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Geithner Gets Bashed in New Book

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Much has been written about “Turbo” Tim Geithner since he first became Treasury Secretary on January 26, 2009.  In his book, Too Big to Fail, Andrew Ross Sorkin wrote adoringly about Geithner’s athletic expertise.  On the other hand, typing “Turbo Tim Geithner” into the space on the upper-right corner of this page and clicking on the little magnifying glass will lead you to no less than 61 essays wherein I saw fit to criticize the Treasury Secretary.  I first coined the “Turbo” nickname on February 9, 2009 and on February 16 of that year I began linking “Turbo” to an explanatory article, for those who did not understand the reference.

Geithner has never lacked defenders.  The March 10, 2010 issue of The New Yorker ran an article by John Cassidy entitled, “No Credit”.  The title was meant to imply that Getithner’s efforts to save America’s financial system were working, although he was not getting any credit for this achievement.  From the very outset, the New Yorker piece was obviously an attempt to reconstruct Geithner’s controversial public image – because he had been widely criticized as a tool of Wall Street.

Edward Harrison of Credit Writedowns dismissed the New Yorker article as “an out and out puff piece” that Geithner himself could have written:

Don’t be fooled; this is a clear plant to help bolster public opinion for a bailout and transfer of wealth, which was both unnecessary and politically damaging.

Another article on Geithner, appearing in the April 2010 issue of The Atlantic, was described by Edward Harrison as “fairly even-handed” although worthy of extensive criticism.  Nevertheless, after reading the following passage from the first page of the essay, I found it difficult to avoid using the terms “fawning and sycophantic” to describe it:

In the course of many interviews about Geithner, two qualities came up again and again.  The first was his extraordinary quickness of mind and talent for elucidating whatever issue was the preoccupying concern of the moment.  Second was his athleticism.  Unprompted by me, friends and colleagues extolled his skill and grace at windsurfing, tennis, basketball, running, snowboarding, and softball (specifying his prowess at shortstop and in center field, as well as at the plate).  He inspires an adolescent awe in male colleagues.

Gawd!  Yeech!

In November of 2008, President George W. Bush appointed Neil M. Barofsky to the newly-established position, Special Inspector General for the Troubled Asset Relief Program (SIGTARP).  Barofsky was responsible for preventing fraud, waste and abuse involving TARP operations and funds.  From his first days on that job, Neil Barofsky found Timothy Geithner to be his main opponent.  On March 31 of 2009, the Senate Finance Committee held a hearing on the oversight of TARP.  The hearing included testimony by Neil Barofsky, who explained how the Treasury Department had been interfering with his efforts to ascertain what was being done with TARP funds which had been distributed to the banks.  Matthew Jaffe of ABC News described Barofsky’s frustration in attempting to get past the Treasury Department’s roadblocks.

On the eve of his retirement from the position of Special Inspector General for TARP (SIGTARP), Neil Barofsky wrote an op-ed piece for the March 30, 2011 edition of The New York Times entitled, “Where the Bailout Went Wrong”.  Barofsky devoted a good portion of the essay to a discussion of the Obama administration’s failure to make good on its promises of “financial reform”, with a particular focus on the Treasury Department:

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions.

In the final analysis, it has been Treasury’s broken promises that have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives.

It wasn’t meant to be that.  Indeed, Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals — whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in — may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises.  This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.

It should come as no surprise that in Neil Barofsky’s new book, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, the author pulls no punches in his criticism of Timothy Geithner.  Barofsky has been feeding us some morsels of what to expect from the book by way of some recent articles in Bloomberg News.  Here is some of what Barofsky wrote for Bloomberg on July 22:

More important, the financial markets continue to bet that the government will once again come to the big banks’ rescue.  Creditors still give the largest banks more favorable terms than their smaller counterparts — a direct subsidy to those that are already deemed too big to fail, and an incentive for others to try to join the club.  Similarly, the major banks are given better credit ratings based on the assumption that they will be bailed out.

*   *   *

The missteps by Treasury have produced a valuable byproduct: the widespread anger that may contain the only hope for meaningful reform. Americans should lose faith in their government.  They should deplore the captured politicians and regulators who distributed tax dollars to the banks without insisting that they be accountable.  The American people should be revolted by a financial system that rewards failure and protects those who drove it to the point of collapse and will undoubtedly do so again.

Only with this appropriate and justified rage can we hope for the type of reform that will one day break our system free from the corrupting grasp of the megabanks.

In his review of Barofsky’s new book, Darrell Delamaide of MarketWatch discussed the smackdown Geithner received from Barofsky:

Barofsky may have an axe to grind, but he grinds it well, portraying Geithner as a dissembling bureaucrat in thrall to the banks and reminding us all that President Barack Obama’s selection of Geithner as his top economic official may have been one of his biggest mistakes, and a major reason the White House incumbent has to fight so hard for re-election.

From his willingness to bail out the banks with virtually no accountability, to his failure to make holders of credit default swaps on AIG take a haircut, to his inability to mount any effective program for mortgage relief, Geithner systematically favored Wall Street over Main Street and created much of the public’s malaise in the aftermath of the crisis.

*    *    *

Barofsky, a former prosecutor, relates that he rooted for Geithner to get the Treasury appointment and was initially willing to give him the benefit of the doubt when it emerged that he had misreported his taxes while he worked at the International Monetary Fund.

But as more details on those unpaid taxes came out and Geithner’s explanations seemed increasingly disingenuous, Barofsky had his first doubts about the secretary-designate.

Barofsky, of course, was not alone in his skepticism, and Geithner’s credibility was damaged from the very beginning by the disclosures about his unpaid taxes.

*   *   *

Barofsky concludes his scathing condemnation of Geithner’s “bank-centric policies” by finding some silver lining in the cloud – that the very scale of the government’s failure will make people angry enough to demand reform.

Once Geithner steps down from his position at the end of the year, we may find that his legacy is defined by Neil Barofsky’s book, rather than any claimed rescue of the financial system.


 

Plutocracy Is Crushing Democracy

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It’s been happening here in the United States since onset of the 2008 financial crisis.  I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  One year ago, economist John Hussman of the Hussman Funds discussed the consequences of the administration’s failure to do what was necessary:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The plutocratic tools in control of our government would never allow the stockholders and bondholders of those “too-big-to-fail” banks to suffer losses as do normal people after making bad investments.

As it turns out, a few of those same banks are flexing their muscles overseas as the European debt crisis poses a new threat to Goldman Sachs and several of its ridiculously-overleveraged European counterparts.  Time recently published an essay by Stephan Faris, which raised the question of whether the regime changes in Greece and Italy amounted to a “bankers’ coup”:

As in Athens, the plan in Rome is to replace the outgoing prime minister with somebody from outside the political class.  Mario Monti, a neo-liberal economist and former EU commissioner who seems designed with the idea of calming the markets in mind, is expected to take over from Berlusconi after he resigns Saturday.

*   *   *

Yet, until the moment he’s sworn in, Monti’s ascension is far from a done deal, and it didn’t take long after the markets had closed for the weekend for it to start to come under fire.  Though Monti, a former advisor to Goldman Sachs, is heavily championed by the country’s respected president, many in parliament have spent the week whispering that Berlusconi’s ouster amounts to a “banker’s coup.”  “Yesterday, in the chamber of deputies we were bitterly joking that we were going to get a Goldman Sachs government,” says a parliamentarian from Berlusconi’s government, who asked to remain anonymous citing political sensitivity.

At The New York Times, Ross Douthat reflected on the drastic policy of bypassing democracy to install governments led by “technocrats”:

After the current crisis has passed, some voices have suggested, there will be time to reverse the ongoing centralization of power and reconsider the E.U.’s increasingly undemocratic character. Today the Continent needs a unified fiscal policy and a central bank that’s willing to behave like the Federal Reserve, Bloomberg View’s Clive Crook has suggested.  But as soon as the euro is stabilized, Europe’s leaders should start “giving popular sovereignty some voice in other aspects of the E.U. project.”

This seems like wishful thinking.  Major political consolidations are rarely undone swiftly, and they just as often build upon themselves.  The technocratic coups in Greece and Italy have revealed the power that the E.U.’s leadership can exercise over the internal politics of member states.  If Germany has to effectively backstop the Continent’s debt in order to save the European project, it’s hard to see why the Frankfurt Group (its German members, especially) would ever consent to dilute that power.

Reacting to Ross Douthat’s column, economist Brad DeLong was quick to criticize the use of the term “technocrats”.  That same label appeared in the previously-quoted Time article, as well:

Those who are calling the shots in Europe right now are in no wise “technocrats”:  technocrats would raise the target inflation rate in the eurozone and buy up huge amounts of Greek and Italian (and other) debt conditional on the enactment of special euro-wide long-run Fiscal Stabilization Repayment Fund taxes. These aren’t technocrats:  they are ideologues – and rather blinders-wearing ideologues at that.

Forget about euphemisms such as:  “technocrats”, “the European Union” or “the European Central Bank”.  Stephen Foley of The Independent pulled back the curtain and revealed the real culprit  .  .  .  Goldman Sachs:

This is the most remarkable thing of all:  a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.

It is not just Mr Monti.  The European Central Bank, another crucial player in the sovereign debt drama, is under ex-Goldman management, and the investment bank’s alumni hold sway in the corridors of power in almost every European nation, as they have done in the US throughout the financial crisis.  Until Wednesday, the International Monetary Fund’s European division was also run by a Goldman man, Antonio Borges, who just resigned for personal reasons.

Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as “the Vampire Squid”, and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence.

*   *   *

This is The Goldman Sachs Project.  Put simply, it is to hug governments close.  Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort.  Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government.  The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.

*   *   *

The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent.  Goldman Sachs, which has written over $2trn of insurance, including an undisclosed amount on eurozone countries’ debt, would not escape unharmed, especially if some of the $2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under.  No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less.  The alternative is a second financial crisis, a second economic collapse.

The previous paragraph explains precisely what the term “too-big-to-fail” is all about:  If a bank of that size fails – it can bring down the entire economy.  Beyond that, the Goldman situation illustrates what Simon Johnson meant when he explained that the United States – acting alone – cannot prevent the megabanks from becoming too big to fail.  Any attempt to regulate the size of those institutions requires an international effort:

But no international body — not the Group of -20, the Group of Eight or anyone else — shows any indication of taking this on, mostly because governments don’t wish to tie their own hands. In a severe crisis, the interests of the state are usually paramount. No meaningful cross-border resolution framework is even in the cards.  (Disclosure:  I’m on the FDIC’s Systemic Resolution Advisory Committee; I’m telling you what I tell them at every opportunity.)

What we are left with is a situation wherein the taxpayers are the insurers of the privileged elite, who invest in banks managed by greedy, reckless megalomaniacs.  When those plutocrats are faced with the risk of losing money – then democracy be damned!  Contempt for democracy is apparently a component of the mindset afflicting the “supply side economics” crowd.  Creepy Stephen Moore, of The Wall Street Journal’s editorial board, has expounded on his belief that capitalism is more important than Democracy.  We are now witnessing how widespread that warped value system is.


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Dubious Reassurances

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There appears to be an increasing number of commentaries presented in the mainstream media lately, assuring us that “everything is just fine” or – beyond that – “things are getting better” because the Great Recession is “over”.  Anyone who feels inclined to believe those comforting commentaries should take a look at the Financial Armageddon blog and peruse some truly grim reports about how bad things really are.

On a daily basis, we are being told not to worry about Europe’s sovereign debt crisis because of the heroic efforts to keep it under control.  On the other hand, I was more impressed by the newest Weekly Market Comment by economist John Hussman of the Hussman Funds.  Be sure to read the entire essay.  Here are some of Dr. Hussman’s key points:

From my perspective, Wall Street’s “relief” about the economy, and its willingness to set aside recession concerns, is a mistake born of confusion between leading indicators and lagging ones.  Leading evidence is not only clear, but on a statistical basis is essentially certain that the U.S. economy, and indeed, the global economy, faces an oncoming recession.  As Lakshman Achuthan notes on the basis of ECRI’s own (and historically reliable) set of indicators, “We’ve entered a vicious cycle, and it’s too late: a recession can’t be averted.”  Likewise, lagging evidence is largely clear that the economy was not yet in a recession as of, say, August or September. The error that investors are inviting here is to treat lagging indicators as if they are leading ones.

The simple fact is that the measures that we use to identify recession risk tend to operate with a lead of a few months.  Those few months are often critical, in the sense that the markets can often suffer deep and abrupt losses before coincident and lagging evidence demonstrates actual economic weakness.  As a result, there is sometimes a “denial” phase between the point where the leading evidence locks onto a recession track, and the point where the coincident evidence confirms it. We saw exactly that sort of pattern prior to the last recession. While the recession evidence was in by November 2007 (see Expecting A Recession ), the economy enjoyed two additional months of payroll job growth, and new claims for unemployment trended higher in a choppy and indecisive way until well into 2008. Even after Bear Stearns failed in March 2008, the market briefly staged a rally that put it within about 10% of its bull market high.

At present, the S&P 500 is again just 10% below the high it set before the recent market downturn began. In my view, the likelihood is very thin that the economy will avoid a recession, that Greece will avoid default, or that Europe will deal seamlessly with the financial strains of a banking system that is more than twice as leveraged as the U.S. banking system was before the 2008-2009 crisis.

*   *   *

A few weeks ago, I noted that Greece was likely to be promised a small amount of relief funding, essentially to buy Europe more time to prepare its banking system for a Greek default, and observed “While it’s possible that the equity markets will mount a relief rally in the event of new funding to Greece, it will be important to recognize that handing out a bit more relief would be preparatory to a default, and that would probably be reflected in a failure of Greek yields to retreat significantly on that news.”

As of Friday, the yield on 1-year Greek debt has soared to 169%. Greece will default. Europe is buying time to reduce the fallout.

As of this writing, the yield on 1-year Greek debt is now 189.82%.  How could it be possible to pay almost 200% interest on a one-year loan?

Despite all of the “good news” about America’s zombie megabanks, which were bailed out during the financial crisis (and for a while afterward) Yves Smith of Naked Capitalism has been keeping an ongoing “Bank of America Deathwatch”.  The story has gone from grim to downright creepy:

If you have any doubt that Bank of America is in trouble, this development should settle it.  I’m late to this important story broken this morning by Bob Ivry of Bloomberg, but both Bill Black (who I interviewed just now) and I see this as a desperate (or at the very best, remarkably inept) move by Bank of America’s management.

The short form via Bloomberg:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…

Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC.  About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

*   *   *

This move reflects either criminal incompetence or abject corruption by the Fed.  Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail.  Remember the effect of the 2005 bankruptcy law revisions:  derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs.  So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral.  It’s well nigh impossible to have an orderly wind down in this scenario.  You have a derivatives counterparty land grab and an abrupt insolvency.  Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that.  During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle.  It had to get more funding from Congress.  This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors.  No Congressman would dare vote against that.  This move is Machiavellian, and just plain evil.

It is the aggregate outrage caused by the rampant malefaction throughout American finance, which has motivated the protesters involved in the Occupy Wall Street movement.  Those demonstrators have found it difficult to articulate their demands because any comprehensive list of grievances they could assemble would be unwieldy.  Most important among their complaints is the notion that the failure to enforce prohibitions against financial wrongdoing will prevent restoration of a healthy economy.  The best example of this is the fact that our government continues to allow financial institutions to remain “too big to fail” – since their potential failure would be remedied by a taxpayer-funded bailout.

Hedge fund manager Barry Ritholtz articulated those objections quite well, in a recent piece supporting the State Attorneys General who are resisting the efforts by the Justice Department to coerce settlement of the States’ “fraudclosure” cases against Bank of America and others – on very generous terms:

The Rule of Law is yet another bedrock foundation of this nation.  It seems to get ignored when the criminals involved received billions in bipartisan bailout monies.

The line of bullshit being used on State AGs is that we risk an economic crisis if we prosecute these folks.

The people who claim that fail to realize that the opposite is true – the protest at Occupy Wall Street, the negative sentiment, the general economic angst – traces itself to the belief that there is no justice, that senior bankers have gotten away with economic murder, and that we have a two-tiered criminal system, one for the rich and one for the poor.

Today’s NYT notes the gloom that has descended over consumers, and they suggest it may be home prices. I think they are wrong – in my experience, the sort of generalized rage and frustration comes about when people realize the institutions they have trusted have betrayed them.  Humans deal with financial losses in a very specific way – and it’s not fury.  This is about a fundamental breakdown of the role of government, courts, and leadership in the nation.  And it all traces back to the bailouts of reckless bankers, and the refusal to hold them in any way accountable.

There will not be a fundamental economic recovery until that is recognized.

In the mean time, the quality of life for the American middle class continues to deteriorate.  We need to do more than simply hope that the misery will “trickle” upward.


 

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Looking Beyond Rhetoric

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As a result of the increasing popularity of the Occupy Wall Street movement (which now gets so much coverage, it’s referred to as “OWS”) President Obama has found it necessary to crank up the populist rhetoric.  He must walk a fine line because his injecting too much enthusiasm into any populist-themed discussion of the economic crisis will alienate those deep-pocketed campaign donors from the financial sector.  Don’t forget:  Goldman Sachs was Obama’s leading private source of 2008 campaign contributions, providing more than one million dollars for the cause.

The Occupy Wall Street protest has now placed Obama and his fellow Democrats in a double-bind situation.  Many commentators – while pondering that predicament – have found it necessary to take a good, hard look at the favorable treatment given to Wall Street by the current administration.  A recent essay by Robert Reich approached this subject by noting that Obama is as far from left-wing populism as any Democratic President in modern history:

To the contrary, Obama has been extraordinarily solicitous of Wall Street and big business – making Timothy Geithner Treasury Secretary and de facto ambassador from the Street; seeing to it that Bush’s Fed appointee, Ben Bernanke, got another term; and appointing GE Chair Jeffrey Immelt to head his jobs council.

Most tellingly, it was President Obama’s unwillingness to place conditions on the bailout of Wall Street – not demanding, for example, that the banks reorganize the mortgages of distressed homeowners, and that they accept the resurrection of the Glass-Steagall Act, as conditions for getting hundreds of billions of taxpayer dollars – that contributed to the new populist insurrection.

*   *   *

But the modern Democratic Party is not likely to embrace left-wing populism the way the GOP has embraced – or, more accurately, been forced to embrace – right-wing populism. Just follow the money, and remember history.

Another commentator, who has usually been positive in his analysis of the current administration’s policies – Tom Friedman of The New York Times – couldn’t help but criticize Obama’s performance while lamenting the loss a great American leader, Steve Jobs:

Obama supporters complain that the G.O.P. has tried to block him at every turn.  That is true. But why have they gotten away with it? It’s because Obama never persuaded people that he had a Grand Bargain tied to a vision worth fighting for.

*    *    *

The paucity of Obama’s audacity is striking.

As I recently pointed out, any discussion of our nation’s economic problems ultimately focuses on President Obama’s failure to seize the opportunity – during the first year of his Presidency – to turn the economy around and reduce unemployment.  Despite the administration’s repeated claims that it has reduced unemployment, Pro Publica offered an honest look of that claim:

Overall, job creation has been relatively meager during the Obama administration, particularly compared to the massive job losses brought on by the recession.  According to the St. Louis Federal Reserve, even if job creation were happening at pre-recession levels, it would take us 11 years to get back to an unemployment rate of 5 percent.

Ron Suskind’s new book, Confidence Men provided a shocking revelation about Obama’s decision allow unemployment to remain above 9 percent by ignoring the advice of Larry Summers (Chair of the National Economic Council) and Christina Romer (Chair of the Council of Economic Advisers).  I discussed that issue and the outrage expressed in reaction to Obama’s attitude on September 22.

At The Washington Post, Ezra Klein wrote an engaging piece, which provided us with a close look at how the Obama administration was fighting the economic crisis.  Klein interviewed several people from inside the administration and provided a sympathetic perspective on Obama’s decisions.  Nevertheless, Klein’s ultimate conclusion – although nuanced – didn’t do much for the President:

From the outset, the policies were too small for the recession the administration and economists thought we faced.  They were much too small for the recession we actually faced.  More and better stimulus, more aggressive interventions in the housing market, more aggressive policy from the Fed, and more attention to preventing layoffs and hiring the unemployed could have led to millions more jobs.  At least in theory.

Of course, ideas always sound better than policies.  Policies must be implemented, and they have unintended consequences and unforeseen flaws.  In the best of circumstances, the policymaking process is imperfect.  But January 2009 had the worst of circumstances – a once-in-a-lifetime economic emergency during a presidential transition.

*   *   *

These sorts of economic crises are, in other words, inherently politically destabilizing, and that makes a sufficient response, at least in a democracy, nearly impossible.

Klein’s apologia simply underscored the necessity for a President to exhibit good leadership qualities.  Despite a “Presidential transition”, the Democratic Party held the majority of seats in both the Senate and the House.  In July of 2009, when it was obvious that the stimulus had been inadequate, Obama was too preoccupied with his healthcare bill to refocus on economic recovery.  As I said back then:

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.  As a result, President Obama will need to re-invent this aspect of his public image before he can even consider presenting a second economic stimulus proposal.

Weak leadership is hardly a justifiable excuse for an inadequate, half-done, economic stimulus program.  Beyond that, President Obama’s sell-out to Wall Street by way of a sham financial “reform” bill has drawn widespread criticism.  In his March 29 op-ed piece for The New York Times, Neil Barofsky, the retiring Special Inspector General for TARP (SIGTARP) criticized the Obama administration’s failure to make good on its promises of “financial reform”:

Finally, the country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior.  This promise also appears likely to go unfulfilled.  The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever.  They reasonably assume that the government will rescue them again, if necessary.

*   *   *

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions.

Running as an incumbent President presents a unique challenge to Mr. Obama.  He must now reconcile his populist rhetoric with his record as President.  The contrast is too sharp to ignore.


 

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Elizabeth Warren Should Run Against Obama

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Now that President Obama has thrown Elizabeth Warren under the bus by nominating Richard Cordray to head the Consumer Financial Protection Bureau (CFPB), she is free to challenge Obama in the 2012 election.  It’s not a very likely scenario, although it’s one I’d love to see:  Warren as the populist, Independent candidate – challenging Obama, the Wall Street tool – who is already losing to a phantom, unspecified Republican.

A good number of people were disappointed when Obama failed to nominate Warren to chair the CFPB, which was her brainchild.  It was bad enough that Treasury Secretary “Turbo” Tim Geithner didn’t like her – but once the President realized he was getting some serious pushback about Warren from Senate Republicans – that was all it took.  Some Warren supporters have become enamored with the idea that she could challenge Scott Brown for his seat representing Massachusetts in the Senate.  However, many astute commentators consider that as a really stupid idea.  Here is the reaction from Yves Smith of Naked Capitalism:

We argued yesterday that the Senate was not a good vehicle for advancing Elizabeth Warren’s aims of helping middle class families, since she would have no more, and arguably less power than she has now, and would be expected to defend Democrat/Obama policies, many of which are affirmatively destructive to middle class interests (just less so than what the Republicans would put in place).

A poll conducted in late June by Scott Brown and the Republican National Committee raises an even more basic question:  whether she even has a shot at winning.

*   *   *

The poll shows a 25 point gap, which is a massive hurdle, and also indicates that Brown is seen by many voters as not being a Republican stalwart (as in he is perceived to vote for the state’s, not the party’s, interest).  A 25 point gap is a near insurmountable hurdle and shows that Warren’s reputation does not carry as far as the Democratic party hackocracy would like her fans to believe.  But there’s no reason not to get this pesky woman to take up what is likely to be a poisoned chalice.  If she wins, she’s unlikely to get on any important committees, given the Democratic party pay to play system, and will be boxed in by the practical requirements of having to make nice to the party and support Obama positions a meaningful portion of the time. And if she runs and loses, it would be taken as proof that her middle class agenda really doesn’t resonate with voters, which will give the corporocrats free rein (if you can’t sell a liberal agenda in a borderline Communist state like Massachusetts, it won’t play in Peoria either).

Obviously, a 2012 challenge to the Obama Presidency by Warren would be an uphill battle.  Nevertheless, it’s turning out to be an uphill battle for the incumbent, as well.  David Weidner of MarketWatch recently discussed how Obama’s failure to adequately address the economic crisis has placed the President under the same pressure faced by many Americans today:

He’s about to lose his job.

*   *   *

Blame as much of the problem on his predecessor as you like, the fact is Obama hasn’t come up with a solution.  In fact, he’s made things worse by filling his top economic posts with banking-friendly interests, status-quo advisers and milquetoast regulators.

And if there’s one reason Obama loses in 2012, it’ll be because he failed to surround himself with people willing to take drastic action to get the economy moving again.

In effect, Obama’s team has rewarded the banking industry under the guise of “saving the economy” while abandoning citizens and consumers desperate for jobs, credit and spending power.

There was the New York Fed banker cozy with Wall Street: Timothy Geithner.

There was the former Clinton administration official who was the architect of policies that led to the financial crisis: Larry Summers.

There was a career bureaucrat named to lead the Securities and Exchange Commission:  Mary Schapiro.

To see just how unremarkable this group is, consider that the most progressive regulator in the Obama administration, Federal Deposit Insurance Corp. Chairman Sheila Bair, was a Republican appointed by Bush.

*   *   *

The lack of action by Obama’s administration of mediocrities is the reason the recovery sputters.  In essence, the turnaround depends too much on a private sector that, having escaped failure, is too content to sit out what’s supposed to be a recovery.

*   *   *

What began as a two-step approach:  1) saving the banks, and then 2) saving homeowners, was cut short after the first step.

Instead of extracting more lending commitments from the banks, forcing more haircuts on investors and more demands on business, Obama has let his team of mediocrities allow the debate to be turned on government.  The government caused the financial crisis.  The government ruined the housing market.

It wasn’t true at the start, but it’s becoming true now.

Despite his status as the incumbent and his $1 billion campaign war chest, President Obama could find himself voted out of office in 2012.  When you consider the fact that the Republican Party candidates who are currently generating the most excitement are women (Bachmann and the undeclared Palin) just imagine how many voters might gravitate to a populist female candidate with substantially more brains than Obama.

The disillusionment factor afflicting Obama is not something which can be easily overlooked.  The man I have referred to as the “Disappointer-In-Chief” since his third month in office has lost more than the enthusiasm of his “base” supporters – he has lost the false “progressive” image he had been able to portray.  Matt Stoller of the Roosevelt Institute explained how the real Obama had always been visible to those willing to look beyond the campaign slogans:

Many people are “disappointed” with Obama.  But, while it is certainly true that Obama has broken many many promises, he projected his goals in his book The Audacity of Hope.  In Audacity, he discussed how in 2002 he was going to give politics one more shot with a Senate campaign, and if that didn’t work, he was going into corporate law and getting wealthy like the rest of his peer group.  He wrote about how passionate activists were too simple-minded, that the system basically worked, and that compromise was a virtue in and of itself in a world of uncertainty. His book was a book about a fundamentally conservative political creature obsessed with process, not someone grounded in the problems of ordinary people.  He told us what his leadership style is, what his agenda was, and he’s executing it now.

I expressed skepticism towards Obama from 2005, onward.  Paul Krugman, Debra Cooper, and Tom Ferguson among others pegged Obama correctly from day one.  Obama broadcast who he was, through his conservative policy focus (which is how Krugman pegged him), his bank backers (which is how Ferguson pegged him), his political support of Lieberman (which is how I pegged him), and his cavalier treatment of women’s issues (which is how Debra Cooper pegged him).  He is doing so again, with his choice to effectively remove Elizabeth Warren from the administration.

I just wish Elizabeth Warren would fight back and challenge Obama for The White House.  If only   .   .   .


 

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Discipline Problem

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At the conclusion of a single, five-year term as Chair of the Federal Deposit Insurance Corporation (FDIC) Sheila Bair is calling it quits.  One can hardly blame her.  It must have been one hell of an experience:  Warning about the hazards of the subprime mortgage market, being ignored and watching the consequences unfold . . .  followed by a painful, weekly ritual, which gave birth to a website called Bank Fail Friday.

Bair’s tenure at the helm of the FDIC has been – and will continue to be – the subject of some great reading.  On her final day at the FDIC (July 8) The Washington Post published an opinion piece by Ms. Bair in which she warned that short-term, goal-directed thinking could bring about another financial crisis.  She also had something to brag about.  Despite the efforts of Attorney General Eric Hold-harmless and the Obama administration to ignore the malefaction which brought about the financial crisis and allowed the Wall Street villains to profiteer from that catastrophe, Bair’s FDIC actually stepped up to the plate:

This past week, the FDIC adopted a rule that allows the agency to claw back two years’ worth of compensation from senior executives and managers responsible for the collapse of a systemic, non-bank financial firm.

To date, the FDIC has authorized suits against 248 directors and officers of failed banks for shirking their fiduciary duties, seeking at least $6.8 billion in damages.  The rationales the executives come up with to try to escape accountability for their actions never cease to amaze me.  They blame the failure of their institutions on market forces, on “dead-beat borrowers,” on regulators, on space aliens.  They will reach for any excuse to avoid responsibility.

Mortgage brokers and the issuers of mortgage-based securities were typically paid based on volume, and they responded to these incentives by making millions of risky loans, then moving on to new jobs long before defaults and foreclosures reached record levels.

The difference between Sheila Bair’s approach to the financial/economic crisis and that of the Obama Administration (whose point man has been Treasury Secretary “Turbo” Tim Geithner) was analyzed in a great article by Joe Nocera of The New York Times entitled, “Sheila Bair’s Bank Shot”.  The piece was based on Nocera’s “exit interview” with the departing FDIC Chair.  Throughout that essay, Nocera underscored Bair’s emphasis on “market discipline” – which he contrasted with Geithner’s fanatic embrace of the exact opposite:  “moral hazard” (which Geithner first exhibited at the onset of the crisis while serving as President of the Federal Reserve of New York).  Nocera made this point early in the piece:

On financial matters, she seemed to have better political instincts than Obama’s Treasury Department, which of course is now headed by Geithner.  She favored “market discipline” – meaning shareholders and debt holders would take losses ahead of depositors and taxpayers – over bailouts, which she abhorred.  She didn’t spend a lot of time fretting over bank profitability; if banks had to become less profitable, postcrisis, in order to reduce the threat they posed to the system, so be it.  (“Our job is to protect bank customers, not banks,” she told me.)

Bair’s discussion of those early, panic-filled days during September 2008 is consistent with reports we have read about Geithner elsewhere.  This passage from Nocera’s article is one such example:

For instance, during the peak of the crisis, with credit markets largely frozen, banks found themselves unable to roll over their short-term debt.  This made it virtually impossible for them to function.  Geithner wanted the F.D.I.C. to guarantee literally all debt issued by the big bank-holding companies – an eye-popping request.

Bair said no.  Besides the risk it would have entailed, it would have also meant a windfall for bondholders, because much of the existing debt was trading at a steep discount.  “It was unnecessary,” she said.  Instead, Bair and Paulson worked out a deal in which the F.D.I.C. guaranteed only new debt issued by the bank-holding companies.  It was still a huge risk for the F.D.I.C. to take; Paulson says today that it was one of the most important, if underrated, actions taken by the federal government during the crisis.  “It was an extraordinary thing for us to do,” Bair acknowledged.

Back in April of 2009, the newly-appointed Treasury Secretary met with similar criticism in this great article by Jo Becker and Gretchen Morgenson at The New York Times:

Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson, Jr. convened the nation’s economic stewards for a brainstorming session.  What emergency powers might the government want at its disposal to confront the crisis? he asked.

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer.  He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

“People thought, ‘Wow, that’s kind of out there,’ ” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward.  Mr. Geithner says, “I don’t remember a serious discussion on that proposal then.”

But in the 10 months since then, the government has in many ways embraced his blue-sky prescription.  Step by step, through an array of new programs, the Federal Reserve and Treasury have assumed an unprecedented role in the banking system, using unprecedented amounts of taxpayer money, to try to save the nation’s financiers from their own mistakes.

Geithner’s utter contempt for market discipline again became a subject of the Nocera-Bair interview when the conversation turned to the infamous Maiden Lane III bailouts.

“I’ve always wondered why none of A.I.G.’s counterparties didn’t have to take any haircuts.  There’s no reason in the world why those swap counterparties couldn’t have taken a 10 percent haircut.  There could have at least been a little pain for them.”  (All of A.I.G.’s counterparties received 100 cents on the dollar after the government pumped billions into A.I.G.  There was a huge outcry when it was revealed that Goldman Sachs received more than $12 billion as a counterparty to A.I.G. swaps.)

Bair continued:  “They didn’t even engage in conversation about that.  You know, Wall Street barely missed a beat with their bonuses.”

“Isn’t that ridiculous?” she said.

This article by Gretchen Morgenson provides more detail about Geithner’s determination that AIG’s counterparties receive 100 cents on the dollar.  For Goldman Sachs – it amounted to $12.9 billion which was never repaid to the taxpayers.  They can brag all they want about paying back TARP – but Maiden Lane III was a gift.

I was surprised that Sheila Bair – as a Republican – would exhibit the same sort of “true believer-ism” about Barack Obama as voiced by many Democrats who blamed Rahm Emanuel for the early disappointments of the Obama administration.  Near the end of Nocera’s interview, Bair appeared taken-in by Obama’s “plausible deniability” defense:

“I think the president’s heart is in the right place,” Bair told me.  “I absolutely do.  But the dichotomy between who he selected to run his economic team and what he personally would like them to be doing – I think those are two very different things.”  What particularly galls her is that Treasury under both Paulson and Geithner has been willing to take all sorts of criticism to help the banks.  But it has been utterly unwilling to take any political heat to help homeowners.

The second key issue for Bair has been dealing with the too-big-to-fail banks. Her distaste for the idea that the systemically important banks can never be allowed to fail is visceral.  “I don’t think regulators can adequately regulate these big banks,” she told me.  “We need market discipline.  And if we don’t have that, they’re going to get us in trouble again.”

If Sheila Bair’s concern is valid, the Obama administration’s track record for market discipline has us on a certain trajectory for another financial crisis.



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Obama And The TARP

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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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Obama Fatigue

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Since President Obama first assumed office, it hasn’t been too difficult to find harsh criticism of the new administration.  One need only tune in to the Fox News, where an awkward Presidential sneeze could be interpreted as a “secret message” to Bill Ayers or George Soros.  Nevertheless, with the passing of time, voices from across the political spectrum have joined a chorus of frustration with the Obama agenda.

On February 26, 2009 – only one month into the Obama Presidency – I voiced my suspicion about the new administration’s unwillingness to address the problem of systemic risk, inherent in allowing a privileged few banks to enjoy their “too big to fail” status:

Will Turbo Tim’s “stress tests” simply turn out to be a stamp of approval, helping insolvent banks avoid any responsible degree of reorganization, allowing them to continue their “welfare queen” existence, thus requiring continuous infusions of cash at the expense of the taxpayers?  Will the Obama administration’s “failure of nerve” –  by avoiding bank nationalization — send us into a ten-year, “Japan-style” recession?  It’s beginning to look that way.

By September of 2009, I became convinced that Mr. Obama was suffering from a degree of hubris, which could seal his fate as a single-term President:

Back on July 15, 2008 and throughout the Presidential campaign, Barack Obama promised the voters that if he were elected, there would be “no more trickle-down economics”.  Nevertheless, his administration’s continuing bailouts of the banking sector have become the worst examples of trickle-down economics in American history – not just because of their massive size and scope, but because they will probably fail to achieve their intended result.

Although the TARP bank bailout program was initiated during the final months of the Bush Presidency, the Obama administration’s stewardship of that program recently drew sharp criticism from Neil Barofsky, the retiring Special Inspector General for TARP (SIGTARP).  Beyond that, in his March 29 op-ed piece for The New York Times, Mr. Barofsky criticized the Obama administration’s failure to make good on its promises of “financial reform”:

Finally, the country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior.  This promise also appears likely to go unfulfilled.  The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever.  They reasonably assume that the government will rescue them again, if necessary.

*   *   *

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions.

*   *   *

In the final analysis, it has been Treasury’s broken promises that have turned TARP – which was instrumental in saving the financial system at a relatively modest cost to taxpayers – into a program commonly viewed as little more than a giveaway to Wall Street executives.

It wasn’t meant to be that.  Indeed, Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals – whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in – may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises.  This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.

Another unlikely critic of President Obama is the retired law school professor who blogs using the pseudonym, “George Washington”.  A recent posting at Washington’s Blog draws from a number of sources to ponder the question of whether President Obama (despite his Nobel Peace Prize) has become more brutal than President Bush.  The essay concludes with a review of Obama’s overall performance in The White House:

Whether or not Obama is worse than Bush, he’s just as bad.

While we had Bush’s “heck of a job” response to Katrina, we had Obama’s equally inept response and false assurances in connection with the Gulf oil spill, and Obama’s false assurances in connection with the Japanese nuclear crisis.

And Bush and Obama’s response to the financial crisis are virtually identical:  bail out the giant banks, let Wall Street do whatever it wants, and forget the little guy.

The American voters asked for change.  Instead, we got a different branch of the exact same Wall Street/military-industrial complex/Big Energy (BP, GE)/Big Pharma party.

Another commentator who has become increasingly critical of President Obama is Robert Reich, Secretary of Labor in the Clinton Administration.  Mr. Obama’s failure to push back against the corporatist politicians, who serve as “reverse Robin Hoods” enriching CEOs at the expense of American workers, resulted in this rebuke from Professor Reich:

President Obama and Democratic leaders should be standing up for the wages and benefits of ordinary Americans, standing up for unions, and decrying the lie that wage and benefit concessions are necessary to create jobs.  The President should be traveling to the Midwest – taking aim at Republican governors in the heartland who are hell bent on destroying the purchasing power of American workers.  But he’s doing nothing of the sort.

As attention begins to focus on the question of who will be the Republican nominee for the 2012 Presidential election campaign, Obama Fatigue is causing many people to appraise the President’s chances of defeat.  The excitement of bringing the promised “change” of 2008 has morphed into cynicism.  Many of the voters who elected Obama in 2008 might be too disgusted to bother with voting in 2012.  As a result, the idea of a Democratic or Independent challenger to Obama is receiving more consideration.  Rolling Stone’s Matt Taibbi recently provided this response to a letter inquiring about the possibility that Elizabeth Warren could make a run for the White House in 2012:

A few months ago I heard a vague rumor from someone who theoretically would know that such a thing was being contemplated, but I don’t know anything beyond that.  I wish she would run.  I’m not sure if it would ultimately be a good thing or a bad thing for Barack Obama – she could fatally wound his general-election chances by exposing his ties to Wall Street – but I think she’s exactly what this country needs. She’s totally literate on the finance issues and is completely on the side of human beings, as opposed to banks and oil companies and the like.  One thing I will say:  if she did run, she would have a lot more support from the press than she probably imagines, as there are a lot of reporters out there who are reaching the terminal-disappointment level with Obama ready to hop on the bandwagon of someone like Warren.

If Elizabeth Warren ultimately decides to make a run for The White House, Mr. Obama should do the right thing:  Stop selling the sky to people and step aside.


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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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Screw The People And Save The Banks

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The economic crisis in Ireland (and the rest of Europe) has resulted in a morass of published commentaries, some of which make sense and most of which don’t.  Sometimes it appears as though the writer hasn’t really formed an opinion on the issue, even though the tone of the article seems to be expressing one.  The problem experienced in Ireland is the same as it is everywhere else:  During tough economic times, governments always choose to bail out the banks regardless of the expense and suffering to be endured by the citizens.  The Pragmatic Capitalist recently upbraided the writer of one of the more poorly-thought-out essays dealing with the Irish predicament:

Sheila Bair, the head of the FDIC, has remained one of the more levelheaded and helpful leaders during the financial crisis.  But in an op-ed in the Washington Post this morning she took a decisive turn for the worse when she waded into waters that were certain to drown her.  Bair is now echoing the cries that have been heard across Ireland for the last 2 years – cries of fiscal austerity.  Of course, the USA is nothing like Ireland and has an entirely different monetary system, but Bair ignores all of this (in fact proves she is entirely ignorant of this).  What’s sad is that Bair clearly understands that this crisis is still largely hurting Main Street America   .   .   .

To the extent that the Irish situation bears any resemblance to what we are experiencing (or may soon experience) in the United States, economist John Hussman has written the best essay on this issue.  Hussman began with this point, made by another economist:

“If you have bad banks then you very urgently want to clean up your banks because bad banks go only one way:  they get worse. In the end every bank is a fiscal problem.  When you have bad banks, it is in a political environment where it is totally understood that the government is going to bail them out in the end.  And that’s why they are so bad, and that’s why they get worse.  So cleaning up the banks is an essential counterpart of any attempt to have a well functioning economy.  It is a counterpart of any attempt to have a dull, uninteresting macroeconomy.  And there is no excuse to do it slowly because it is very expensive to postpone the cleanup.  There is no technical issue in doing the cleanup.  It’s mostly to decide to start to grow up and stop the mess.”

MIT Economist Rudiger Dornbusch, November 1998

The TARP bailout was not the only time when our government chose a temporary fix (as in cure or heroin injection) at great taxpayer expense.  I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  John Hussman discussed the consequences:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The present situation

Europe will clearly be in the spotlight early this week, as a run on Irish banks coupled with large fiscal deficits has created a solvency crisis for the Irish government itself and has been (temporarily) concluded with a bailout agreement.  Ireland’s difficulties are the result of a post-Lehman guarantee that the Irish government gave to its banking system in 2008.  The resulting strains will now result in a bailout, in return for Ireland’s agreement to slash welfare payments and other forms of spending to recipients that are evidently less valuable to society than bankers.

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Over the short run, Ireland will promise “austerity” measures like Greece did – large cuts in government spending aimed at reducing the deficit.  Unfortunately, imposing austerity on a weak economy typically results in further economic weakness and a shortfall on the revenue side, meaning that Ireland will most probably face additional problems shortly anyway.

The “austerity” approach is more frequently being used as a dividing line to distinguish “liberal” economists from “conservative” economists.  The irony here is that many so-called liberal politicians are as deeply in the pocket of the banking lobby as their conservative counterparts.  Economist Dean Baker recently wrote an article for The Guardian, urging Ireland to follow the example of Argentina and simply default on its debt:

The failure of the ECB or IMF to take steps to rein in the bubble before the crisis has not made these international financial institutions shy about using a heavy hand in imposing conditions now.  The plan is to impose stiff austerity, requiring much of Ireland’s workforce to suffer unemployment for years to come as a result of the failure of their bankers and the ECB.

While it is often claimed that these institutions are not political, only the braindead could still believe this.  The decision to make Ireland’s workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country’s bankers is entirely a political one.  There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.

Bloomberg News columnist, Matthew Lynn wrote a great article for the Pittsburgh Tribune-Review, setting out five reasons why Ireland should refuse a bailout from the European Union and the International Monetary Fund to opt for default as the logical approach.

Pay close attention to how your favorite politicians weigh-in on the Irish situation.  It should give you a fairly good tip as to what actions those pols can be expected to take when the Wall Street bankers dash back to Capitol Hill for TARP 2 The Sequel.


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