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Sign This Petition

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May 25, 2009

For some reason, the Boston College School of Law invited Federal Reserve Chairman, B.S. Bernanke, to deliver the commencement address to the class of 2009 on May 22.  While reading the text of that oration, I found the candor of this remark at the beginning of his speech, to be quite refreshing:

Along those lines, last spring I was nearby in Cambridge, speaking at Harvard University’s Class Day.  The speaker at the main event, the Harvard graduation the next day, was J. K. Rowling, author of the Harry Potter books.  Before my remarks, the student who introduced me took note of the fact that the senior class had chosen as their speakers Ben Bernanke and J. K. Rowling, or, as he put it, “two of the great masters of children’s fantasy fiction.”  I will say that I am perfectly happy to be associated, even in such a tenuous way, with Ms. Rowling, who has done more for children’s literacy than any government program I know of.

Meanwhile, that great master of children’s fantasy fiction (and money printing) is now faced with the possibility that someday, someone might actually start looking over his shoulder in attempt to get some vague idea of just what the hell is going on over at the Federal Reserve.

The Federal Reserve’s resistance to transparency has been a favorite topic of many commentators.  For example, once Ben Bernanke took over the Fed Chairmanship from Alan Greenspan in 2006, Ralph Nader expressed his high hopes that Bernanke might adopt Nader’s suggested “seven policies of openness”.  Dream on, Ralph!

Speaking of children’s fantasy fiction, one expert on that subject is Congressman Alan Grayson.  As the Representative of Florida’s Eighth Congressional District, his territory includes Disney World.  Thus, it should come as no surprise that back in January of 2009, as a new member of the House Financial Services Committee, he immediately set about cross-examining Federal Reserve Vice-Chairman Donald Kohn about what had been done with the 1.2 trillion dollars in bank bailout money squandered by the Fed after September 1, 2008.  Glenn Greenwald of Salon.com provided a five-minute video clip of that testimony along with an audio recording of his 20-minute interview with Congressman Grayson, focusing on the complete lack of transparency at the Federal Reserve.

Better yet was Congressman Grayson’s questioning of Federal Reserve Board Inspector General Elizabeth Coleman on May 7.  In one of the classic “WTF Moments” of all time, Ms. Coleman admitted that she had no clue about the “off balance sheet transactions” by the Federal Reserve, reported by Bloomberg News as amounting to over nine trillion dollars in the previous eight months.  If you haven’t seen this yet, you can watch it here.  After reviewing this video clip, Yves Smith of Naked Capitalism was of the opinion that Coleman was not stonewalling, but instead was “clearly completely clueless”.  Ms. Smith pointed out how opacity at the Federal Reserve may be by design, with the apparent motive being obfuscation:

But there is a possibly more important issue at stake.  The interview is with the Inspector General of the Federal Reserve Board of Governors.  The programs are actually at the Federal Reserve Bank of New York.  For reasons I cannot fathom, the Board of Governors is subject to Freedom of Information Act requests, while the Fed of New York has been able to rebuff them.

So I take Coleman’s inability to answer key questions to be a feature, not a bug.  The Fed of New York probably can answer Congressional questions, is taking care to limit what it conveys to the Board so as to keep the information from Congress and the public.  Note in the questioning the emphasis on “high level reviews”.

In order to shine a bright light on the Federal Reserve, Republican Congressman Ron Paul of Texas has introduced the Federal Reserve Transparency Act, (H.R. 1207) which would give the Government Accountability Office the authority to audit the Federal Reserve and its member components, and require a report to Congress by the end of 2010.  On May 21, Congressman Alan Grayson wrote to his Democratic colleagues in the House, asking them to co-sponsor the bill.  Among the many interesting points made in his letter were the following:

Furthermore, the Federal Reserve has refused multiple inquiries from both the House and the Senate to disclose who is receiving trillions of dollars from the central banking system.  The Federal Reserve has redacted the central terms of the no-bid contracts it has issued to Wall Street firms like Blackrock and PIMCO, without disclosure required of the Treasury, and is participating in new and exotic programs like the trillion-dollar TALF to leverage the Treasury’s balance sheet.  With discussions of allocating even more power to the Federal Reserve as the “systemic risk regulator” of the credit markets, more oversight over the central bank’s operations is clearly necessary.

The net effect of recent actions has been to isolate financial policy-making entirely from democratic input, and allow the Treasury Department to leverage the Federal Reserve’s balance sheet to spend money it cannot get appropriated from Congress.  The public does not know where trillions of its dollars are going, and so has no meaningful control over the currency or this unappropriated “budget”.  The extraordinary size of these lending facilities combined, the extreme secrecy, and the private influence is a dangerous seizure of Congress’s constitutional prerogative to appropriate public monies and control the currency.

You can do your part for this cause by signing the on-line petition.  Let Congress know that we will no longer tolerate “children’s fantasy fiction” from the Federal Reserve.  Demand an audit of the Federal Reserve as well as a report to the public of what that audit reveals.

The New Welfare Queens

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February 26, 2009

In 1999, UCLA Professor Franklin D. Gilliam wrote a report for Harvard University’s Nieman Foundation for Journalism.  That paper concerned a study he had done regarding public perception of the “welfare queen” stereotype and how that perception had been shaped by the media.  He discussed how the term had been introduced by Ronald Reagan during the 1976 Presidential campaign.  Reagan told the story of a woman from Chicago’s South Side, who had been arrested for welfare fraud.  The term became widely used in reference to a racist (and sexist) stereotype of an iconic African-American woman, enjoying a lavish lifestyle and driving a Cadillac while cheating the welfare system.

Ten years after the publication of Gilliam’s paper, we have a new group of “welfare queens”:  the banks.  The banks have already soaked over a trillion dollars from the federal government to remedy their self-inflicted wounds.  Shortly after receiving their first $350,000,000,000 in payments under the TARP program (which had no mechanism of documenting where the money went) their collective reputation as “welfare queens” was firmly established.  In the most widely-reported example of “corporate welfare” abuse by a bank, public outcry resulted in Citigroup’s refusal of delivery on its lavishly-appointed, French-made, Falcon 50 private jet.  Had the sale gone through, Citi would have purchased the jet with fifty million dollars of TARP funds.  Now, as they seek even more money from us, the banks chafe at the idea that American taxpayers, economists and political leaders are suggesting that insolvent (or “zombie”) banks should be placed into temporary receivership until their “toxic assets” are sold off and their balance sheets are cleaned up.  This has been referred to as “nationalization” of those banks.

Despite all the bad publicity and public outrage, banks still persist in their welfare abuse.  After all, they have habits to support.  Their “drug” of choice seems to be the lavish golf outing at a posh resort.  The most recent example of this resulted in Maureen Dowd’s amusing article in The New York Times, about a public relations misstep by Sheryl Crow.

The New Welfare Queens have their defenders.  CNBC’s wildly-animated Jim Cramer has all but pulled out his remaining strands of hair during his numerous rants about how nationalization of banks “would crush America”.  A number of investment advisors, such as Bill Gross, co-chief investment officer at Pacific Investment Management Company, have also voiced objections to the idea of bank nationalization.

Another defender of these welfare queens appears to be Federal Reserve Chairman Ben Bernanke.   In his latest explanation of Turbo Tim Geithner’s “stress test” agenda, Bernanke attempted to assure investors that the Obama administration does not consider the nationalization of banks as a viable option for improving their financial health.  As Craig Torres and Bradley Keoun reported for Bloomberg News on February 25, the latest word from Bernanke suggests that nationalization is not on the table:

. . .  while the U.S. government may take “substantial” stakes in Citigroup Inc. and other banks, it doesn’t plan a full- scale nationalization that wipes out stockholders.

Nationalization is when the government “seizes” a company, “zeroes out the shareholders and begins to manage and run the bank, and we don’t plan anything like that,” Bernanke told lawmakers in Washington today.

The only way to deal with The New Welfare Queens is to replace their directors and managers.  The Obama administration appears unwilling to do that.  During his February 25 appearance on MSNBC’s Countdown, Paul Krugman (recipient of the Nobel Prize in Economics) expressed his dread about the Administration’s plan to rehabilitate the banks:

I’ve got a bad feeling about this, as do a number of people.  I was just reading testimony from Adam Posen, who is our leading expert on Japan.  He says we are moving right on the track of the Japanese during the 1990s:  propping up zombie banks — just not doing resolution.

. . .  The actual implementation of policy looks like a kind of failure of nerve.

*   *   *

On the banks — I really can’t see  — there really seems to be — we’re going to put in some money, as we’re going to say some stern things to the bankers about how they should behave better.  But if there is a strategy there, it’s continuing to be a mystery to me and to everybody I’ve talked to.

You can read Adam Posen’s paper:  “Temporary Nationalization Is Needed to Save the U.S. Banking System” here.  Another Economics professor, Matthew Richardson, wrote an excellent analysis of the pros and cons of bank nationalization for the RGE Monitor.  After discussing both sides of this case, he reached the following conclusion:

We are definitely caught between a rock and a hard place.  But the question is what can we do if a major bank is insolvent?  Sometimes the best way to repair a severely dilapidated house is to knock it down and rebuild it.  Ironically, the best hope of maintaining a private banking system may be to nationalize some of its banks.  Yes, it is risky.  It could go wrong. But it is the surest path to avoid a “lost decade” like Japan.

As the experts report on their scrutiny of the “stress testing” methodology, I get the impression that it’s all a big farce.  Eric Falkenstein received a PhD in Economics from Northwestern University.  His analysis of Geithner’s testing regimen (posted on the Seeking Alpha website) revealed it to be nothing more than what is often referred to as “junk science”:

Geithner noted he will wrap this up by April.  Given the absurdity of this exercise, they should shoot for Friday and save everyone a lot of time.  It won’t be any more accurate by taking two months.

On a similar note, Ari Levy wrote an illuminating piece for Bloomberg News, wherein he discussed the stress testing with Nancy Bush, bank analyst and founder of Annandale, New Jersey-based NAB Research LLC and Richard Bove of Rochdale Securities.  Here’s what Mr. Levy learned:

Rather than checking the ability of banks to withstand losses, the tests outlined yesterday are designed to convince investors that the firms don’t need to be nationalized, said analysts including (Nancy) Bush and Richard Bove from Rochdale Securities.

*   *   *

“I’ve always thought that this stress-testing was a politically motivated approach to try to defuse the argument that the banks didn’t have enough capital,” said Bove, in an interview from Lutz, Florida.  “They’re trying to prove that the banks are well-funded.”

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

Summers Solstice

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November 27, 2008

We are now approaching the winter solstice (December 21 – the time at which the sun is at its most southern distance from the equator during the year – a/k/a:  “the shortest day of the year” for those of us in the northern hemisphere).  President-elect Obama’s appointment of Larry Summers as Director of the National Economic Council reminds me of another definition of the word “solstice”:  a turning point.  For all his faults (most notably, his infamous remarks as President of Harvard University, about the involvement of women in the study of science) he is no longer considered so much of a “supply sider” as a centrist in the world of economics.  Summers has apparently passed a turning point in his economic philosophy.

For those unfamiliar with Larry Summers, David Leonhardt’s article, “The Return of Larry Summers” in the November 25 New York Times is worth reading. I’ve been hearing reverberations of Leonhardt’s commentary throughout the mainstream media lately.  Here is an important observation from Mr. Leonhardt’s piece:

He (Summers) is also the centrist who has made it safe for other centrist Democrats to move to the left.  Both times I’ve interviewed Mr. Obama this year, he has brought up Mr. Summers, unbidden, and pointed out that Mr. Summers was now writing a lot more about the plight of the middle class than about budget deficits.  At Monday’s news conference, Mr. Obama called him “a thought leader.”

The “thought leader” remark came up in the following context when Barack Obama announced his appointment of Summers to the National Economic Council post on November 24.

As a thought leader, Larry has urged us to confront the problems of income inequality and the middle class squeeze, consistently arguing that the key to a strong economy is a strong, vibrant, growing middle class.

This idea is at the core of my own economic philosophy and will be the foundation of all of my economic policies. And as one of the great economic minds of our time, Larry has earned a global reputation for being able to cut to the heart of the most complex and novel policy challenges.

Looking back to June 10, 2007, we find another article in the New York Times written by David Leonhardt, entitled:  “Larry Summers’s Evolution”.  As we revisit this commentary in light of our current economic crisis, the pronouncements made by Summers seem almost prophetic:

The model that most appeals to Summers is, in fact, the United States — in the decades after World War II.  At the time, this country was opening itself to more global competition, by rebuilding Europe and signing financial agreements like Bretton Woods.  But it was also taking concrete steps to build the modern middle class.  In addition to the G.I. Bill, there were the Federal Housing Administration, the Interstate Highway System and a very different tax code.  The history of progressivism “has been one of the market being protected from its own excesses,” Summers says.  “And I think now the challenge is, again, to protect a basic market system based on open trade and globalization, to make it one that works for everyone or for almost everyone, at a time when market forces are often producing outcomes that seem increasingly problematic to middle-class families.”

That essay inspired The Economist to post a piece on its Free Exchange blog on the following day, entitled “Has Larry Summers Gone Soft?”

Nevertheless, conservative writers such as Kevin Hassett of Forbes still think of Summers as an opponent to increased capital gains taxation and hence, an advocate of “supply side” economics.   Conservative writer, David Harsanyi of the Denver Post exhibited similar enthusiasm about the appointment of Summers.  However, in the November 24 National Review, Larry Kudlow saw Obama’s appointment of Summers as a move to the center:

As for Summers, while he has been mau-maued by Democratic feminists and some of the unions, he is a tough, clear-headed thinker who has for years tried to merge Keynesian and supply-side policies.  No mean feat.

At this point, many pundits are attempting to “read the tea leaves” for hints as to whether President Obama will act to reverse the Bush tax cuts or let them expire in 2011.  The consensus suggests that he may simply let them expire.  This has drawn some anxious criticism from the left.  On the November 25 broadcast of the program, Democracy Now, author Naomi Klein made the following remark about Obama’s appointment of Summers:  “I think this is really troubling.”  However, on that same program, economics professor Robert Kuttner (the chief economics adviser to Rep. Dennis Kucinich) explained that he was “less pessimistic” than Ms. Klein about the Summers appointment:

I think even Larry Summers, because he is such an opportunist, has lately been calling for very large stimulus package, has been calling for tighter regulation of banks.

The influence of Larry Summers on the Obama Administration’s economic policy will be a continuing saga for the next few years.  At this point, the “change you can believe in” seems to absorb more than a little input from the center.