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When the Music Stops

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Forget about all that talk concerning the Mayan calendar and December 21, 2012.  The date you should be worried about is January 1, 2013.  I’ve been reading so much about it that I decided to try a Google search using “January 1, 2013” to see what results would appear.  Sure enough – the fifth item on the list was an article from Peter Coy at Bloomberg BusinessWeek entitled, “The End Is Coming:  January 1, 2013”.  The theme of that piece is best summarized in the following passage:

With the attention of the political class fixated on the presidential campaign, Washington is in danger of getting caught in a suffocating fiscal bind.  If Congress does nothing between now and January to change the course of policy, a combination of mandatory spending reductions and expiring tax cuts will kick in – depriving the economy of oxygen and imperiling a recovery likely to remain fragile through the end of 2012.  Congress could inadvertently send the U.S. economy hurtling over what Federal Reserve Chairman Ben Bernanke recently called a “massive fiscal cliff of large spending cuts and tax increases.”

Peter Coy’s take on this impending crisis seemed a bit optimistic to me.  My perspective on the New Year’s Meltdown had been previously shaped by a great essay from the folks at Comstock Partners.  The Comstock explanation was particularly convincing because it focused on the effects of the Federal Reserve’s quantitative easing programs, emphasizing what many commentators describe as the Fed’s “Third Mandate”:  keeping the stock market inflated.  Beyond that, Comstock pointed out the absurdity of that cherished belief held by the magical-thinking, rose-colored glasses crowd:  the Fed is about to introduce another round of quantitative easing (QE 3).  Here is Comstock’s dose of common sense:

A growing number of indicators suggest that the market is running out of steam.  Equities have been in a temporary sweet spot where investors have been factoring in a self-sustaining U.S. economic recovery while also anticipating the imminent institution of QE3.  This is a contradiction.  If the economy were indeed as strong as they say, we wouldn’t need QE3.  The fact that market observers eagerly look forward toward the possibility of QE3 is itself an indication that the economy is weaker than they think.  We can have one or the other, but we can’t have both.

After two rounds of quantitative easing – followed by “operation twist” – the smart people are warning the rest of us about what is likely to happen when the music finally stops.  Here is Comstock’s admonition:

The economy is also facing the so-called “fiscal cliff” beginning on January 1, 2013.  This includes expiration of the Bush tax cuts, the payroll tax cuts, emergency unemployment benefits and the sequester.  Various estimates placed the hit to GDP as being anywhere between 2% and 3.5%, a number that would probably throw the economy into recession, if it isn’t already in one before then.  At about that time we will also be hitting the debt limit once again.   U.S. economic growth will also be hampered by recession in Europe and decreasing growth and a possible hard landing in China.

Technically, all of the good news seems to have been discounted by the market rally of the last three years and the last few months.  The market is heavily overbought, sentiment is extremely high, daily new highs are falling and volume is both low and declining.  In our view the odds of a significant decline are high.

Charles Biderman is the founder and Chief Executive Officer of TrimTabs Investment Research.  He was recently interviewed by Chris Martenson.  Biderman’s primary theme concerned the Federal Reserve’s “rigging” of the stock market through its quantitative easing programs, which have steered so much money into stocks that stock prices have now become a “function of liquidity” rather than fundamental value.  Biderman estimated that the Fed’s liquidity pump has fed the stock market “$1.8 billion per day since August”.  He does not believe this story will have a happy ending:

In January of ’10, I went on CNBC and on Bloomberg and said that there is no money coming into stocks, and yet the stock market keeps going up.  The law of supply and demand still exists and for stock prices to go up, there has to be more money buying those shares.  There is no other way in aggregate that that could happen.

So I said it has to be coming from the government.  And everybody thought I was a lunatic, conspiracy theorist, whatever.  And then lo and behold, on October of 2011, Mr. Bernanke then says officially, that the purpose of QE1 and QE2 is to raise asset prices.  And if I remember correctly, equities are an asset, and bonds are an asset.

So asset prices have gone up as the Fed has been manipulating the market. At the same time as the economy is not growing (or not growing very fast).

*   *   *

At some point, the world is going to recognize the Emperor is naked. The only question is when.

Will it be this year?  I do not think it will be before the election, I think there is too much vested interest in keeping things rosy and positive.

One of my favorite economists is John Hussman of the Hussman Funds.  In his most recent Weekly Market Comment, Dr. Hussman warned us that the “music” must eventually stop:

What remains then is a fairly simple assertion:  the primary way to boost corporate profits to abnormally high – but unsustainable – levels is for the government and the household sector to both spend beyond their means at the same time.

*   *   *

The conclusion is straightforward.  The hope for continued high profit margins really comes down to the hope that government and the household sector will both continue along unsustainable spending trajectories indefinitely.  Conversely, any deleveraging of presently debt-heavy government and household balance sheets will predictably create a sustained retreat in corporate profit margins.  With the ratio of corporate profits to GDP now about 70% above the historical norm, driven by a federal deficit in excess of 8% of GDP and a deeply depressed household saving rate, we view Wall Street’s embedded assumption of a permanently high plateau in profit margins as myopic.

Will January 1, 2013 be the day when the world realizes that “the Emperor is naked”?  Will the American economy fall off the “massive fiscal cliff of large spending cuts and tax increases” eleven days after the end of the Mayan calendar?  When we wake-up with our annual New Year’s Hangover on January 1 – will we all regret not having followed the example set by those Doomsday Preppers on the National Geographic Channel?

Get your “bug-out bag” ready!  You still have nine months!


 

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An Army Of Lobbyists For The Middle Class

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

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

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

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

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

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

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

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

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

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

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

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

Wake up America, listen:

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

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

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

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

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

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

*   *   *

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

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


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License To Steal

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

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

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

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

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

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

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

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

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

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

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

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

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

*   *   *

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

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

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

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

CRAIG HOLMAN: It’s called political intelligence.

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

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

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

BAGLEY: So information is a commodity in Washington.

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

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

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

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

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

NAME               MINIMUM NET WORTH    AVERAGE   MAXIMUM NET WORTH

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

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

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

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

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

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

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

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

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

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

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

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


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Formula For Failure

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

I recently came across a dangerous manifestation of  “The Smug” in a recent article written by Ed Kilgore for The New Republic, in which Mr. Kilgore complacently explained “why Obama won’t face a primary challenge”.  We are supposed to forget about the “shellacking” taken by Democrats in the mid-term elections.  We are to ignore the fact that “mischief-making pundits have seized on a couple of polls to burnish their narrative”.  In an act exemplifying what my late father described as “tempting fate”, Mr. Kilgore proceeded to belittle the most serious criticisms of the President, while daring lightening to strike:

Above all, primary challenges to incumbent presidents require a galvanizing issue.  It’s very doubtful that the grab-bag of complaints floated by the Democratic electorate — Obama’s legislative strategy during the health care fight; his relative friendliness to Wall Street; gay rights; human rights; his refusal to prosecute Bush administration figures for war crimes or privacy violations — would be enough to spur a serious challenge.  And while Afghanistan is an increasing source of Democratic discontent, it’s hardly Vietnam, and Obama has promised to reduce troop levels sharply by 2012.

The timing of Kilgore’s supercilious disregard of a challenge to Obama’s presence atop the 2012 ticket could not have been worse.  Thanks to the efforts of the late Mark Pittman, a Freedom of Information Act lawsuit filed by Bloomberg News has forced the Federal Reserve to disclose the details of its bailouts to those business entities benefiting from the Fed’s eleven emergency lending programs initiated as a result of the 2008 financial crisis. The Fed’s massive document dump on December 1 (occurring right on the heels of the WikiLeaks publication of indiscretions by Obama’s Secretary of State — Hillary Clinton) has refocused criticism of what Kilgore described as the President’s “relative friendliness to Wall Street”.  Although Mr. Obama had not yet assumed office in the fall of 2008, after moving into the White House, the new President re-empowered the same cast of characters responsible for the financial crisis and the worst of the bailouts.  The architect of Maiden Lane III (which included a $13 billion gift to Goldman Sachs) “Turbo” Tim Geithner, was elevated from president of the New York Fed to Treasury Secretary.  Ben Bernanke was re-nominated by Obama (over strenuous bipartisan objection) to serve another term as Federal Reserve Chairman.

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

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

The Pragmatic Capitalist criticized President Obama’s habitual reliance on members of the Clinton administration as futile attempts to bring about the same results obtained fifteen years ago.  Obama’s appointment of Erskine Bowles (Clinton’s former Chief of Staff) as co-chair of the deficit commission was denounced as a recent example.  Bowles’ platitudinous insistence that it’s time for an “adult conversation about the dangers of this debt” drew this blistering retort:

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

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

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

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

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

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

I hope it doesn’t take “a 1937 moment” for the Democrats to appreciate the very serious risk that the Palin family could be living in the White House in 2013.


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How The Democrats Self-Destruct

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June 29, 2009

For the past few days, we have been inundated with news reports detailing the self-destructive behavior of the late singing sensation, Michael Jackson.  Perhaps it is this heightened awareness of self-destruction that is causing people to take a closer look at the self-destructive behavior taking place within the Democratic Party.

Most notable is the behavior of President Obama.  As his Inauguration approached, many people were surprised to learn that some principal players selected for Obama’s economic team were the same people responsible for creating this mess during the Clinton years.  The most prominent of these is Larry Summers, who is expected to replace Ben Bernanke as Chairman of the Federal Reserve in January.  On June 24, Robert Scheer, on his Truthdig website, bemoaned the fact that Obama is following the “trickle down” strategy of bailing out the big banks, while doing nothing to really solve the mortgage crisis:

It’s not working.  The Bush-Obama strategy of throwing trillions at the banks to solve the mortgage crisis is a huge bust.  The financial moguls, while tickled pink to have $1.25 trillion in toxic assets covered by the feds, along with hundreds of billions in direct handouts, are not using that money to turn around the free fall in housing foreclosures.

*    *    *

Here again the administration, continuing the Bush strategy, is working the wrong end of the problem.  Although President Obama was wise enough to at least launch a job stimulus program, a far greater amount of federal funding benefits Wall Street as opposed to Main Street.

*    *    *

Why was I so naive as to have expected this Democratic president to not do the bidding of the banks when the last president from that party joined the Republicans in giving the moguls everything they wanted?  Please, Obama, prove me wrong.

If President Obama doesn’t prove Robert Scheer wrong, Obama might find himself facing some hostile crowds at the “town hall” meetings as 2012 approaches.

The President might also be surprised to encounter large-scale Democratic grassroots disappointment over his proposed “overhaul” of the financial regulatory system.  As I pointed out on June 18, President Obama’s financial reform proposal, released on that date, drew immediate criticism for the expanded powers granted to the Federal Reserve.  On June 24, The Nation (which prides itself on having a liberal bias) ran a harshly critical piece by William Greider, entitled:  “Obama’s False Reform”.  In addition to criticizing the expanded powers granted to the Federal Reserve, Greider emphasized that the proposal did not contain any significant measures, or “hard rules”, to reform the financial system.  Beyond that, Greider took Obama to task for the false claim that the regulatory system was overwhelmed by “the speed, scope and sophistication of a 21st century global economy”.  The article emphasized the need to “slow down the rush to weak solutions” by taking the time to find out about the root causes of the breakdown and then to address those causes:

Give subpoena power to Elizabeth Warren the Congressional Oversight Board she chairs.  Hire some of those investigative reporters who have no political investment in digging deeper into the mulch.  What exactly went wrong?  Who has bloody hands?  Where are the fundamental reforms?  If the economy returns to “normal’ rather soon, the ardor for serious reform might dissipate with much left undone.  That is a small risk to take, especially if the alternative is enacting the bankers’ pallid version of reform.

President Obama is now taking pride for the passage in the House of Representatives of the “climate change bill” (H.R. 2454, the American Clean Energy and Security Act of 2009).  Despite the claim of House Majority Leader Steny H. Hoyer (D-Md.) that the bill’s passage in the House was “a transformative moment”, 44 Democrats voted against the bill.  One harsh critic of the bill is Democrat Dennis Kucinich.  Here’s some of what Mr. Kucinich had to say:

It won’t address the problem.  In fact, it might make the problem worse.  It sets targets that are too weak, especially in the short term, and sets about meeting those targets through Enron-style accounting methods.  It gives new life to one of the primary sources of the problem that should be on its way out — coal — by giving it record subsidies.  And it is rounded out with massive corporate giveaways at taxpayer expense.

*   *   *

.  .  .  the bill does not require any greenhouse gas reductions beyond current levels until 2030.

Worse yet is the Democrats’ fumbling and bumbling with their efforts at healthcare reform legislation.  Polling wiz Nate Silver of fivethirtyeight.com, did a meta-analysis of the polls conducted to assess public support for the so-called “public option”in healthcare coverage, wherein people have the option to buy health insurance from the government.  The insurance companies obviously aren’t interested in that sort of competition and they have launched advertising campaigns portraying it as controversial and flawed.  Nevertheless, Nate Silver’s report revealed that five of the six polls analyzed, demonstrated lopsided support for the public option, exceeding 60 percent.  Despite the strong popular support for the public option, Mr. Silver pointed out in another posting, how there is a great risk that Democrats might oppose the measure due to payoffs from lobbyists:

Lobbying contributions appear to have the largest marginal impact on middle-of-the-road Democrats.  Liberal Democrats are likely to hold firm to the public option unless they receive a lot of remuneration from healthcare PACs.  Conservative Democrats may not support the public option in the first place for ideological reasons, although money can certainly push them more firmly against it.  But the impact on mainline Democrats appears to be quite large:  if a mainline Democrat has received $60,000 from insurance PACs over the past six years, his likelihood of supporting the public option is cut roughly in half from 80 percent to 40 percent.

Awareness of this venality obviously has many commentators expressing outrage.  On June 23, Joe Conason wrote such an article for The New York Observer:

If Congress fails to enact health care reform this year –or if it enacts a sham reform designed to bail out corporate medicine while excluding the “public option” — then the public will rightly blame Democrats, who have no excuse for failure except their own cowardice and corruption.  The punishment inflicted by angry voters is likely to be reduced majorities in both the Senate and the House of Representatives — or even the restoration of Republican rule on Capitol Hill.

*  *  *

The excuses sound different, but all of these lawmakers have something in common — namely, their abject dependence on campaign contributions from the insurance and pharmaceutical corporations fighting against real reform.

*  *  *

Whenever Democratic politicians are confronted with this conflict between the public interest and their private fund-raising, they take offense at the implied insult.  They protest, as a spokesman for Senator Landrieu did, that they make policy decisions based on what is best for the people of their states, “not campaign contributions.”  But when health reform fails — or turns into a trough for their contributors, who will believe them?  And who will vote for them?

Those Democrats inclined to oppose the public option don’t appear to be too concerned about public indignation over their behavior.  Take California Senator Dianne Feinstein for example.  Do you really believe she gives a damn about voter outrage?  She was re-elected in 2006, despite criticism that as chair of the Senate Military Construction Appropriations subcommittee, she helped her husband, Iraq war profiteer Richard C. Blum, benefit from decisions she made as chair of that subcommittee.  So what if MoveOn.org is targeting her for ambivalence about the issue of healthcare reform?  MoveOn.org is also targeting other Democrats who are attempting to eliminate the public option.  If these officials have so much hubris as to believe that they can get away with scoffing at the public will, they had better start looking for new jobs now  . . . because the market isn’t very good.

Obama Unveils His Most Ambitious Plan

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June 18, 2009

On Wednesday, June 18, President Obama released his anxiously-awaited, 88-page proposal to reform the financial regulatory system.  An angry public, having seen its jobs and savings disappear as home values took a nosedive, has been ready to set upon the culprits responsible for the economic meltdown.  Nevertheless, the lynch mobs don’t seem too anxious to string up former Federal Reserve Chairman, Alan Greenspan.  Perhaps because he is so old, they might likely prefer to see him die a slow, painful death from some naturally-occurring degenerative disease.  Meanwhile, a website, Greenspan’s Body Count, has been keeping track of the number of suicides resulting from the recent financial collapse.  (The current total is 96.)  As usual, President Obama has been encouraging us all to “look forward”.  (Sound familiar?  . . . as in:   “Forget about war crimes prosecutions because some Democrats might also find themselves wearing orange jumpsuits.”)

In reacting to Obama’s new financial reform initiative, some critics have observed that the failure to oust those officials responsible for our current predicament, could set us up for a repeat experience.  For example, The Hill quoted the assessment of Dean Baker, Co-director of the Center for Economic Policy and Research:

However, the big downside to this reform proposal is the implication that the problem was the regulations and not the regulators.  The reality is that the Fed had all the power it needed to rein in the housing bubble, which is the cause of the current crisis.  However, they chose to ignore its growth, either not recognizing or not caring that its collapse would devastate the economy. If regulators are not held accountable for such a monumental failure (e.g., by getting fired), then they have no incentive to ever stand up to the financial industry.

The Wall Street Journal‘s Smart Money magazine provided some similarly-skeptical criticisms of this plan:

Influential bank analyst Richard Bove of Rochedale Securities believes the Obama rules will only add costs to the system and will not lead to more effective oversight.  After all, a regulatory framework is already in place, Bove says, but the political will to enforce it has been absent — and that’s just the way Washington wants it.  Indeed, the only truly aggressive SEC director since the Kennedy administration was Harvey Pitt, Bove says. “[And] when he got religion about regulation, he got removed.”

Dr. Walter Gerasimowicz of New York-based Meditron Asset Management is dubious about a number of proposals, especially that of expanding the Fed’s role.  “What I find to be very disconcerting is the fact that our Federal Reserve is going to have extensive power over much of the industry,” Gerasimowicz says.  “Why would we give the Fed such powers, especially when they’ve failed over the past 10 years to monitor, to warn, or to bring these types of speculative bubbles under control?”

Our government was kind enough to provide us with an Executive Summary of the financial reform proposal.  Here is how that summary explains the “five key objectives” of the plan, along with the general recommendations for achieving those objectives:

(1)  Promote robust supervision and regulation of financial firms.  Financial institutions that are critical to market functioning should be subject to strong oversight.  No financial firm that poses a significant risk to the financial system should be unregulated or weakly regulated.  We need clear accountability in financial oversight and supervision.  We propose:

  • A new Financial Services Oversight Council of financial regulators to identify emerging systemic risks and improve interagency cooperation.
  • New authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, even those that do not own banks.
  • Stronger capital and other prudential standards for all financial firms, and even higher standards for large, interconnected firms.
  • A new National Bank Supervisor to supervise all federally chartered banks.
  • Elimination of the federal thrift charter and other loopholes that allowed some depository institutions to avoid bank holding company regulation by the Federal Reserve.
  • The registration of advisers of hedge funds and other private pools of capital with the SEC.

(2)  Establish comprehensive supervision of financial markets. Our major financial markets must be strong enough to withstand both system-wide stress and the failure of one or more large institutions. We propose:

  • Enhanced regulation of securitization markets, including new requirements for market transparency, stronger regulation of credit rating agencies, and a requirement that issuers and originators retain a financial interest in securitized loans.
  • Comprehensive regulation of all over-the-counter derivatives.
  • New authority for the Federal Reserve to oversee payment, clearing, and settlement systems.

(3)  Protect consumers and investors from financial abuse.  To rebuild trust in our markets, we need strong and consistent regulation and supervision of consumer financial services and investment markets.  We should base this oversight not on speculation or abstract models, but on actual data about how people make financial decisions.  We must promote transparency, simplicity, fairness, accountability, and access. We propose:

  • A new Consumer Financial Protection Agency to protect consumers across the financial sector from unfair, deceptive, and abusive practices.
  • Stronger regulations to improve the transparency, fairness, and appropriateness of consumer and investor products and services.
  • A level playing field and higher standards for providers of consumer financial products and services, whether or not they are part of a bank.

(4)  Provide the government with the tools it needs to manage financial crises.  We need to be sure that the government has the tools it needs to manage crises, if and when they arise, so that we are not left with untenable choices between bailouts and financial collapse.  We propose:

  • A new regime to resolve nonbank financial institutions whose failure could have serious systemic effects.
  • Revisions to the Federal Reserve’s emergency lending authority to improve accountability.

(5)  Raise international regulatory standards and improve international cooperation.  The challenges we face are not just American challenges, they are global challenges.  So, as we work to set high regulatory standards here in the United States, we must ask the world to do the same.  We propose:

  • International reforms to support our efforts at home, including strengthening the capital framework; improving oversight of global financial markets; coordinating supervision of internationally active firms; and enhancing crisis management tools.

In addition to substantive reforms of the authorities and practices of regulation and supervision, the proposals contained in this report entail a significant restructuring of our regulatory system.  We propose the creation of a Financial Services Oversight Council, chaired by Treasury and including the heads of the principal federal financial regulators as members.  We also propose the creation of two new agencies. We propose the creation of the Consumer Financial Protection Agency, which will be an independent entity dedicated to consumer protection in credit, savings, and payments markets. We also propose the creation of the National Bank Supervisor, which will be a single agency with separate status in Treasury with responsibility for federally chartered depository institutions.  To promote national coordination in the insurance sector, we propose the creation of an Office of National Insurance within Treasury.

So there you have it.  Most commentators expect that the real fighting over this plan won’t begin until this fall, with healthcare reform taking center stage until that time.  Regardless of whatever form this financial reform initiative takes by the time it is enacted, it will ultimately be seen by history as Barack Obama’s brainchild.  If this plan turns out to be a disaster, it could overshadow whatever foreign policy accomplishments may lie ahead for this administration.

The News Nobody Wants To Hear

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December 11, 2008

You can’t watch a news program these days without hearing some “happy talk” about how our dismal economy is “on the verge of recovery”.  You have to remember that many of these shows are sponsored by brokerage firms.  That fact must be taken into consideration when you decide how much weight you will give the opinions of the so-called “experts” appearing on those programs to tell you that the stock market has reached “the bottom” and that it is now time to jump back in and start buying stocks.  Similarly, those people interested in making a home purchase (i.e. millionaires, who don’t have to worry about getting a mortgage) want to know when the residential real estate market will hit “bottom” so they can get the best value.  If I had a thousand dollars for every time during the past six months that some prognosticator has appeared on television to tell us that the stock market has “hit bottom”, I would have enough money to start my own geothermal power utility.

People interested in making investments have been scared away from stocks due to the pummeling that the markets have taken since the “mortgage crisis” raised its ugly head and devastated the world economy.  If those folks believe the hype and start buying stocks now, they are taking a greater risk than the enthusiastic promoters on TV might be willing to disclose.

People just don’t like bad news, especially when it is about the future and worse yet, if it’s about the economy.  On Friday, December 5, the stock market rallied, despite the dismal news that November’s non-farm employment loss was the greatest monthly employment decline in 34 years.  More than half a million people lost their jobs in November.  Despite this news, all of the major stock indices were up at least 3 percent for that day alone.  Have all these people bought into the magical thinking described in The Secret?  Do that many people believe that wishing hard enough can cause a dream to become reality?

There is one authority on the subject of economics, who earned quite a bit of “street cred” when our current economic crisis hit the fan. He is Nouriel Roubini, a professor of economics at New York University’s Stern School of Business. He earned the nickname “Doctor Doom” when he spoke before the International Monetary Fund (IMF) on September 7, 2006 and described, in precise detail, exactly what would bring the financial world to its knees, two years later.  In this time of uncertainty, many people (myself included) pay close attention to what Dr. Roubini has to say by regularly checking in on his website.  On December 5, we were surprised to hear Doctor Doom’s admission to Aaron Task (on the web TV show, Tech Ticker) that his own 401(k) plan is comprised entirely of stocks.  Dr. Roubini explained that he is not in the “Armageddon camp” and that for the long haul, stocks are still a good investment (although currently not a good idea for investors with more short-term goals).  Upon learning of this, I began to wonder if the revelation about Doctor Doom’s stock holdings could have been the reason for the stock market rally that day.

Yesterday, I had the pleasure of meeting Dr. Roubini at a lecture he gave within staggering distance of my home.  I was able to talk to him about my concern over Federal Reserve Chairman, Ben Bernanke’s idea of having the federal government purchase stocks in order to pep-up a depressed stock market.  How could this possibly be accomplished?  How could the Fed decide which stocks to buy to the exclusion of others?  Dr. Roubini told me that the government has already done this by purchasing preferred shares of stock issued by the banks participating in the TARP program.  He explained that rather than purchasing selected stocks of particular companies, the government would, more likely, invest in stock indices.  Before I get to Doctor Doom’s other points from his lecture, I will share this photo taken of yours truly and Doctor Roubini (who appears on your left):

Doctor Doom with Me

Dr. Roubini told the audience that he believes this recession will be worse than everyone expects. During the next few months, “the flow of macroeconomic news will be awful and worse than expected”. He opined that people are going to be surprised if they think that the stock market “bottom” will come in mid-2009. He expects that by the end of 2009 “things will still be bad” and unemployment will peak at 9% in early 2010. He thinks that the consensus on earnings-per-share estimates for stocks during the next year is “delusional”. He anticipates risk aversion among investors to be severe next year. We are now in a global recession and this has caused commodity prices to fall 30%. He pointed out that commodity prices could still fall another 20%. He considers it “very likely” that between 500 to 600 hedge funds will go out of business within the next six months. As this happens, the stocks held by these funds must be dumped onto the market. With respect to the beleaguered residential real estate market, he pointed out that home prices could fall another 15-20% by early 2010.

The good news provided by Dr. Roubini is that the global recession should end by the close of 2009. However, he expects recovery to be “weak” in 2010. He surmised that the possibility of a systemic meltdown has been minimized by the actions taken at the recent G7 meeting and most particularly with the G7 resolution to prevent further “Lehman Brothers-type” bankruptcies from taking place. He concluded that this recession should be nothing like the Japanese recession of the 1990s, which lasted nearly a decade.

So there you have it:  The news (almost) nobody wants to hear.  You can say these are the predictions voiced by one man who could be wrong.  Nevertheless, given Dr. Roubini’s track record, I and many others hold his opinions in high regard.  Now, let’s see how this all plays out.

Manipulating The Markets

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July 17, 2008

On Wednesday night, Jon Stewart pointed out that President Bush saw fit to hold a news conference about the economy at exactly 10:20 a.m. on Tuesday, July 15.  As luck would have it, this was the very minute when Federal Reserve Chairman, Ben Bernanke, was to begin his testimony before Congress about the state of the economy.  Stewart deftly contrasted the “spin” message presented by Bush with the sworn testimony of the Federal Reserve Chairman.  Bush was obviously out to blunt any negative impact Beranake’s testimony might have on the markets.  The 180-degree difference between Bush’s spin and Bernanke’s reality was hilarious.  Regardless, Bush’s plan didn’t work.  The Dow Jones industrial average dropped 92 points (.84 percent) on Tuesday and the Standard and Poor’s 500 index (which includes many financial stocks) fared worse.  Wednesday saw a dramatic shift in the markets due to a drop in the price of oil – the only thing that ever gives the stock market a boost these days.

July 15 was also the day when the Securities Exchange Commission enacted a new, emergency rule against “naked” short-selling of financial stocks.  As Dane Hamilton reported for Reuters, the rule drew mixed reactions among hedge fund managers and traders.  Hamilton described the SEC’s reasoning that:

…  naked short selling, which is putting in a short stock order with no intention of actually borrowing it to drive down the price, may have contributed to this year’s collapse of Bear Stearns and sharp declines in other financial stocks this year.

As Mr. Hamilton explained:  this new, temporary rule was enacted to protect 19 financial stocks, including battered mortgage guarantors Fannie Mae, Freddie Mac and a number of banks, against “a substantial threat of sudden and excessive” stock price movements.  What other industry could count on the Federal Government to protect it from the predatory tactics of a handful of unscrupulous “short sellers”?  Some of these traders make multiple short sales on a single share of stock.  The net effect of this is that they are actually “counterfeiting” stocks to be sold short and bought back at a lower price, before anyone might realize the shares never existed.

Investors have been victimized by such tactics for decades. However, until now, the SEC has been of little or no help in regulating these tactics.  In an article from the March 23, 2007 issue of USA Today, Matt Krantz reported on the boasts of MSNBC’s TV host, Jim Cramer, about how Cramer had used “short” sales to manipulate stock prices:

A lot of times when I was short (stocks) at my hedge fund … meaning I needed it (the stock) down …I would create a level of activity beforehand that would drive the futures … It’s a fun game, and it’s a lucrative game.

If you are wondering how the 19 financial companies covered by the July 15 emergency SEC rule, were able to obtain the kind of protection afforded by that measure, you may want to consider some of the observations made by Lisa Lerer in her July 17 article for Politico.com:

If you want to know how Fannie Mae and Freddie Mac have survived scandal and crisis, consider this: Over the past decade, they have spent nearly $200 million on lobbying and campaign contributions.

*   *   *

When their stock prices took a dive last week, their government allies extended another helping hand with a plan for the Treasury Department, the Federal Reserve and, possibly, Congress to shore up the companies.

It’s nice to see the SEC doing something to protect investors from predatory trading practices.  The only reason the SEC is protecting investors in this instance is because investors are the collateral beneficiaries of a rule written to protect 19 financial institutions.   We just don’t see enough government action to stop the manipulation of the markets on a broader scale.  Worse yet, when the President gets on TV to compete with the Federal Reserve Chairman’s testimony in order to paint a contrasting, more favorable picture of the economy – what do you call that?  How about:  manipulation of the markets?