phil Mattingly and Robert Schmidt of Bloomberg News provides a good history of the partisan struggle within the FCIC.  On December 14, Sewell Chan of The New York Times disclosed that the four Republican members of the FCIC would issue their own report on December 15:

The Republican members of the panel were angered last week when the commission voted 6 to 4, along partisan lines, to limit individual comments by the commissioners to 9 pages each in a 500-page report that the commission plans to publish next month with Public Affairs, an imprint of the Perseus Books Group, one Republican commissioner said.

Beyond that, Shahien Nasiripour of the Huffington Post revealed more details concerning the dissent voiced by Republican panel members:

During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

I gave those four Republican members more credit than that.  I was wrong.  Commission Vice-Chairman Bill Thomas, along with Douglas Holtz-Eakin, Peter Wallison, and Keith Hennessey issued their own propaganda piece as a preemptive strike against whatever less-than-complimentary things the FCIC might ultimately say about the Wall Street Plutocrats.  The spin strategy employed by these men in explaining the cause of the financial crisis is to blame Fannie Mae and Freddie Mac for the entire episode.  (That specious claim has been debunked by Mark Thoma and others many times.)  This remark from the “Introduction” section of the Republicans’ piece set the tone:

While the housing bubble, the financial crisis, and the recession are surely interrelated events, we do not believe that the housing bubble was a sufficient condition for the financial crisis. The unprecedented number of subprime and other weak mortgages in this bubble set it and its effect apart from others in the past.

Many economists and other commentators will have plenty of fun ripping this thing to shreds.  One of the biggest lies that jumped right out at me was this statement from page 5 of the so-called Financial Crisis Primer:

Put simply, the risk of a housing collapse was simply not appreciated.  Not by homeowners, not by investors, not by banks, not by rating agencies, and not by regulators.

That lie can and will be easily refuted —  many times over —  by the simple fact that a large number of essays had been published by economists, commentators and even dilettantes who predicted the housing collapse.

Yves Smith provided a refreshing retort to the Plutocracy’s Primer at her Naked Capitalism website:

This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth.  Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea.  But that’s been our policy for decades.  Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy.  In reality, both the run-up to the crisis and its aftermath were one of the greatest wealth transfers from the citizenry at large to a comparatively small group of rentiers in the history of man.

*   *   *

This pathetic development shows how deeply this country is in thrall to lobbyists.  But these so-called commissioners, who are really no more than financial services minions out to misbrand themselves as independent, look to have overplayed their hand.  This stunt shows more than a tad of desperation on the part of banks and their operatives in their excessive efforts block any remotely accurate, and therefore critical, report on the industry.

Perversely, this development may be a positive indicator on several fronts.  First, the FCIC report may be tougher and more probing than I dared hope.

The fact that a pre-emptive strike by the Plutocratic “Gang of Four” has been initiated with the release of their Primer could indeed suggest that that their patrons are worried about the ultimate conclusions to be published by the FCIC next month.  The release of this Primer will surely draw plenty of criticism and attract more attention to the FCIC’s final report.  Nevertheless, will the resulting firestorm motivate the public to finally demand some serious action beyond the lame “financial reform” fiasco?  Adam Garfinkle’s recent essay in The American Interest suggests that such hope could be misplaced:

Obsessed with vacuous celebrity, Americans make it easier than ever for plutocrats to sail under the radar.  Corporate heavyweights and bankers may be suborning Congress and ripping off  “we the people” left and right, but we’re too busy dancing with the stars to notice.

Will this situation ever change?