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Wading In Quicksand

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July 12, 2010

The recent Gallup Poll, revealing that President Obama’s approval rating has dropped to 38% among independent voters, has resulted in an outpouring of (unsolicited) advice offered to the President by numerous commentators.  As I pointed out in my last posting, Matt Miller’s July 8 Washington Post article set out a really great plan, which he described as “a radically centrist ‘Jobs Now, Deficits Soon’ package”.   Nevertheless, Mr. Miller’s piece was not written as advice to the President, as some of the more recent articles have been.  I recently read one of those “advice to Obama” pieces that the President would do well to ignore.  It was written by a former Bill Clinton pollster named Douglas Schoen for the New York Daily News Schoen’s plan focused on this premise:

The independent swing voters who hold the fate of the Democratic Party in their hands are looking for candidates and parties that champion fiscal discipline, limited government, deficit reduction and a free market, pro-growth agenda.

Not true.  The independent swing voters are disappointed with Obama because the candidate’s promise of “hope and change” turned out to be a “bait and switch” scam to sell the public more cronyism.  At this point, it appears as though the entire Democratic Party will suffer the consequences in the 2010 elections.

The shortcomings of the Obama administration were more accurately summed up by Robert Kuttner for The Huffington Post:

But even a dire economic crisis and a Republican blockade of needed remedies have not fundamentally altered the temperament, trajectory, or tactical instincts of this surprisingly aloof  president.  He has not been willing or able to use his office to move public opinion in a direction that favors more activism.  Nor has Obama, for the most part, seized partisan and ideological opportunities that hapless Republicans and clueless corporate executives keep lobbing him like so many high, hanging curve balls.

*   *   *

But despite our hopes, Barack Obama is unlikely to offer bolder policies or give tougher speeches any time soon, even as threats of a double-dip recession and an electoral blowout in November loom.  This is just not who he is.  If the worst economic crisis in eight decades were going to change his assumptions about how to govern and how to lead, it would have done so by now.

*   *   *

I have also watched Obama’s loyal opposition –people like Joseph Stiglitz, Paul Krugman, Elizabeth Warren, Sheila Bair — be proven right by events, again and again.  So there are alternative paths, as there always are.  But the White House has disdained them.

And I’ve noticed that it is the populists among Democratic elected officials who are best defended against defeat in November.  That tells you something, too.  Why should the project of rallying the common people against elites in Washington, on Wall Street, and in the media, be ceded to the far right?  But that is what this White House is doing.

E. J. Dionne of The Washington Post demonstrated a good understanding of why independent voters have become fed up with Obama and how this has ballooned into a larger issue of anti-Democrat sentiment:

On the one hand, independent voters are turning on them.  Democratic House candidates enjoyed a 51 percent to 43 percent advantage over Republicans in 2008.  This time, the polls show independents tilting Republican by substantial margins.

But Democrats are also suffering from a lack of enthusiasm among their own supporters.  Poll after poll has shown that while Republicans are eager to cast ballots, many Democrats seem inclined to sit out this election.

The apathy of the rank-and-file Democrats and the alienation of the independents is best explained by the Administration’s faux-reform agenda.  The so-called healthcare “reform” bill turned out to be a giveaway to big pharma and the health insurance industry.  Worse yet, the financial “reform” bill not only turned out to be a hoax – it did nothing to address systemic risk.  In other words, if one of those five “untouchable” Wall Street banks fails, it will take the entire financial system down with it — in the absence of another huge, trillion-dollar bailout from the taxpayers.

Mike Konczal of the Roosevelt Institute documented the extent to which Obama’s Treasury Department undermined the financial reform bill at every step:

Examples?  Off the top of my head, ones with a paper trail:  They fought the Collins amendment for quality of bank capital, fought leverage requirements like a 15-to-1 cap, fought prefunding the resolution mechanism, fought Section 716removed foreign exchange swaps and introduced end user exemption from derivative language between the Obama white paper and the House Bill, believed they could have gotten the SAFE Banking Amendment to break up the banks but didn’t try, pushed against the full Audit the Fed and encouraged the Scott Brown deal. spinning out swap desks,

You can agree or disagree with any number of those items, think they are brilliant or dumb, reasonable or a pipe dream.  But what is worth noting is that they always end up leaving their fingerprints on the side of less structural reform and in favor of the status quo on Wall Street.

The Obama administration is apparently operating from the mistaken perspective that the voters are too stupid to see through their antics.  Sending Joe Biden to appear on Jay Leno’s Tonight Show to dissuade the public from considering the motives of politicians will not solve the administration’s problem of sinking approval ratings.




Failed Leadership

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July 8, 2010

Exactly one year ago (on July 7, 2009) I pointed out that it would eventually become necessary for President Obama to propose a second economic stimulus package because he didn’t get it right the first time.  As far back as January of 2009, the President was ignoring all of the warnings from economists such as Nobel Laureate Joseph Stiglitz, who forewarned that the proposed $850 billion economic recovery package would be inadequate.  Mr. Obama also ignored the Bloomberg News report of February 12, 2009 concerning its survey of 50 economists, which described Obama’s stimulus plan as “insufficient”.  Last year, the public and the Congress had the will – not to mention the sense of urgency – to approve a robust stimulus initiative.  As we now approach mid-term elections, the politicians whom Barry Ritholtz describes as “deficit chicken hawks” – elected officials with a newfound concern about budget deficits – are resisting any further stimulus efforts.  Worse yet, as Ryan Grim reported for the Huffington Post, President Obama is now ignoring his economic advisors and listening, instead, to his political advisors, who are urging him to avoid any further economic rescue initiatives.

Ryan Grim’s article revealed that there has been a misunderstanding of the polling data that has kept politicians running scared on the debt issue.  A recent poll revealed that responses to polling questions concerning sovereign debt are frequently interpreted by the respondents as limited to the issue of China’s increasing role as our primary creditor:

The Democrats gathered on Thursday morning to dig into the national poll, which was paid for by the Alliance for American Manufacturing and done by Democrat Mark Mellman and Republican Whit Ayers.

It hints at an answer to why people are so passionate when asked by pollsters about the deficit:  It’s about jobs, China and American decline.  If the job situation improves, worries about the deficit will dissipate.  Asking whether Congress should address the deficit or the jobless crisis, therefore, is the wrong question.

*   *   *

About 45 percent of respondents said the biggest problem is that “we are too deep in debt to China,” the highest-ranking concern, while 58 percent said the U.S. is no longer the strongest economy, with China being the overwhelming alternative identified by people.

As I pointed out on May 27, even Larry Summers gets it now – providing the following advice that Obama is ignoring because our President is motivated more by fear than by a will to lead:

In areas where the government has a significant opportunity for impact, it would be pennywise and pound foolish not to take advantage of our capacity to encourage near-term job creation.

*   *   *

Consider the package currently under consideration in Congress to extend unemployment and health benefits to those out of work and support to states to avoid budget cuts as a case in point.

It would be an act of fiscal shortsightedness to break from the longstanding practice of extending these provisions at a moment when sustained economic recovery is so crucial to our medium-term fiscal prospects.

Since our President prefers to be a follower rather than a leader, I suggest that he follow the sound advice of The Washington Post’s Matt Miller:

I come before you, in other words, a deficit hawk to the core.  But it is the height of economic folly — and socially dangerous, in my view — to elevate deficit reduction as a goal today over boosting jobs and growth.  Especially when there are ways to goose the economy while at the same time legislating changes that move us toward fiscal sanity once we’re past this stagnation.

Mr. Miller presented a fantastic plan, which he described as “a radically centrist ‘Jobs Now, Deficits Soon’ package”.  He concluded the piece with this painfully realistic assessment:

The fact that nothing like this will happen, therefore, is both depressing and instructive.  Republicans are content to glide toward November slamming Democrats without offering answers of their own.  Democrats who now know the first stimulus was too puny feel they’ll be clobbered for trying more in the Tea Party era.

The leadership void brought to us by the Obama Presidency was the subject of yet another great essay by Paul Farrell of MarketWatch.  He supported his premise — that President Obama has capitulated to Wall Street’s “Conspiracy of Weasels” — with the perspectives of twelve different commentators.

The damage has already been done.  Any hope that our President will experience a sudden conversion to authentic populism is pure fantasy.  There will be no more federal efforts to resuscitate the job market, to facilitate the availability of credit to small businesses or to extend benefits to the unemployed.  The federal government’s only concern is to preserve the well-being of those five sacred Wall Street banks because if any single one failed – such an event would threaten our entire financial system.  Nothing else matters.




A Closer Look

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December 28, 2009

As the year and the decade come to a close, we are being bombarded with a slew of retrospectives about what was “important” during this crazy time.  Those of us who are capable of directing our attention to intellectually stimulating subjects, have found the increasing availability of information from internet-based sources to be life-changing.  Now that we are no longer stuck with a focus on the handful of news stories deemed “important” by mainstream media outlets, we have familiarized ourselves with the ever-expanding marketplace of ideas to be found online.  We all have our favorite websites, where we go first when we want to find out the latest and most attention-grabbing news events of the day.  From there, many of us take a closer look at a particular topic by going to a more specialized, subject-oriented website.  I keep a blogroll at the left side of this page, which is offered as a diverse aggregation of sources and perspectives on subjects usually covered in this blog.  Lately, I’ve found myself spending more and more time reading the great material by Edward Harrison of Credit Writedowns.  As a result, I’ve added a link to that site on my blogroll.

Edward Harrison explained the reason why he chose such a gloomy name for his website:

I named my blog “Credit Writedowns” because I anticipated an historic wave of credit writedowns in the global banking system which would lead to a wave of deleveraging, systemic risk, and bank failures — in short, a massive financial and economic bust to rival the Great Depression.

Mr.  Harrison has an MBA degree in Finance from Columbia University and he works as a banking and finance specialist for Global Macro Advisors.  One of his noteworthy efforts from the first year of Credit Writedowns came about on September 24, 2008, when he published “The Dummy’s Guide to the US Banking Crisis”.

I have been particularly impressed by the “year in review” series, presently underway at Credit Writedowns.  On December 23, Mr. Harrison published a great essay about how “kleptocracy” (rule by thieves) has become the status quo.  The premise for this piece was originally included in one of Harrison’s early postings on Credit Writedowns, from March 24, 2008.  At that time, he explained the subject this way:

First, let’s use a theory from Guns, Germs, and Steel by Jared Diamond as the center-piece for this little theory.  In Chapter 14, entitled “From Egalitarianism to Kleptocracy,” Diamond postulates that more stratified societies are by definition less egalitarian, but more efficient and are, thus, able to eradicate or conquer more egalitarian, less stratified societies.  Thus, all “advanced” societies with high levels of GDP are complex and hierarchical.

The problem is:  these more stratified, more complex societies are in essence Kleptocracies, where those in power re-distribute societal wealth to themselves.  Those at the bottom of the society’s pyramid accept this unequal, non-egalitarian state of affairs because they too benefit from their society’s relative advancement. It’s a case of a rising tide lifting all boats.

Back in March of 2008, Edward Harrison was one of just a small handful of thinkers capable of facing up to the ugly reality of where the credit bubble brought us:

The United States has been living beyond its means for some time.  Since the 1960s, we have run up a massive federal debt and current account deficit, while debt levels have doubled on a percentage of GDP basis.  Our present levels of consumption are simply not justified by our current levels of productivity, if we want to maintain our present standard of living in the future.

*   *   *

The fact is our day of reckoning is upon us.  We will soon realize that our massive debt and an outsized credit bubble have not only saddled us with debt, but it has also misallocated capital so that we are less productive than we believed.  We have built miles and miles of telecom dark fibre when we could have invested in schools.  We have built massive numbers of new homes, when we could have repaired our bridges and roads. The last 35 years have been an illusion of extreme productivity and wealth because we have artificially pulled forward demand by misallocating resources in order to consume today, what could have been consumed tomorrow.  In essence, we are consuming today, while unwittingly making it more difficult to consume tomorrow because we believe we are wealthier than we truly are.

The recent sneaky move by Treasury Secretary “Turbo” Tim Geithner on Christmas Eve, lifting the $400 billion restriction on bailouts to Fannie Mae and Freddie Mac (sidestepping the need for Congressional approval because it was done before the end of the year) is drawing attention to the kleptocracy’s strategy of relying on distraction of public attention in order to get away with skullduggery.  Harrison’s point from the December 23 posting:  that the kleptocracy anesthetizes the public with television, which has become “our own modern-day agent of mental anesthesia”, struck a chord with me.

The latest entry in the “year in review” series at Credit Writedowns concerns the subject of crony capitalism.  Here’s how Edward Harrison described the piece:

In this post, I want to talk about Obama’s economic policies in the context of what I perceive as a crony capitalism which is now endemic in Washington.  As I see it, Americans are angry because the economy is still quite fragile and the personal financial situation for many ordinary Americans is still quite dire.  Yet, the so-called fat cats seem more pigs eating at the trough of government largesse.  This juxtaposition is galling and undermines any success that the Obama Administration has achieved.

A key theme of that essay is expressed in this passage:

The evidence, therefore, tends to demonstrate that we have witnessed an orchestrated campaign by the Bush and Obama Administrations to recapitalize too big to fail institutions by hook or by crook, bypassing Congressional approval if necessary.  And when it comes to healthcare, both Congress and the White House have bent over backwards to keep the lobbyists onside.  As I see it, our government has favored special interests in the past year of Obama’s tenure to our detriment.

As more economists voice agreement with the opinion expressed by Joseph Stiglitz, that there will likely be further economic contraction in the second half of 2010, the inevitability of a dreaded “double-dip” recession will become more apparent.  Mr. Harrison pointed out that this scenario could result in some disdain for President Obama, which might impact the 2010 election results.  Perhaps President Obama should start reading Credit Writedowns — and stop listening to Larry Summers.



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The Legacy Of Mark Pittman

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December 3, 2009

Just a week before the Senate banking committee was to begin confirmation hearings on President Obama’s nomination of Ben Bernanke to a second term as chairman of the Federal Reserve, one of the most important watchdogs of the Fed died at the age of 52.  Mark Pittman was the reporter at Bloomberg News whose work was responsible for the lawsuit, brought under the Freedom of Information Act, against the Federal Reserve, seeking disclosure of the identities of those financial firms benefiting from the Fed’s eleven emergency lending programs.  The suit, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, (U.S. District Court, Southern District of New York) resulted in a ruling last August by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions to compete for business.  The suit also sought disclosure of the amounts loaned to those institutions as well as the assets put up as collateral under the Fed’s eleven lending programs, created in response to the financial crisis.  The Federal Reserve is pursuing an appeal of that decision.

Since September of 2008, we have been overexposed to the specious claims by politicians, regulators and other federal officials, that the financial crisis was “unforeseeable”.  The veracity of such statements is undercut by the fact that on June 29 of 2007, Mark Pittman provided us with this ominous warning from his desk at Bloomberg News:

The subprime meltdown is sending shock waves through the capital markets in part because mortgage bonds are the world’s biggest debt market, according to the Securities Industry Financial Markets Association.

Pittman’s groundbreaking work on the havoc created by the subprime mortgage-backed securities market resulted in his receiving the Gerald Loeb Award in 2008, which he shared with his fellow Bloomberg reporters, Bob Ivry and Kathleen Howley, for a five-part series entitled “Wall Street’s Faustian Bargain”.

On November 30, Bob Ivry wrote what many have described as the “definitive obituary” for Mark Pittman.  Ivry disclosed that although the actual cause of death was not yet known, Pittman had suffered from “heart-related illnesses”.  In addition to providing us with his colleague’s impressive biography, Ivry shared the reactions to Pittman’s death, expressed by several prominent individuals:

“He was one of the great financial journalists of our time,” said Joseph Stiglitz, a professor at Columbia University in New York and the winner of the 2001 Nobel Prize for economics. “His death is shocking.”

*   *   *

“Who sues the Fed?  One reporter on the planet,” said Emma Moody, a Wall Street Journal editor who worked with Pittman at Bloomberg News.  “The more complex the issue, the more he wanted to dig into it.  Years ago, he forced us to learn what a credit- default swap was.  He dragged us kicking and screaming.”

*   *   *

“He’s been on this crisis since before the crisis,” said Gretchen Morgenson, the Pulitzer Prize-winning financial columnist for the NewYork Times.  “He was the best at burrowing into the most complex securities Wall Street could come up with and explaining the implications of them to readers of all levels of sophistication.  His investigative work during the crisis set the standard for other reporters everywhere.  He was a giant.”

Congressman Brad Miller of North Carolina wrote an informative remembrance of Pittman for The Huffington Post.  This statement is one of the highlights from that piece:

The financial crisis is a result of a failure of every institution of our democracy.  Regulators failed.  Congress failed.  And the financial press failed abysmally.  Mark was an exception.  Mark’s irreverence allowed him to see the crisis coming when other financial reporters accepted uncritically what the industry said.  Mark’s irreverence was what made him a great reporter.

Mark Pittman was featured in the recent film American Casino, a documentary which analyzed the subprime mortgage catastrophe and the resulting financial crisis.  In September of 2008, when the crisis had most people in the world scratching their heads in confusion, Pittman provided a roadmap to the initial bailouts, shortly after they were distributed.

The interview with Mark Pittman, conducted by Ryan Chittum for the Columbia Journalism Review in February of 2009, gave Pittman the opportunity to share his experiences during the onset of the financial crisis.  The interview is especially informative as to what we can expect to find out about this mess in the future, as the investigations begin to unfold.  Passages like these reveal the magnitude of the loss resulting from Pittman’s death:

TA:  Does there need to be regulation just to simplify things to where it makes sense to more people?

MP:  If it was all transparent the complexity wouldn’t matter.  If the CDO market had had publicly available prospectuses with the contents of the CDO disclosed, we wouldn’t have this issue, because Bloomberg probably would have made fun of anybody who bought anything like this.  But there was this enormous shadow banking system going on.  We did a series about that, too.  A lot of times people don’t see what we do.

*   *   *

The thing that people don’t realize is that the Fed is now the “bad bank.”  That’s just something that people don’t understand.  They’ve taken collateral, and they refuse to tell us how they valued it  …

We have numerous banks — dozens, maybe hundreds that are insolvent.  And they become more insolvent every day because more people quit paying their mortgage loans, and more guys move out of the shopping center, and more people quit paying their credit cards.  But nobody wants to have the adult conversation.  We need to be honest about what the problem is here, how big it is, and how we’re going forward to clean it up, and who’s going to pay for it.

*   *   *

Hopefully, we will be able to inform the people enough to know how badly we’re getting screwed (laughs).  We need to know how to prevent it from happening again, and we need to know who did it.  There’s renewed energy on this front because we’ve staffed up the people who cover banks, the securities firms.  We have a lot more people going at real estate and a bunch of different areas that this involves.  That was a conscious move from meetings we started having in 2007.  We hired people and we moved people from one area to another area.

Pittman’s final statement during the interview underscores the fact that one of the greatest fighters for an informed public has been lost:

This is a big deal and it’s going to be going on — I swear to God I’m going to retire on this story, because it’s just going to keep happening.

Tragically, Mark Pittman was forced to “retire” on terms that were not satisfactory to any of us.  We can only hope that others will be inspired by his work and follow his lead.



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The Second Stimulus

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July 9, 2009

It’s a subject that many people are talking about, but not many politicians want to discuss.  It appears as though a second economic stimulus package will be necessary to save our sinking economy and get people back to work.  Because of the huge deficits already incurred in responding to the financial meltdown, along with the $787 billion price tag for the first stimulus package and because of the President’s promise to get healthcare reform enacted, there aren’t many in Congress who are willing to touch this subject right now, although some are.  A July 7 report by Shamim Adam for Bloomberg News quoted Laura Tyson, an economic advisor to President Obama, as stating that last February’s $787 billion economic stimulus package was “a bit too small”.  Ms. Tyson gave this explanation:

“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum.  “We probably have already 2.5 million more job losses than anticipated.”

As Victoria McGrane reported for Politico, other Democrats are a bit uncomfortable with this subject:

Democrats are all over the map on the stimulus and the possibility of a sequel, and it’s not hard to see why:  When it comes to a second stimulus, they may be damned if they do and damned if they don’t.

Kevin Hall and David Lightman reported for the McLatchy Newspapers that at least one high-ranking Democrat was keeping an open mind about the subject:

“I think we need to be open to whether we need additional action,” House Majority Leader Steny Hoyer, D-Md., said Tuesday.  “We need to continue to focus on bringing the economy back to a place where we’re not losing jobs.”

An informative article by Theo Francis and Elise Craig, in the July 7 issue of Business Week, explained the real-world difficulties in putting the original stimulus to work:

Dispensing billions of dollars, it turns out, simply takes time, particularly given government contracting rules and the fact that much of federal spending is funneled through the states. Moreover, some spending was intentionally spread out over several years, and other projects are fundamentally more long-term in nature.  “There are real constraints — physical, legal, and then just the process of how fast you can commit funds,” says George Guess, co-director of the Center for Public Finance Research at American University’s School of Public Affairs.  “It’s the way it works in a decentralized democracy, and that’s what we’re stuck with.”

Nevertheless, from the very beginning, when the stimulus was first proposed and through last spring, many economists and other commentators voiced their criticism that the $787 billion stimulus package was simply inadequate to deal with the disaster it was meant to address.  Back on December 28, Nobel laureate Paul Krugman explained on Face The Nation, that a stimulus package in the $675-775 billion range would fall short:

So you do the math and you say, you know, even these enormous numbers we’re hearing about are probably enough to mitigate but by no means to reverse the slump we’re heading into.

On July 5, Professor Krugman emphasized the need for a second stimulus:

The problem, in other words, is not that the stimulus is working more slowly than expected; it was never expected to do very much this soon.  The problem, instead, is that the hole the stimulus needs to fill is much bigger than predicted.  That — coupled with the fact that yes, stimulus takes time to work — is the reason for a second round, ASAP.

Another Nobel laureate, Joseph Stiglitz, pointed out for Bloomberg TV back on January 8, that the President-elect’s proposed stimulus would be inadequate to heal the ailing economy:

“It will boost it,” Stiglitz said.  “The real question is — is it large enough and is it designed to address all the problems.  The answer is almost surely it is not enough, particularly as he’s had to compromise with the Republicans.”

On February 26, Economics Professor James Galbarith pointed out in an interview that the stimulus plan was inadequate.

On January 19, financier George Soros contended that even an $850 billion stimulus would not be enough:

“The economies of the world are falling off a cliff.  This is a situation that is comparable to the 1930s. And once you recognize it, you have to recognize the size of the problem is much bigger,” he said.

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

Disappointer-In-Chief

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April 9, 2009

President Obama must feel relieved by the cartoonish attacks against him by the likes of Rep. Michelle Bachmann and Fox News character, Sean Hannity.  Bachmann’s accusations that Obama is planning “re-education camps” for young people surely brought some comic relief to the new President.  Hannity must have caused some thunderous laughter in the White House with his claim that during a speech the President gave in Strasbourg, France, we saw examples of how “Obama attacks America”.  These denigration attempts were likely received as a welcome break from criticism being voiced by commentators who are usually supportive of the Obama administration.  Take Keith Olbermann for example.  He has not been holding back on expressing outrage over the Obama administration’s claim that the Patriot Act provides sovereign immunity to the federal government in civil lawsuits brought by victims of illegal wiretapping conducted by the Bush administration.  Another example of a disillusioned Obama supporter is MSNBC’s Rachel Maddow, who has been fretting over the President’s plan to up the stakes for success in Afghanistan by increasing our troop commitment there and settling in to fight the good fight for as long as it takes.

Nothing has broken the spirits of Obama supporters more than his administration’s latest bank bailout scheme —  a/k/a  the Public-Private Investment Program (PPIP or “pee-pip”).  Although Treasury Secretary “Turbo” Tim Geithner has been the guy selling this plan to Congress and the public, the “man behind the curtain” who likely hatched this scam is Larry Summers.  Summers is the economist whom Obama named director of the National Economic Council.  At the time of that appointment, many commentators expressed dismay, since Summers, as Bill Clinton’s Treasury Secretary, supported repeal of the 1933 Glass-Steagall Act.  It is widely accepted that the repeal of the Glass-Steagall Act helped bring about the subprime mortgage crisis and our current economic meltdown.  On the November 25, 2008 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.”  She was right.  It was recently reported by Jeff Zeleny of The New York Times that Summers earned more than $5 million last year from the hedge fund, D. E. Shaw and collected $2.7 million in speaking fees from Wall Street companies that received government bailout money.  Many economists are now voicing opinions that the Geithner-Summers Public-Private Investment Program (PPIP) is “really troubling”, as well.  Nobel laureates Paul Krugman and Joseph Stiglitz have been vocal critics of this plan.  As James Quinn reported for London’s Telegraph:  Professor Stiglitz said that the plan is “very flawed” and “amounts to robbery of the American people.”

Obama supporter George Soros, the billionaire financier and hedge fund manager, had this to say to Saijel Kishan and Kathleen Hays of Bloomberg News about Obama’s performance so far:

“He’s done very well in every area, except in dealing with the recapitalization of the banks and the restructuring of the mortgage market,” said Soros, who has published an updated paperback version of his book “The New Paradigm for Financial Markets:  The Credit Crisis of 2008 and What It Means” (Scribe Publications, 2009).  “Unfortunately, there’s just a little bit too much continuity with the previous administration.”

The usually Obama-friendly Huffington Post has run a number of critical pieces addressing the Geithner – Summers plan.  Sam Stein pointed out how the plan is “facing a new round of withering criticism from economists”:

These critiques have produced a Washington rarity:  the re-sparking of a debate that, in the wake of positive reviews from Wall Street, had largely subsided.  Just as Geithner seemed to be finding his political footing, the spotlight has been placed right back on his cornerstone proposal, with critics calling into question both his projections and past testimony on the matter.

Jeffrey Sachs, an Economics professor at Columbia University, wrote a follow-up article for The Huffington Post on April 8, affirming earlier criticisms leveled against the bailout proposal with the added realization that “the situation is even potentially more disastrous” than previously described:

Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.

Zachary Goldfarb of The Washington Post took a closer look at Treasury Secretary Geithner’s testimony before Congress last month, to ascertain the viability of some of the proposals Geithner mentioned at that hearing:

The Obama administration’s plan for a sweeping expansion of financial regulations could have unintended consequences that increase the very hazards that these changes are meant to prevent.

Financial experts say the perception that the government will backstop certain losses will actually encourage some firms to take on even greater risks and grow perilously large.  While some financial instruments will come under tighter control, others will remain only loosely regulated, creating what some experts say are new loopholes.  Still others say the regulation could drive money into questionable investments, shadowy new markets and lightly regulated corners of the globe.

If President Obama does not change course and deviate from the Geithner-Summers plan before it’s too late, his legacy will be a ten-year recession rather than a two year recession without the PPIP.  Worse yet, the toughest criticism and the most pressure against his administration are coming from people he has considered his supporters.  At least he has the people at Fox News to provide some laughable “decoy” reports to keep his hard-core adversaries otherwise occupied.

Geithner Goes Rogue

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April 2, 2009

Forget what you’ve heard about “oversight” and “transparency”.  What is really going on with the bank bailouts is beginning to scare some pretty level-headed people.

On March 31, the Senate Finance Committee held a hearing on the oversight of TARP (the Troubled Asset Relief Program, a/k/a the $700 billion bank bailout initiated last fall by former Treasury Secretary, Hank Paulson).  The hearing featured testimony by Elizabeth Warren, chairwoman of the Congressional Oversight Panel; Neil Barofsky, Speical Inspector General for TARP and Gene Dodaro of the General Accounting Office.  All three testified that the Treasury Department was not cooperating with their efforts to conduct oversight.  In other words:  They are being stonewalled.  Worse yet, Ms. Warren testified that she could not even get the Treasury Department to explain what the hell is its strategy for TARP.  As Chris Adams reported for the McClatchy Newspapers:

Noting that TARP passed Congress six months ago, Warren said that her group has repeatedly called on the Treasury Department to provide a clear strategy for the program – and that “the absence of such a vision hampers effective oversight.”

Although she has asked Treasury to explain its strategy, “Congress and the American public have no clear answer to that question.”

That article also included Warren’s testimony that she experienced similar difficulties in obtaining information about the TALF (Term Asset-Backed Securities Loan Facility):

TARP is one of several programs the government has launched in recent months to help ailing institutions and even bolster healthy banks.  Warren singled out one program, known as TALF, for involving “substantial downside risk and high costs for the American taxpayer” while offering big potential rewards for private interests.  She said the public information about that program was “contradictory, promoting substantial confusion.”

Matthew Jaffe of ABC News pointed out that Neil Barofsky, Speical Inspector General for TARP, voiced similar concerns during his testimony.  Not surprisingly, the prepared testimony of the GAO’s Gene Dodaro revealed that:

We continue to note the difficulty of measuring the effect of TARP’s activities.

*    *    *

. . .  Treasury has yet to develop a means of regularly and routinely communicating its activities to relevant Congressional committees, members, the public and other critical stakeholders.

The Treasury Department’s inability to account for what the banks have been doing with TARP funds is based on the simple fact that it hasn’t even bothered to ask the banks that question.  As Steve Aquino reported for Mother Jones:

Neil Barofsky, the Special Inspector General of TARP, testified that the Treasury has yet to require TARP recipients to deliver reports disclosing exactly how they are spending taxpayer money.  “[C]omplaints that it was impractical or impossible for banks to detail how they used TARP funds were unfounded,” Barofsky said.  “While some banks indicated that they had procedures for monitoring their use of TARP money, others did not but were still able to give information on their use of funds.”

Apparently, Treasury Secretary “Turbo” Tim Geithner has adopted a “Don’t Ask — Don’t Tell” policy on the subject of what banks and other financial institutions do with the TARP money they receive.  Steve Aquino’s article emphasized how Elizabeth Warren’s testimony raised suspicions about the relationship between the Treasury and AIG — along with its “counterparties” (such as Goldman Sachs):

Congressional Oversight Panel chair Elizabeth Warren — who made news last month when she reported the Treasury had received securities worth $78 billion less than it paid for through TARP — cast more doubt on the Treasury’s relationship with AIG, saying “the opaque nature of the relationship among AIG, its counterparties, the Treasury, and the Federal Reserve Banks, particuarly the Federal Reserve Bank of New York, has substantially hampered oversight of the TARP program by Congress.”

That quote is particularly damning of Treasury Secretary Tim Geithner, because Warren specifically mentions the New York Fed, which Geithner headed before coming to Washington, and who also organized the first bailout of AIG.

At this point, it is difficult to understand why anyone, especially President Obama, would trust Turbo Tim to solve the “toxic asset” problem, with the scam now known as the Public-Private Investment Program or PPIP (pee-pip).  John P. Hussman, PhD, President of Hussman Investment Trust, wrote a superb analysis demonstrating the futility of the PPIP.  Here’s his conclusion:

The misguided policy of defending bondholders against losses with public funds has increased uncertainty, crowded out private investment, harmed consumer confidence, and prompted defensive saving against possible adversity.  We observe this as a plunge in gross domestic investment that is much broader than just construction and real estate, and a corresponding but misleading “improvement” in the current account deficit as domestic investment plunges.

Aside from a few Nobel economists such as Joseph Stiglitz (who characterized the Treasury policy last week as “robbery of the American people”) and Paul Krugman (who called it “a plan to rearrange the deck chairs and hope that that keeps us from hitting the iceberg”), the recognition that this problem can be addressed without a massive waste of public funds (and that it is both dangerous and wrong to do so) is not even on the radar.

In short, attempting to avoid the need for debt restructuring by wasting trillions in public funds increases the likelihood that the current economic downturn will be prolonged, places a massive claim on our future production in order to transfer our nation’s wealth to the bondholders of mismanaged financial companies, and raises the likelihood that any nascent recovery will be cut short by inflation pressures.  We are nowhere near the completion of this deleveraging cycle.

Unfortunately, we are also nowhere near finding someone who has the will or the ability to pull the plug on Turbo Tim’s recipe for disaster.

The Betrayal

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March 23, 2009

We the people, who voted for Barack Obama, are about to get ripped off by our favorite Hope dealer.  Throughout the recent controversy arising from the huge bonuses paid to AIG executives, President Obama has done quite a bit of hand wringing over the fact that the government is rewarding “the very same people who got us into this mess”.  Treasury Secretary, “Turbo” Tim Geithner is now rolling out the administration’s so-called Financial Stability Plan, wherein once again, “the very same people who got us into this mess” will be rewarded with our tax dollars.  Over a trillion dollars of taxpayer money will be used to either buy back or insure an arbitrarily-assigned value for the infamous mortgage-backed securities.  The purpose of this exercise will be to prevent the bankers themselves from losing money.  The country’s top economists, including two Nobel Prize winners (Paul Krugman and Joseph Stiglitz) have advocated a different solution:  placing those banks that are about to fail into “temporary receivership”.  However, this process would result in a significant reduction of the stock prices for those banks, in addition to replacement of the management of those institutions.  The big-shot bankers won’t put up with this.

In Sunday’s New York Times, Frank Rich referenced a reader’s observation that this is President Obama’s “Katrina Moment”.  How the new President responds to this crisis will likely shape “the trajectory of his term”.  I prefer to call it Obama’s “Yellow Cake Moment”, since he and his administration are bent on selling a lie (the likelihood that the Financial Stability Plan can succeed) to the public in order to further assist the bad bankers.  It is similar to when George W. Bush convinced many in Congress and the public, that Saddam Hussein was attempting to purchase yellow cake uranium to make atomic bombs (with Bush’s ultimate goal being widespread support for the invasion of Iraq).

It should be no coincidence that the Financial Stability Plan is rewarding the bad bankers, since it was prepared by some of “the very same people who got us into this mess”.  I am specifically referring to Larry Summers and Turbo Tim himself.  Frank Rich covered this point quite well in Sunday’s article.  As a result, Obama’s attempt to chastise “the very same people who got us into this mess” is quite specious, in light of the fact that some of those people have shaped his latest bank bailout.

Back during the campaign, Candidate Obama caught quite a bit of flack for talking about “putting lipstick on a pig”.  Nevertheless, his continued promotion of the various incarnations of what is essentially the same ill-conceived plan floated by former Treasury Secretary Henry Paulson, demonstrates that Obama himself is now putting lipstick on a pig.  As Paul Krugman pointed out:

Why was I so quick to condemn the Geithner plan?  Because it’s not new; it’s just another version of an idea that keeps coming up and keeps being refuted.  It’s basically a thinly disguised version of the same plan Henry Paulson announced way back in September.

*    *    *

But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets.  Actually, that’s not quite it:  the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls “a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don’t think I can finish this on a Times blog]”

Nevertheless, “public outcry” is exactly what is warranted in response to this soon-to-be fiasco.  Most economists favor the “temporary receivership” approach, rather than the continued bailouts of insolvent banks.  The Administration’s Financial Stability Plan is just another way to reward “the very same people who got us into this mess”.  This plan is expected to cost at least one trillion dollars.  As a result, the government is about to bilk the taxpayers out of an amount in excess of 20 Bernie Madoff Ponzi schemes.

MSNBC’s Rachel Maddow has recently vilified Senator Evan Bayh’s caucus of moderate Democrats, whom she calls “Conservadems” because they have been offering some resistance to a few of Obama’s proposals.   These Senators are actually smart people who can detect the distinctive odor of snake oil.  They know better than to tie their political futures to a bank bailout plan that can destroy their own credibility with the voting public.  They know that public support of Obama’s broader agenda is hinged on how he deals with the banking problem.  As Ben Smith and Manu Raju reported for Politico:

But many lawmakers made clear Tuesday their view that voters’ willingness to trust Obama on some subjects will be determined by their view of how well he handles the economic crisis.

*    *    *

“Unless we can instill some trust back with the American people that these people who brought on this problem, who risked our 401K funds and hard-working people’s money, aren’t going to be able to profit from their folly, I think we are at risk of losing their trust,” said Sen. Amy Klobuchar (D-Minn.).

Meanwhile, there’s an ill wind a-blowin’ and it’s coming from 1600 Pennsylvania Avenue.  The efforts by many pundits to blame the flawed financial policy on Geithner are misplaced.  If President Obama weren’t on board with this plan, it would have never made it outside of the Oval Office.  The problem is with Obama himself, rather than Geithner.  Unfortunately, the decision our President has made will likely turn a two-year recession into a ten-year recession.  To him, the corresponding benefit of helping out the bankers must apparently be worth it.