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.
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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.
Comments Off on Occupy Wall Street – For Some Reason
Back in July, the Canadian-based, activist network known as Adbusters, announced plans to organize an occupation of Wall Street on September 17, 2011. Their July 13 announcement revealed that the ultimate goal of the occupation was deliberately left open:
On September 17, we want to see 20,000 people flood into lower Manhattan, set up tents, kitchens, peaceful barricades and occupy Wall Street for a few months. Once there, we shall incessantly repeat one simple demand in a plurality of voices.
Tahrir succeeded in large part because the people of Egypt made a straightforward ultimatum – that Mubarak must go – over and over again until they won. Following this model, what is our equally uncomplicated demand?
The most exciting candidate that we’ve heard so far is one that gets at the core of why the American political establishment is currently unworthy of being called a democracy: we demand that Barack Obama ordain a Presidential Commission tasked with ending the influence money has over our representatives in Washington. It’s time for DEMOCRACY NOT CORPORATOCRACY, we’re doomed without it.
This demand seems to capture the current national mood because cleaning up corruption in Washington is something all Americans, right and left, yearn for and can stand behind.
A website specifically dedicated to this event was created: OccupyWallSt.org. The site has a Mission Statement, proclaiming that on September 17, a tent city will be established in lower Manhattan:
Once there, we shall incessantly repeat one simple demand in a plurality of voices and we will not leave until that demand has been met.
As for that mysterious demand, the website provides a hint as to how it will be determined:
What we demand from our government is for the people to decide through democratic consensus, not this website. A Facebook poll started by Adbusters suggests the demand might be an end to corporate personhood.
So, will the Facebook poll serve as the vehicle for reaching that “democratic consensus”?
On August 23, Adbusters announced that the Internet hacktivist group, Anonymous had joined #OCCUPYWALLSTREET. Anonymous prepared this one-minute, promotional video for the cause. Once Anonymous got on board, the Department of Homeland Security became interested in the event (if it had not done so already). Computerworld magazine reported that on September 2, a bulletin was issued by the DHS National Cybersecurity and Communications Integration Center (NCCIC):
The DHS alert also warns of three cyber attacks and civil protests it says are planned by Anonymous and affiliated groups.
The first attack, dubbed Occupy Wall Street (OWS) is scheduled for Sept. 17.
The so-called ‘Day of Rage’ protest was first announced by a group called Adbusters in July and is being actively supported by Anonymous. The organizers of OWS hope to get about 20,000 individuals to gather on Wall Street on that day to protest various U.S. government policies.
It sounds to me as though the Department of Homeland Security is getting revved-up for a mass-rendition to Guantanamo and a busy schedule of “Full Roto-Rooter” cavity searches. It could get scary. The camoflauge-attired attendees probably won’t be interested in hearing my explanation that “I’m just here to demand the dismissal of Kathryn Wylde from her post as a Class C Director of the New York Federal Reserve Bank.”
My favorite commentator for MarketWatch, Paul Farrell, predicted that the turnout could be a bit larger than anticipated:
Given today’s intense anger against America’s totally dysfunctional government, no one should be surprised if 90,000 arrive for Occupy Wall Street and its solidarity allies at other financial centers across the world, armed with their rallying cry to stop “the corruption of our governments by Wall Street money.”
After discussing the potential for historic change Occupy Wall Street seems to offer, Farrell posed the simple question: Will it work?
In the final analysis, this may be a bad case of “too little, too late:” Back in 1776 our original 57 revolutionaries also “had enough” when they signed the Declaration of Independence. They also risked everything, family, fortunes and lives. They actually had “one simple demand,” to be free of a tyrannical ruler, George III.
Today, the new ruler is greedy, corrupting democracy. But it’s locked deep in the American soul. Maybe they’re asking the wrong question: Not “Is America Ready for a Tahrir Moment?” Rather ask: “Is America Past That Moment, Buried Too Deep in a Culture of Greed to Change?”
If so, Wall Street wins, again. And America loses, again.
The promoters of the Tea Party movement were able to channel the outrage experienced by taxpayers, who watched the Federal Reserve hand trillions over to a small handful of ineptly-managed megabanks. The Tea Party promoters redirected and exploited that anger as a motivating force, which provoked those citizens to vote against their own interests. The attempt to tame the beast with regulation (as had been done after the Great Depression) was sabotaged. Could the Occupy Wall Street effort bring justice back to defeat financial anarchy? It would be nice if it worked, although I gave up on “hope” in early 2009.
Comments Off on Voices Of Reason For An Audience Of Psychotics
A “double-dip” recession? Maybe not. In his August 30 article for the Financial Times, economist Martin Wolf said the 2008 recession never ended:
Many ask whether high-income countries are at risk of a “double dip” recession. My answer is: no, because the first one did not end. The question is, rather, how much deeper and longer this recession or “contraction” might become. The point is that, by the second quarter of 2011, none of the six largest high-income economies had surpassed output levels reached before the crisis hit, in 2008 (see chart). The US and Germany are close to their starting points, with France a little way behind. The UK, Italy and Japan are languishing far behind.
If that sounds scary – it should. The fact that nothing was done by our government to address the problems which caused the financial crisis is just part of the problem. The failure to make an adequate attempt to restore the economy (i.e. facilitate growth in GDP as well as a reduction in unemployment) poses a more immediate risk. Here’s more from Martin Wolf:
Now consider, against this background of continuing fragility, how people view the political scene. In neither the US nor the eurozone, does the politician supposedly in charge – Barack Obama, the US president, and Angela Merkel, Germany’s chancellor – appear to be much more than a bystander of unfolding events, as my colleague, Philip Stephens, recently noted. Both are – and, to a degree, operate as – outsiders. Mr Obama wishes to be president of a country that does not exist. In his fantasy US, politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed. Ms Merkel, similarly, seeks a non-existent middle way between the German desire for its partners to abide by its disciplines and their inability to do any such thing. The realisation that neither the US nor the eurozone can create conditions for a speedy restoration of growth – indeed the paralysing disagreements over what those conditions might be – is scary.
Centrism continues to get a bad name because two of the world’s most powerful leaders have used that term to “re-brand” passivity.
Martin Wolf is not the only pundit expressing apprehension about the future of the global economy. Margaret Brennan of Bloomberg Television interviewed economist Nouriel Roubini (a/k/a “Dr. Doom”) on August 31. Roubini noted that there is no reason to believe that Republicans will consent to any measures toward restoring the economy during this election year because “if things get worse – it’s only to their political benefit”. He estimated a “60% probability of recession next year”. Beyond that, Roubini focused on the forbidden topic of stimulus. He pointed out that the limited 2009 stimulus program prevented a recession from becoming another Great Depression “but it was not significant enough”. Nevertheless, a real economic stimulus is still necessary – but don’t count on it:
With millions of unemployed construction workers, we need a trillion-dollar, five-year program just for infrastructure – but that’s not politically feasible, and that’s why there will be a fiscal drag and we will have a recession.
Nick Baker of Bloomberg BusinessWeek observed that Dr. Roubini’s remarks negatively impacted the stock market on Wednesday, “offsetting reports showing faster-than-estimated growth in American business activity and factory orders.”
If you aren’t worried yet, the most recent Weekly Market Comment by economist John Hussman of the Hussman Funds might get you there. Pay close attention to Hussman’s distinction between opinion and evidence:
It is now urgent for investors to recognize that the set of economic evidence we observe reflects a unique signature of recessions comprising deterioration in financial and economic measures that is always and only observed during or immediately prior to U.S. recessions. These include a widening of credit spreads on corporate debt versus 6 months prior, the S&P 500 below its level of 6 months prior, the Treasury yield curve flatter than 2.5% (10-year minus 3-month), year-over-year GDP growth below 2%, ISM Purchasing Managers Index below 54, year-over-year growth in total nonfarm payrolls below 1%, as well as important corroborating indicators such as plunging consumer confidence. There are certainly a great number of opinions about the prospect of recession, but the evidence we observe at present has 100% sensitivity (these conditions have always been observed during or just prior to each U.S. recession) and 100% specificity (the only time we observe the full set of these conditions is during or just prior to U.S. recessions). This doesn’t mean that the U.S. economy cannot possibly avoid a recession, but to expect that outcome relies on the hope that “this time is different.”
While the reduced set of options for monetary policy action may seem unfortunate, it is important to observe that each time the Fed has attempted to “backstop” the financial markets by distorting the set of investment opportunities that are available, the Fed has bought a temporary reprieve only at the cost of amplifying the later fallout.
Be sure to read Hussman’s entire essay. It provides an excellent account of the Fed’s role in helping to cause the financial crisis, as well as its reinforcement of a “low level equilibrium” in the economy. In response to those hoping for another round of quantitative easing, Hussman provided some common sense:
The upshot is that it remains unclear whether the Fed will revert to reckless policy in September, or whether the growing disagreement within the FOMC will result in a more enlightened approach – abandoning the “activist Fed” role, and passing the baton to public policies that encourage objectives such as productive investment, R&D, broad-benefit infrastructure, and mortgage restructuring – rather than continuing reckless monetary interventions that defend and encourage the continued misallocation of resources and the repeated emergence of speculative bubbles.
President Obama should look to John Hussman if he wants to learn the difference between centrism and passivity.
Support for President Obama’s re-election bid is in disarray. His sinking poll numbers have left many Democrats hoping for a miracle (i.e. some degree of economic recovery before November of 2012). A significant component of the party’s progressive bloc is looking for a challenger to step forward – as can be seen at the StopHoping.org website. One of the bloggers at Corrente – Hugh – recently had a good laugh at those who were anticipating a possible Primary challenge to Obama from former Wisconsin Senator Russ Feingold. Here is some of what Hugh had to say:
The point is that Feingold could have been, and should have been, if he were legit, a focus for progressive organizing. But he wasn’t. . . . Feingold could have been the voice of opposition to Bush and his policies, but the silence from the Wisconsin Senator’s office was deafening. He could have played the same role opposing Obama’s right wing corporatist agenda. He did not. Indeed he lost his Senate seat largely because of his failure to distance himself from Obama.
There are other reasons to dislike Feingold and question his progressive credentials. He voted for John Roberts as Chief Justice of the Supreme Court. He voted for Obamacare. And he is a deficit hawk.
Many left-leaning commentators have been offering suggestions to the President as to what actions he should be taking – as well as what message he should be delivering. Experience has demonstrated that Obama never pays attention to well-intentioned, sensible advice. How many times has Robert Reich written a roadmap for the President to use toward saving the economy as well as Obama’s own Presidency – only to be ignored? As the campaign drags on, try to keep count of how many commentaries are written under the theme: “What Obama Needs to Say and Do Right Now”. Rest assured that he won’t say or do any of it.
Meanwhile, Republican voters are currently flocking to the standard-bearer du jour, Texas Governor Rick Perry. Alexander Cockburn of CounterPunch wrote a great essay about Perry’s unmatched political instincts and the challenges ahead for both parties in the upcoming Presidential race:
The obvious question is whether Perry, having won the right, can clamber back along the kook branch towards something vaguely resembling the solid timber of sanity, to capture the necessary independents and disillusioned folk who bet on Obama in 2008. Hard to say. Perry is pretty far out on the limb. Reagan, with the strenuous help of the press, managed the crawl back in 1980, amid widespread disappointment and disgust with Jimmy Carter. Disappointment and disgust with Barack Obama? The president has slithered down in the most recent polls, and now is just above the 50 per cent disapproval rating. There are still around 30 million Americans without work, or enough work. There’s the endlessly cited observation that no president presiding over more than a 7 per cent jobless rate can hope for a second term.
The progressive sector is already rallying the Obama vote by pounding out the unsurprising message that Perry is a shil and errand boy for corporate America, Amazing! Imagine that a conservative Texas Republican would end up in that corner, arm in arm with Barack Obama, messenger of hope and change, also shil and errand boy for corporate America, starting with the nuclear industry, the arms sector, the ag/pesticide complex and moving on through Wall Street and the Fed, and equipped with truly noxious beliefs about fiscal discipline, the merits of compromise. He’s a far more dangerous man to have in the Oval Office than Perry. We need a polarizer to awaken the left from its unending, unbreakable infatuation with our current president, despite all the horrors he has perpetrated and presided over, most significantly the impending onslaught on Social Security and Medicare.
Any Republican who wants to maintain a viable candidacy will be forced to start taking some hard swings at Rick Perry. Jon Huntsman has already started to do so. Michele Bachmann might not, if she wants a shot at becoming Perry’s running mate. It won’t matter what Ron Paul says … because the mainstream media are pretending as though he doesn’t exist. If you haven’t seen it yet, Jon Stewart ran a superb piece, exhibiting how all of the major news outlets – including Fox – were apparently reading from the same script after Congressman Paul came within 100 votes of beating Michele Bachmann in the Iowa Straw Poll. Watching those reports could have led one to believe that Ron Paul had dropped out of the race. On August 17, Tara Sartor of the Pew Research Center’s Project for Excellence in Journalism provided this analysis of how the television news organizations squelched Ron Paul’s near-victory in Iowa:
In a further attempt to gauge the post-straw poll attention to Paul’s campaign, PEJ also used the Snapstream server’s closed captioning capability to assess the candidates’ television coverage in the first few days after that balloting.
The sample included the three network Sunday morning panel shows on August 14, the morning and evening network news programs on August 15 and four hours of prime-time cable and one hour of daytime from each of the three major cable news networks on August 15.
According to that analysis, Paul was mentioned just 29 times. By comparison, Perry was mentioned 371 times, Bachmann was mentioned 274 times, and Romney was mentioned 183 times.
I hope that the anti-Paul conspiracy helps to energize those voters who had been ambivalent about supporting the “other Texan” in the race.
At some point, the progressive Democrats are going to be faced with the ugly reality that they don’t have a candidate in the 2012 Presidential campaign. As has been the case with Ron Paul and his supporters – the Left will be left out.
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.
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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”.
The clowns in Washington seem to be going out of their way to ignore the advice of respected economists as they focus on deficit reduction while ignoring the worsening unemployment crisis. The fact that mainstream news outlets are oblivious to the consequences of foolish economic policy doesn’t really help. President Obama now finds himself wedded to a policy of economic destruction, while at the mercy of his opponents, simply because he ignored the good advice he was receiving back in 2009.
The urgency of our current predicament is lost on the asshats vested with the responsibility and authority to implement a “course correction”. As I pointed out last month, bond guru Bill Gross of PIMCO made an effort to debunk the myth that balancing the budget “will magically produce 20 million jobs over the next 10 years”. More recently, Princeton economics professor and former vice-chairman of the Federal Reserve, Alan Blinder, wrote an article for The Wall Street Journal entitled, “Our National Jobs Emergency”. After discussing the most recent non-farm payrolls report from the Bureau of Labor Statistics, Professor Blinder made this observation:
The horrific June employment number made it two in a row. With the latest revisions, job growth in May is now estimated to have clocked in at only 25,000 jobs. So that’s 25,000 and 18,000 in consecutive months. Given the immense size of total U.S. payroll employment (around 131 million) and the sampling error in the survey, those numbers are effectively zero. Job creation has stopped for two months.
If we were at 5% unemployment, two bad payroll reports in a row would be of some concern yet tolerable. But when viewed against the background of 9%-plus unemployment, they are catastrophic.
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All this adds up to a national jobs emergency. Tragically, however, it is not being treated as such. When is the last time you heard one of our national leaders propose a serious job-creating program?
The operative word here is “serious.” Every day brings new proposals to slash government spending. But as I noted on this page last month, those are ways to kill jobs, not create them. As a matter of fact, despite all the cries of “big government” or even “socialism,” public-sector employment has been falling.
Fortunately, Professor Blinder had some good ideas for private-sector job creation. One such idea was a tax credit for firms that create new jobs:
As one concrete example, companies might be offered a tax credit equal to 10% of the increase in their wage bills (over 2011 levels, say). No increase, no reward.
You might think Republicans would embrace an idea like that. After all, it’s a business tax cut and all the new jobs would be in the private sector. But you’d be wrong. Frankly, I’m not sure why. Maybe it’s seen as “left-wing social engineering.”
Professor Blinder then proposed an alternative:
Suppose we allow firms to repatriate profits at some super-low tax rate, but only to the extent that they increase their wage payments subject to Social Security. For example, if XYZ Corporation paid wages covered by Social Security of $1.5 billion in 2011, and then boosted that amount to $1.6 billion in 2012, it would be allowed to repatriate $100 million at a tax rate of 5% or 10% instead of the usual 35% rate. The tax savings to the company would thus be $25 million-$30 million for raising its payroll by $100 million. That’s a powerful incentive.
Did anyone in Washington pay serious attention to Professor Blinder’s Wall Street Journal article . . . or were they all too busy shorting Treasuries to give a damn?
Oxford-educated economist Martin Wolf wrote a piece for the Financial Times, in which he lamented the antics of those entrusted with the power of managing financial and economic policy:
It is not that tackling the US fiscal position is urgent. At a time of private sector deleveraging, it is helpful. The US is able to borrow on easy terms, with yields on 10-year bonds close to 3 per cent, as the few non-hysterics predicted. The fiscal challenge is long term, not immediate. A decision not to allow the government to borrow to finance the programmes Congress has already mandated would be insane…. Yet, astonishingly, many of the Republicans opposed to raising the US debt ceiling do not merely wish to curb federal spending: they enthusiastically desire a default. Either they have no idea how profound would be the shock to their country’s economy and society of a repudiation of debt legally contracted by their state, or they fall into the category of utopian revolutionaries, heedless of all consequences.
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These are dangerous times. The US may be on the verge of making among the biggest and least-necessary financial mistakes in world history. The eurozone might be on the verge of a fiscal cum financial crisis that destroys not just the solvency of important countries but even the currency union and, at worst, much of the European project. These times require wisdom and courage among those in charge of our affairs. In the US, utopians of the right are seeking to smash the state that emerged from the 1930s and the second world war. In Europe, politicians are dealing with the legacy of a utopian project which requires a degree of solidarity that their peoples do not feel. How will these clashes between utopia and reality end? In late August, when I return from my break, we may know at least some of the answers.
At this point, those “answers” are beginning to look pretty scary. Of course, the Republicans are not the only ones to blame. Let’s take a look at the wonderful job Mike Whitney of CounterPunch did when he dropped the entire matter back onto President Obama’s lap:
How do you light a fire under Washington, that’s the question? Is Congress even aware that we’re undergoing a major jobs crisis or are they too busy bickering over tax cuts for fatcats or how much money they can divert from Social Security to Wall Street?
Look; unemployment is over 9% and rising. The states are firing tens of thousands of teachers and public employees every month because they need to balance their budgets and they’re not taking in enough revenue. The stimulus is dwindling (which means that fiscal policy is actually contractionary in real terms) And the 10-year Treasury has dipped below 3 percent (as of Monday morning.) In other words, the bond market is signaling “recession”, even while the dope in the White House is doing his utmost to slice $4 trillion off the deficits.
Does that make any sense?
Maybe if you’re Herbert Hoover, it does. But it makes no sense at all if you were elected with a mandate to “change” the way Washington operates and put the country back to work. Obama is just making a bad situation worse by gadding about in his golf togs blabbering about belt tightening. It’s enough to make you sick.
Get with the program, Barry, or resign. That would be even better. Then maybe we can find someone who’s serious about running the country.
As I pointed out on November 4, 2010 . . . someone has to challenge Obama for the 2012 Democratic nomination and I have someone in mind . . .
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.
We bloggers have the mainstream news outlets to thank for our readership. The inane, single-minded focus on a particular story, simply because it brings a huge audience to one’s competitors, regularly provides the driving force behind programming decisions made by those news producers. As a result, America’s more discerning, critical thinkers have turned to internet-based news sources (and blogs) to familiarize themselves with the more important stories of these turbulent times.
Robert Oak, at The Economic Populist website, recently expressed his outrage concerning the fact that a certain over-publicized murder trial has eclipsed coverage of more important matters:
For over a week we’ve heard nothing else by the press but Casey Anthony. Imagine what would happen if Nancy Grace used her never ending tape loop rants of hatred against tot mom to spew and prattle about the U.S. economy? Instead of some bizarre post traumatic public stress disorder, stuck in a rut, obsessive thought mantra, repeating ad nauseum, she’s guilty, we might hear our politicians are selling this nation down the river.
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Folks, don’t you think the economy is just a little more important and actually impacts your lives than one crime and trial? The reality is any story which really impacts the daily lives of working America is not covered or spun to fiction.
The fact that “our politicians are selling this nation down the river” has not been overlooked by Brett Arends at MarketWatch. He recently wrote a great essay entitled, “The Next, Worse Financial Crisis”, wherein he discussed ten reasons “why we are doomed to repeat 2008”. Of the ten reasons, my favorite was number 7, “The ancient regime is in the saddle”:
I have to laugh whenever I hear Republicans ranting that Barack Obama is a “liberal” or a “socialist” or a communist. Are you kidding me? Obama is Bush 44. He’s a bit more like the old man than the younger one. But look at who’s still running the economy: Bernanke. Geithner. Summers. Goldman Sachs. J.P. Morgan Chase. We’ve had the same establishment in charge since at least 1987, when Paul Volcker stood down as Fed chairman. Change? What “change”? (And even the little we had was too much for Wall Street, which bought itself a new, more compliant Congress in 2010.)
As the 2012 campaign season begins, one need not look too far to find criticism of President Obama. Nevertheless, as Brett Arends explained, most of that criticism is a re-hash of the same, tired talking points we have been hearing since Obama took office. We are only now beginning to hear a broader chorus of pushback from commentators who see Obama as the President I have often described as the “Dissapointer-In-Chief”. Marshall Auerback wasn’t so restrained in his recent appraisal of Obama’s maladroit response to our economic crisis, choosing instead to ratify a well-deserved putdown, which most commentators felt obligated to denounce:
It may not have been the most felicitous choice of phrase, but Mark Halperin’s characterization of Barack Obama was not far off the mark, even if he did get suspended for it. The President is a dick, at least as far as his understanding of basic economics goes. Obama’s perverse fixation with deficit reduction uber alles takes him to areas where even George W. Bush and Ronald Reagan dared not to venture. Medicare and Social Security are now on the table. In fact entitlements of all kinds (excluding the myriad of subsidies still present to Wall Street) are all deemed fair game.
To what end? Deficit control and deficit reduction, despite the fact that at present, the US has massive excess capacity including millions of unemployed and underemployed, a negative contribution from net exports, and a stagnant private spending growth horizon. Yet the President marches on, oblivious to the harm his policies would introduce to an already bleeding economy, using the tired analogy between a household and a sovereign government to support his tired arguments. It may have been impolitic, but “dick” is what immediately sprang to mind as one listened incredulously to the President’s press conference, which went from the sublime to the ridiculous.
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Let’s state it again: households do not have the power to levy taxes, to issue the currency we use, and to demand that those taxes are paid in the currency it issues. Rather, households are users of the currency issued by the sovereign government. Here the same distinction applies to private businesses, which are also users of the currency. There’s a big difference, as all us on this blog have repeatedly stressed: Users of a currency do face an external constraint in a way that a sovereign issuer of its currency does not.
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The President has the causation here totally backward. A growing economy, characterized by rising employment, rising incomes and rising capacity utilization causes the deficit to shrink, not the other way around. Rising prosperity means rising tax revenues and reduced social welfare payments, whereas there is an overwhelming body of evidence to support the opposite – cutting budget deficits when there is slack private spending growth and external deficits will erode growth and destroy net jobs.
The increasing, widespread awareness of Obama’s mishandling of the economic crisis has resulted in a great cover story for New York Magazine by Frank Rich, entitled, “Obama’s Original Sin”. While discussing Rich’s article, Yves Smith of Naked Capitalism lamented the fact that Obama is – again – the beneficiary of undeserved restraint:
Even Rich’s solid piece treats Obama more kindly that he should be. He depicts the President as too easily won over by “the best and the brightest” in the guise of folks like Robert Rubin and his protégé Timothy Geithner.
We think this characterization is far too charitable. Obama had a window in time in which he could have acted, decisively, to rein the financial services in, and he and his aides chose to let it pass and throw their lot in with the banksters. That fatal decision has severely constrained their freedom of action, as we explain . . .
Miscreants such as Casey Anthony serve as convenient decoys for public anger. Hopefully, by Election Day, the voters will realize that Casey Anthony isn’t to blame for the pathetic state of America’s economy and they will vote accordingly.
Congressman Ron Paul is one of the few original thinkers on Capitol Hill. Sometimes he has great ideas, although at other times he might sound a little daft. He recently grabbed some headlines by expressing the view that the United States “should declare bankruptcy”. A June 28 CNN report focused on Paul’s agreement with the contention that if bankruptcy is the cure for Greece, it is also the cure for the United States. However, as most economists will point out, the situation in Greece is not at all relevant to our situation because the United States issues its own currency and Greece is stuck with the euro, under the regime of the European Central Bank. Anyone who can’t grasp that concept should read this posting by Cullen Roche at the Seeking Alpha website.
Nevertheless, economist Dean Baker picked up on one of Congressman Paul’s points, which – if followed through to its logical conclusion – could actually solve the debt ceiling impasse. The remark by Ron Paul which inspired Dean Baker was a gripe about the $1.6 trillion in Treasury securities that the Federal Reserve now holds as a result of two quantitative easing programs:
“We owe, like, $1.6 trillion because the Federal Reserve bought that debt, so we have to work hard to pay the interest to the Federal Reserve,” Paul said. “We don’t, I mean, they’re nobody; why do we have to pay them off?”
In an article for The New Republic, Dr. Baker commended Dr. Paul for his creativity and agreed that having the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds as a result of quantitative easing “is actually a very reasonable way to deal with the crisis”. Baker provided this explanation:
Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself.
Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs.
Unfortunately, the next passage of Dr. Baker’s essay exposed the reason why this simple, logical solution would never become implemented:
As it stands now, the Fed plans to sell off its bond holdings over the next few years. This means that the interest paid on these bonds would go to banks, corporations, pension funds, and individual investors who purchase them from the Fed.
And therein lies the rub: The infamous “too-big-to-fail” banks could buy those bonds with money borrowed from the Fed at a fractional interest rate, and then collect the yield on those bonds – entirely at the expense of American taxpayers! Not only would the American people lose money by loaning the bond purchase money to the banks almost free of charge – we would lose even more money by paying those banks interest on the money we just loaned to those same banks – nearly free of charge. (This is nothing new. It’s been ongoing since the inception of “zero interest rate policy” or ZIRP on December 16, 2008.) President Obama would never allow his patrons on Wall Street to have such an opportunity “stolen” from them by the American taxpayers. Banking industry lobbyists would start swarming all over Capitol Hill carrying briefcases filled with money if any serious effort to undertake such a plan reached the discussion stage. At this point, you might suspect that the grifters on the Hill could have a scheme underway: Make a few noises about following Baker’s suggestion and wait for the lobbyists to start sharing the love.
In the mean time, the rest of us will be left to suffer the consequences of our government’s failure to raise the debt ceiling.
You’ve been reading it everywhere and hearing it from scores of TV pundits: The ongoing economic crisis could destroy President Obama’s hopes for a second term. In a recent interview with Alexander Bolton of The Hill, former Democratic National Committee chairman, Howard Dean warned that the economy is so bad that even Sarah Palin could defeat Barack Obama in 2012. Dean’s statement was unequivocal: “I think she could win.”
I no longer feel guilty about writing so many “I told you so” pieces about Obama’s failure to heed sane economic advice since the beginning of his term in the White House. A chorus of commentators has begun singing that same tune. In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I predicted that our new President would realize that his economic stimulus program was inadequate because he followed the advice from the wrong people. After quoting the criticisms of a few economists who warned (in January and February of 2009) that the proposed stimulus would be insufficient, I said this:
Despite all these warnings, as well as a Bloomberg survey conducted in early February, revealing the opinions of economists that the stimulus would be inadequate to avert a two-percent economic contraction in 2009, the President stuck with the $787 billion plan. He is now in the uncomfortable position of figuring out how and when he can roll out a second stimulus proposal.
President Obama should have done it right the first time. His penchant for compromise – simply for the sake of compromise itself – is bound to bite him in the ass on this issue, as it surely will on health care reform – should he abandon the “public option”. The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return. The voting public will perceive this as weak leadership.
Stephanie Kelton recently provided us with an interesting reminiscence of that fateful time, in a piece she published on William Black’s New Economic Perspectives website:
Some of us saw this coming. For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery. Anything shy of that, they worried, would fail to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.
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In July 2009, I wrote a post entitled, “Gift-Wrapping the White House for the GOP.” In it, I said:
“If President Obama wants a second term, he must join the growing chorus of voices calling for another stimulus and press forward with an ambitious program to create jobs and halt the foreclosure crisis.”
With the recent announcement of Austan Goolsbee’s planned departure from his brief stint as chairman of the Council of Economic Advisers, much has been written about Obama’s constant rejection of the “dissenting opinions” voiced by members of the President’s economics team, such as those expressed by Goolsbee and his predecessor, Christina Romer. Obama chose, instead, to paint himself into a corner by following the misguided advice of Larry Summers and “Turbo” Tim Geithner. Ezra Klein of The Washington Post recently published some excerpts from a speech (pdf) delivered by Professor Romer at Stanford University in May of 2011. At one point, she provided a glimpse of the acrimony, which often arose at meetings of the President’s economics team:
Like the Federal Reserve, the Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery. I remember that fall of 2009 as a very frustrating one. It was very clear to me that the economy was still struggling, but the will to do more to help it had died.
There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit. A number of us tried to make the case that more action was desperately needed and would be effective. Normally, meetings with the President were very friendly and free-wheeling. He likes to hear both sides of an issue argued passionately. But, about the fourth time we had the same argument over more stimulus in front of him, he had clearly had enough. As luck would have it, the next day, a reporter asked him if he ever lost his temper. He replied, “Yes, I let my economics team have it just yesterday.”
By May of 2010, even Larry Summers was discussing the need for further economic stimulus measures, which I discussed in a piece entitled, “I Knew This Would Happen”. Unfortunately, most of the remedies suggested at that time were never enacted – and those that were undertaken, fell short of the desired goal. Nevertheless, Larry Summers is back at it again, proposing a new round of stimulus measures, likely due to concern that Obama’s adherence to Summers’ failed economic policies could lead to the President’s defeat in 2012. Jeff Mason and Caren Bohan of Reuters reported that Summers has proposed a $200 billion payroll tax program and a $100 billion infrastructure spending program, which would take place over the next few years. The Reuters piece also supported the contention that by 2010, Summers had turned away from the Dark Side and aligned himself with Romer in opposing Peter Orszag (who eventually took that controversial spin through the “revolving door” to join Citigroup):
During much of 2010, Obama’s economic advisers wrestled with a debate over whether to shift toward deficit reduction or pursue further fiscal stimulus.
Summers and former White House economist Christina Romer were in the camp arguing that the recession that followed the financial markets meltdown of 2008-2009 was a unique event that required aggressive stimulus to avoid a long period of stagnation similar to Japan’s “lost decade” of the 1990s.
Former White House budget director Peter Orszag was among those who cautioned against a further big stimulus, warning of the need to be mindful of ballooning budget deficits.
By the time voters head to the polls for the next Presidential election, we will be in Year Four of our own “lost decade”. Accordingly, President Obama’s new “Jobs Czar” – General Electric CEO, Jeffrey Immelt – is busy discussing new plans, which will be destined to go up in smoke when Congressional Republicans exploit the opportunity to maintain the dismal status quo until the day arrives when disgruntled voters can elect President Palin. Barack Obama is probably suffering from some awful nightmares about that possibility.
TheCenterLane.com offers opinion, news and commentary on politics, the economy, finance and other random events that either find their way into the news or are ignored by the news reporting business. As the name suggests, our focus will be on what seems to be happening in The Center Lane of American politics and what the view from the Center reveals about the events in the left and right lanes. Your Host, John T. Burke, Jr., earned his Bachelor of Arts degree from Boston College with a double major in Speech Communications and Philosophy. He earned his law degree (Juris Doctor) from the Illinois Institute of Technology / Chicago-Kent College of Law.
Dubious Reassurances
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:
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:
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:
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.