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Geithner Gets Bashed in New Book

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

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

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

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

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

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

Gawd!  Yeech!

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

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

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

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

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

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

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

*   *   *

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

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

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

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

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

*    *    *

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

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

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

*   *   *

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

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


 

Banksters Live Up to the Nickname

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Matt Taibbi has done it again.  His latest article in Rolling Stone focused on the case of United States of America v. Carollo, Goldberg and Grimm, in which the Obama Justice Department actually prosecuted some financial crimes.  The three defendants worked for GE Capital (the finance arm of General Electric) and were involved in a bid-rigging conspiracy wherein the prices paid by banks to bond issuers were reduced (to the detriment of the local governments who issued those bonds).

The broker at the center of this case was a firm known as CDR.  CDR would be hired by a state or local government which was planning a bond issue.  Banks would then submit bids which are interest rates paid to the issuer for holding the money until payments became due to the various contractors involved in the project which was the subject of the particular bond.  The brokers would tip off a favored bank about the amounts of competing bids in return for a kickback based on the savings made by avoiding an unnecessarily high bid.  In the Carollo case, the GE Capital employees were supposed to be competing with other banks who would submit bids to CDR.  CDR would then inform the bidders on how to coordinate their bids so that the bid prices could be kept low and the various banks could agree among themselves as to which entity would receive a particular bond issue.  Four of the banks which “competed” against GE Capital in the bidding were UBS, Bank of America, JPMorgan Chase and Wells Fargo.  Those four banks paid a total of $673 million in restitution after agreeing to cooperate in the government’s case.

The brokers would also pay-off politicians who selected their firm to handle a bond issue.  Matt Taibbi gave one example of how former New Mexico Governor Bill Richardson received $100,000 in campaign contributions from CDR.  In return, CDR received $1.5 million in public money for services which were actually performed by another broker – at an additional cost.

Needless to say, the mainstream news media had no interest in covering this case.  Matt Taibbi quoted a remark made to the jury at the outset of the case by the trial judge, Harold Baer:  “It is unlikely, I think, that this will generate a lot of media publicity”.  Although the judge’s remark was intended to imply that the subject matter of the case was too technical and lacking in the “sex appeal” of the usual evening news subject, it also underscored the aversion of mainstream news outlets to expose the wrongdoing of their best sponsors:  the big banks.

Beyond that, this case exploded a myth – often used by the Justice Department as an excuse for not prosecuting financial crimes.  As Taibbi explained at the close of the piece:

There are some who think that the government is limited in how many corruption cases it can bring against Wall Street, because juries can’t understand the complexity of the financial schemes involved.  But in USA v. Carollo, that turned out not to be true.  “This verdict is proof of that,” says Hausfeld, the antitrust attorney.  “Juries can and do understand this material.”

One important lesson to be learned from the Carollo case is a simple fact that the mainstream news media would prefer to ignore:  This is but one tiny example of the manner in which business is conducted by the big banks.  As Matt Taibbi explained:

The men and women who run these corrupt banks and brokerages genuinely believe that their relentless lying and cheating, and even their anti-competitive cartel­style scheming, are all legitimate market processes that lead to legitimate price discovery.  In this lunatic worldview, the bid­rigging scheme was a system that created fair returns for everyone.

*   *   *

That, ultimately, is what this case was about.  Capitalism is a system for determining objective value.  What these Wall Street criminals have created is an opposite system of value by fiat. Prices are not objectively determined by collisions of price information from all over the market, but instead are collectively negotiated in secret, then dictated from above

*   *   *

Last year, the two leading recipients of public bond business, clocking in with more than $35 billion in bond issues apiece, were Chase and Bank of America – who combined had just paid more than $365 million in fines for their role in the mass bid rigging. Get busted for welfare fraud even once in America, and good luck getting so much as a food stamp ever again.  Get caught rigging interest rates in 50 states, and the government goes right on handing you billions of dollars in public contracts.

By now we are all familiar with the “revolving door” principle, wherein prosecutors eventually find themselves working for the law firms which represent the same financial institutions which those prosecutors should have dragged into court.  At the Securities and Exchange Commission, the same system is in place.  Worst of all is the fact that our politicians – who are responsible for enacting laws to protect the public from such criminal enterprises as what was exposed in the Carollo case – are in the business of lining their pockets with “campaign contributions” from those entities.  You may have seen Jon Stewart’s coverage of Jamie Dimon’s testimony before the Senate Banking Committee.  How dumb do the voters have to be to reelect those fawning sycophants?

Yet it happens  .  .  .  over and over again.  From the Great Depression to the Savings and Loan scandal to the financial crisis and now this bid-rigging scheme.  The culprits never do the “perp walk”.  Worse yet, they continue on with “business as usual” partly because the voting public is too brain-dead to care and partly because the mainstream news media avoid these stories.  Our political system is incapable of confronting this level of corruption because the politicians from both parties are bought and paid for by the banking cabal.  As  Paul Farrell of MarketWatch explained:

Seriously, folks, the elections are relevant.  Totally.  Oh, both sides pretend it matters.  But it no longer matters who’s president.  Or who’s in Congress.  Money runs America.  And when it comes to the public interest, money is not just greedy, but myopic, narcissistic and deaf.  Money from Wall Street bankers, Corporate CEOs, the Super Rich and their army of 261,000 highly paid mercenary lobbyists.  They hedge, place bets on both sides.  Democracy is dead.

Why would anyone expect America to solve any of its most pressing problems when the officials responsible for addressing those issues have been compromised by the villains who caused those situations?


 

Harsh Reality

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Several years ago, at one of the seven Laurie Anderson performances I have attended, Ms. Anderson (now Mrs. Lou Reed – although I seriously doubt whether she uses that moniker) described her first meeting with Philip Glass.  Immediately after meeting Glass, she anxiously asked him:  “Are things getting better or are things getting worse?”

These days, that same question is on everyone’s mind.  It appears as though the mainstream news media are hell-bent on convincing us that everything is just fine.  Nevertheless, many of us remember hearing the same thing from Ben Bernanke and Hank Paulson during the summer of 2008.  As a result, we ponder the onslaught of rosy prognostications about the future of our economy with a good degree of skepticism.  Regardless of whether there might be some sort of conspiracy to convince the public to go out and spend money because everything is all right  . . . consider these remarks by Steve Randy Waldman from a discussion about market monetarist theory:

Self-fulfilling expectations lie at the heart of the market monetarist theory.  A depression occurs when people come to believe that income will be scarce relative to prior expectations and debts.  They nervously scale back expenditures and hoard cash, fulfilling their expectations of income scarcity.  However, if everybody could suddenly be made to believe that income would be plentiful, everyone would spend freely and fulfill the expectations of plenty.  The world is a much more pleasant place under the second set of expectations than the first.  And to switch between the two scenarios, all that is required is persuasion.  The market-monetarist central bank is nothing more than a great persuader:  when “shocks happen”, it persuades us all to maintain our optimism about the path of nominal income.  As long as we all keep the faith, our faith will be rewarded.  This is not a religion, but a Nash equilibrium.

The persuasion described by Steve Waldman has been drowning out objective analysis lately.  Obviously, the sovereign debt crisis in Europe has created quite a bit of anxiety in the United States.  The mainstream media focus is apparently targeting that consensual anxiety with heavy doses of “feel good” material.  One must search around a bit before finding any commentary which runs against that current.  I found some and I would like to share it with you.  The first item appeared in Bloomberg BusinessWeek on November 22:

Pacific Investment Management Co.’s Chief Executive Officer Mohamed A. El-Erian said U.S. economic conditions are “terrifying” as the nation struggles to recover from recession.

The odds of the U.S. returning to recession are as much as 50 percent, El-Erian said during an interview on Bloomberg Television’s “In the Loop” with Betty Liu.  U.S. economic growth was worse than expected and congressional policy makers are gridlocked over what to do about the economy and the deficit, which risk exacerbating an already weak recovery, he said.

“We have less economic momentum than we thought we had and we have no policy momentum,” said El-Erian, who also serves as co-chief investment officer with Pimco founder Bill Gross at the world’s largest manager of bond funds.

“What’s most terrifying,” he said, “we are having this discussion about the risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time then the fiscal deficit is at 9 percent and at a time when interest rates are at zero.”

Let’s not forget that all of this is happening at a time when we are plagued by the most dysfunctional, stupid and corrupt Congress in our nation’s history.  President Obama is currently preoccupied with his re-election campaign.  His own leadership failures are conveniently re-packaged as products of that feckless Congress.  As a result, Americans have plenty of justification for being worried about the future.

One of my favorite commentators, Paul Farrell of MarketWatch, recently shared some information with us, which he acquired by attending an InvestmentNews Round Table, as well as from reading Gary Shilling’s expensive newsletter:

Get it? Main Street America, you should “expect very slow growth” in 2012.  That was the response when asked what “scenarios are you painting for your clients?”  The panelist at a recent InvestmentNews Round Table then added:  “It’s going to be ugly and violent.”  Why?  Because the politicians “are driving things” and they are “capricious, which leads to volatility.”  And clients are “not really happy,” but “they lived through ‘08 and ’09,” so 2012 will be “just a little bump in the road.”

*   *   *

So don’t kid yourself folks, recent economic and market “ugliness and violence” not only won’t end soon, it’ll get meaner and meaner for years after 2012 elections … no matter who wins.  Only a fool would believe that a new bull market will take off in 2013.  Ain’t going to happen.  That’s a Wall Street fantasy.  Fall for that, and you’re delusional.

In fact, you better plan on a very long secular bear the next decade through 2020.  With the European banks, credit and currency on the edge of a global financial meltdown, there’s a high probability that a black swan virus, a contagion will sweep the world, making all investing “uglier” and more “violent” for Americans in 2013, indeed for the rest of the decade.

*   *   *

Shilling sees “a secular bear market really started in 2000 and may persist for a decade as a result of slower GDP growth,” yes, persist till 2020 “with 2% to 3% deflation.”  He warns:  “Nominal GDP might not gain at all,” like recent flat-lining.  Which coincides with the expectations of America’s professional financial advisers.

Are you still feeling optimistic?  Consider the closing thoughts from a piece by Karl Denninger entitled, “The Game Is About Done”:

30+ years of lawless behavior has now devolved down to blatant, in-your-face theft.  They don’t even bother trying to hide it any more, and Eric “Place” Holder is too busy supervising the running of guns into Mexico so the drug cartels can shoot both Mexican and American citizens.

What am I, or anyone else, supposed to do in this sort of “market” environment?  Invest in…. what?  Land titles are worthless as they’ve been corrupted by robosigning, margin deposits have been stolen, Madoff’s clients had confirmations of trades that never happend and proved to worthless pieces of paper instead of valuable securities and while Madoff went to prison nobody else has and the money is still gone!

Without enforcement of the law — swift and certain — there is no deterrent against this behavior.

There has been no enforcement and there is no indication that this will change.

It will take just one — or maybe two — more events like MF Global and Greek CDS “determinations” before the entire market — all of it — goes “no bid” as participants simply stuff their hands in their pockets and say “screw this.”

It’s coming folks, and I guarantee you this:  Whatever your “nightmare” scenario is for such an event, it’s not bearish enough.

Keep all of this in mind as you plan for the future.  I would not expect that you might hear any of this on CNBC.


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Unwinding The Spin

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We are caught in a steady “spin cycle” of contradictory reports about our most fundamental concerns:  the environment and the economy.  Will China financially intervene to resolve the sovereign debt crisis in Europe and save us all from the economic consequences that loom ahead?  Will the “China syndrome” finally become a reality at Fukushima?  When confronted with a propaganda assault from the “rose-colored glasses” crowd, I become very skeptical.

Widespread concern that Greece would default on its debt inflamed lingering fear about debt contagion throughout the Eurozone.  Economist John Hussman, one of the few pundits who has been keeping a sober eye on the situation, made this remark:

Simply put, the Greek debt market is screaming “Certain default. Amésos.”

Meanwhile, the Financial Times reported that China Investment Corporation has been involved in discussions with the government of Italy concerning Italian bond purchases as well as business investments.  Bloomberg BusinessWeek quoted Zhang Xiaoqiang, vice chairman of China’s top economic planning agency, who affirmed that nation’s willingness to buy euro bonds from countries involved in the sovereign debt crisis “within its capacity”.

Stefan Schultz of Der Speigel explained that China expects something in return for its rescue efforts:

The supposed “yellow peril” has positioned itself as a “white knight” which promises not to leave its trading partners in Europe and America in the lurch.

In return, however, Beijing is demanding a high price — the Chinese government wants more political prestige and more political power  .  .  .

Specifically, China wants:  more access to American markets, abolition of restrictions on the export of high-technology products to China as well as world-wide recognition of China’s economy as a market economy.

Even if such a deal could be made with China, would that nation’s bailout efforts really save the world economy from another recession?

As usual, those notorious cheerleaders for stock market bullishness at CNBC are emphasizing that now is the time to buy.  At MSN Money, Anthony Mirhaydari wrote a piece entitled, “The bulls are taking charge”.

Last week, Robert Powell of MarketWatch directed our attention to an analysis just published by Sam Stovall, the chief investment strategist of Standard & Poor’s Equity Research.  Powell provided us with this summary:

Consider, at a place and time such as this, with the economy teetering on the verge of another recession, none of the 1,485 stocks that make up the S&P 1,500 has a consensus “Sell” rating. And just five, or 0.3%, are ranked as being a “Weak Hold.”

*   *   *

From his vantage point, Stovall says it “appears as if most analysts are not expecting the U.S. to fall back into recession, and that now is the time to scoop up undervalued cyclical issues at bargain-basement prices.”

However, in S&P’s opinion, it might be high time to “buck the trend and embrace the traditionally defensive sectors (including utilities), as the risk of recession — and downward earnings per share revisions – appear to us to be on the rise.”

On September 14, investing guru Mark Hulbert picked up from where Robert Powell left off by reminding us that – ten years ago – stock analysts continued to rate Enron stock as a “hold” during the weeks leading up to its bankruptcy, despite the fact that the company was obviously in deep trouble.  Hulbert’s theme was best summed-up with this statement:

If you want objectivity from an analyst, you might want to start by demanding that he issue as many “sell” recommendations as “buys.”

It sounds to me as though Wall Street is looking for suckers to be holding all of those high-beta, Russell 2000 stocks when the next crash comes along.  I’m more inclined to follow Jeremy Grantham’s assessment that “fair value” for the S&P 500 is 950, rather than its current near-1,200 level.

While the “rose colored glasses” crowd is dreaming about China’s rescue of the world economy, the “China syndrome” is becoming a reality at Japan’s Fukushima nuclear power facility.  Immediately after the tragic earthquake and tsunami, I expressed my suspicion that the true extent of the nuclear disaster was the subject of a massive cover-up.  Since that time, Washington’s Blog has been providing regular updates on the status of the ongoing, uncontrolled nuclear disaster at Fukushima.  The September 14 posting at Washington’s Blog included an interview with a candid scientist:

And nuclear expert Paul Gunter says that we face a “China Syndrome”, where the fuel from the reactor cores at Fukushima have melted through the container vessels, into the ground, and are hitting groundwater and creating highly-radioactive steam . . .

On the other hand, this article from New Scientist reeks of nuclear industry spin:

ALARMIST predictions that the long-term health effects of the Fukushima nuclear accident will be worse than those following Chernobyl in 1986 are likely to aggravate harmful psychological effects of the incident.

As long as experts such as Paul Gunter and Arnie Gundersen continue to provide reliable data contradicting the “move along – nothing to see here” meme being sold to us by the usual suspects, I will continue to follow the updates on Washington’s Blog.


 

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Occupy Wall Street – For Some Reason

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Back in July, the Canadian-based, activist network known as Adbusters, announced plans to organize an occupation of Wall Street on September 17, 2011.  Their July 13 announcement revealed that the ultimate goal of the occupation was deliberately left open:

On September 17, we want to see 20,000 people flood into lower Manhattan, set up tents, kitchens, peaceful barricades and occupy Wall Street for a few months.  Once there, we shall incessantly repeat one simple demand in a plurality of voices.

Tahrir succeeded in large part because the people of Egypt made a straightforward ultimatum – that Mubarak must go – over and over again until they won.  Following this model, what is our equally uncomplicated demand?

The most exciting candidate that we’ve heard so far is one that gets at the core of why the American political establishment is currently unworthy of being called a democracy:  we demand that Barack Obama ordain a Presidential Commission tasked with ending the influence money has over our representatives in Washington.  It’s time for DEMOCRACY NOT CORPORATOCRACY, we’re doomed without it.

This demand seems to capture the current national mood because cleaning up corruption in Washington is something all Americans, right and left, yearn for and can stand behind.

A website specifically dedicated to this event was created:  OccupyWallSt.org.  The site has a Mission Statement, proclaiming that on September 17, a tent city will be established in lower Manhattan:

Once there, we shall incessantly repeat one simple demand in a plurality of voices and we will not leave until that demand has been met.

As for that mysterious demand, the website provides a hint as to how it will be determined:

What we demand from our government is for the people to decide through democratic consensus, not this website.  A Facebook poll started by Adbusters suggests the demand might be an end to corporate personhood.

So, will the Facebook poll serve as the vehicle for reaching that “democratic consensus”?

On August 23, Adbusters announced that the Internet hacktivist group, Anonymous had joined #OCCUPYWALLSTREET.  Anonymous prepared this one-minute, promotional video for the cause.  Once Anonymous got on board, the Department of Homeland Security became interested in the event (if it had not done so already).  Computerworld magazine reported that on September 2, a bulletin was issued by the DHS National Cybersecurity and Communications Integration Center (NCCIC):

The DHS alert also warns of three cyber attacks and civil protests it says are planned by Anonymous and affiliated groups.

The first attack, dubbed Occupy Wall Street (OWS) is scheduled for Sept. 17.

The so-called ‘Day of Rage’ protest was first announced by a group called Adbusters in July and is being actively supported by Anonymous.  The organizers of OWS hope to get about 20,000 individuals to gather on Wall Street on that day to protest various U.S. government policies.

It sounds to me as though the Department of Homeland Security is getting revved-up for a mass-rendition to Guantanamo and a busy schedule of “Full Roto-Rooter” cavity searches.  It could get scary.  The camoflauge-attired attendees probably won’t be interested in hearing my explanation that “I’m just here to demand the dismissal of Kathryn Wylde from her post as a Class C Director of the New York Federal Reserve Bank.”

My favorite commentator for MarketWatch, Paul Farrell, predicted that the turnout could be a bit larger than anticipated:

Given today’s intense anger against America’s totally dysfunctional government, no one should be surprised if 90,000 arrive for Occupy Wall Street and its solidarity allies at other financial centers across the world, armed with their rallying cry to stop “the corruption of our governments by Wall Street money.”

After discussing the potential for historic change Occupy Wall Street seems to offer, Farrell posed the simple question:  Will it work?

In the final analysis, this may be a bad case of “too little, too late:”  Back in 1776 our original 57 revolutionaries also “had enough” when they signed the Declaration of Independence. They also risked everything, family, fortunes and lives.  They actually had “one simple demand,” to be free of a tyrannical ruler, George III.

Today, the new ruler is greedy, corrupting democracy.  But it’s locked deep in the American soul.  Maybe they’re asking the wrong question:  Not “Is America Ready for a Tahrir Moment?” Rather ask:  “Is America Past That Moment, Buried Too Deep in a Culture of Greed to Change?”

If so, Wall Street wins, again.  And America loses, again.

The promoters of the Tea Party movement were able to channel the outrage experienced by taxpayers, who watched the Federal Reserve hand trillions over to a small handful of ineptly-managed megabanks.  The Tea Party promoters redirected and exploited that anger as a motivating force, which provoked those citizens to vote against their own interests.  The attempt to tame the beast with regulation (as had been done after the Great Depression) was sabotaged.  Could the Occupy Wall Street effort bring justice back to defeat financial anarchy?  It would be nice if it worked, although I gave up on “hope” in early 2009.


 

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Elizabeth Warren Should Run Against Obama

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

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

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

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

*   *   *

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

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

He’s about to lose his job.

*   *   *

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

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

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

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

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

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

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

*   *   *

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

*   *   *

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

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

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

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

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

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

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

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


 

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Looking Beyond The Smokescreen

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We bloggers have the mainstream news outlets to thank for our readership.  The inane, single-minded focus on a particular story, simply because it brings a huge audience to one’s competitors, regularly provides the driving force behind programming decisions made by those news producers.  As a result, America’s more discerning, critical thinkers have turned to internet-based news sources (and blogs) to familiarize themselves with the more important stories of these turbulent times.

Robert Oak, at The Economic Populist website, recently expressed his outrage concerning the fact that a certain over-publicized murder trial has eclipsed coverage of more important matters:

For over a week we’ve heard nothing else by the press but Casey Anthony.  Imagine what would happen if Nancy Grace used her never ending tape loop rants of hatred against tot mom to spew and prattle about the U.S. economy? Instead of some bizarre post traumatic public stress disorder, stuck in a rut, obsessive thought mantra, repeating ad nauseum, she’s guilty, we might hear our politicians are selling this nation down the river.

*   *   *

Folks, don’t you think the economy is just a little more important and actually impacts your lives than one crime and trial?  The reality is any story which really impacts the daily lives of working America is not covered or spun to fiction.

The fact that “our politicians are selling this nation down the river” has not been overlooked by Brett Arends at MarketWatch.  He recently wrote a great essay entitled, “The Next, Worse Financial Crisis”, wherein he discussed ten reasons “why we are doomed to repeat 2008”.  Of the ten reasons, my favorite was number 7, “The ancient regime is in the saddle”:

I have to laugh whenever I hear Republicans ranting that Barack Obama is a “liberal” or a “socialist” or a communist.  Are you kidding me?  Obama is Bush 44.  He’s a bit more like the old man than the younger one.  But look at who’s still running the economy: Bernanke. Geithner. Summers. Goldman Sachs. J.P. Morgan Chase. We’ve had the same establishment in charge since at least 1987, when Paul Volcker stood down as Fed chairman.  Change?  What “change”?  (And even the little we had was too much for Wall Street, which bought itself a new, more compliant Congress in 2010.)

As the 2012 campaign season begins, one need not look too far to find criticism of President Obama. Nevertheless, as Brett Arends explained, most of that criticism is a re-hash of the same, tired talking points we have been hearing since Obama took office.  We are only now beginning to hear a broader chorus of pushback from commentators who see Obama as the President I have often described as the “Dissapointer-In-Chief”.  Marshall Auerback wasn’t so restrained in his recent appraisal of Obama’s maladroit response to our economic crisis, choosing instead to ratify a well-deserved putdown, which most commentators felt obligated to denounce:

It may not have been the most felicitous choice of phrase, but Mark Halperin’s characterization of Barack Obama was not far off the mark, even if he did get suspended for it.  The President is a dick, at least as far as his understanding of basic economics goes.  Obama’s perverse fixation with deficit reduction uber alles takes him to areas where even George W. Bush and Ronald Reagan dared not to venture.  Medicare and Social Security are now on the table.  In fact entitlements of all kinds (excluding the myriad of subsidies still present to Wall Street) are all deemed fair game.

To what end?  Deficit control and deficit reduction, despite the fact that at present, the US has massive excess capacity including millions of unemployed and underemployed, a negative contribution from net exports, and a stagnant private spending growth horizon.  Yet the President marches on, oblivious to the harm his policies would introduce to an already bleeding economy, using the tired analogy between a household and a sovereign government to support his tired arguments.  It may have been impolitic, but “dick” is what immediately sprang to mind as one listened incredulously to the President’s press conference, which went from the sublime to the ridiculous.

*   *   *

Let’s state it again:  households do not have the power to levy taxes, to issue the currency we use, and to demand that those taxes are paid in the currency it issues.  Rather, households are users of the currency issued by the sovereign government.  Here the same distinction applies to private businesses, which are also users of the currency.  There’s a big difference, as all us on this blog have repeatedly stressed:  Users of a currency do face an external constraint in a way that a sovereign issuer of its currency does not.

*   *   *

The President has the causation here totally backward.  A growing economy, characterized by rising employment, rising incomes and rising capacity utilization causes the deficit to shrink, not the other way around.  Rising prosperity means rising tax revenues and reduced social welfare payments, whereas there is an overwhelming body of evidence to support the opposite – cutting budget deficits when there is slack private spending growth and external deficits will erode growth and destroy net jobs.

The increasing, widespread awareness of Obama’s mishandling of the economic crisis has resulted in a great cover story for New York Magazine by Frank Rich, entitled, “Obama’s Original Sin”.  While discussing Rich’s article, Yves Smith of Naked Capitalism lamented the fact that Obama is – again – the beneficiary of undeserved restraint:

Even Rich’s solid piece treats Obama more kindly that he should be.  He depicts the President as too easily won over by “the best and the brightest” in the guise of folks like Robert Rubin and his protégé Timothy Geithner.

We think this characterization is far too charitable.  Obama had a window in time in which he could have acted, decisively, to rein the financial services in, and he and his aides chose to let it pass and throw their lot in with the banksters.  That fatal decision has severely constrained their freedom of action, as we explain .  .  .

Miscreants such as Casey Anthony serve as convenient decoys for public anger.  Hopefully, by Election Day, the voters will realize that Casey Anthony isn’t to blame for the pathetic state of America’s economy and they will vote accordingly.


 

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More Wisdom From Jeremy Grantham

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One of my favorite commentators, Paul Farrell of MarketWatch, recently discussed some of the prescient essays of Jeremy Grantham, who manages over $100 billion as chief executive of an asset management firm – GMO.  Paul Farrell reminded us that Grantham warned of the impending financial crisis in July of 2007, which came as a surprise to those vested with the responsibility of paying attention to such advice.  As Farrell pointed out:

Our nation’s leaders are in denial, want happy talk, bull markets, can’t even see the crash coming, even though the warnings were everywhere for years. Why the denial?  Grantham hit the nail on the head:  Our leaders are “management types who focus on what they are doing this quarter or this annual budget and are somewhat impatient.”

Paul Farrell is warning of an “inevitable crash that is coming possibly just before the Presidential election in 2012”.  He incorporated some of Grantham’s rationale in his own discussion about how and why this upcoming crash will come as another surprise to those who are supposed to help us avoid such things:

Most business, banking and financial leaders are short-term thinkers, focused on today’s trades, quarterly earnings and annual bonuses.  Long-term historical thinking is a low priority.

Paul Farrell’s article was apparently written in anticipation of the release of Jeremy Grantham’s latest Quarterly Letter at the conclusion of the first quarter of 2011.  Grantham’s newest discourse is entitled, “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever”.  The theme is best summed-up by these points from the “summary” section:

  • From now on, price pressure and shortages of resources will be a permanent feature of our lives.  This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
  • We all need to develop serious resource plans, particularly energy policies.  There is little time to waste.

After applying some common sense and simple mathematics to the bullish expectations of immeasurable growth ahead, Grantham obviously upset many people with this sober observation:

Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period.  Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution.  Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels.

We have all experienced the rapid spike in commodity prices:  more expensive gas at the pump, higher food prices and widespread cost increases for just about every consumer item.  Many economists and other commentators have blamed the Federal Reserve’s ongoing program of quantitative easing for keeping interest rates so low that the enthusiasm for speculation on commodities has been enhanced, resulting in skyrocketing prices.  Surprisingly, Grantham is not entirely on board with that theory:

The Monetary Maniacs may ascribe the entire move to low interest rates.  Now, even I know that low rates can have a large effect, at least when combined with moral hazard, on the movement of stocks, but in the short term, there is no real world check on stock prices and they can be, and often are, psychologically flakey.  But commodities are made and bought by serious professionals for whom today’s price is life and death. Realistic supply and demand really is the main influence.

Grantham demonstrated that most of the demand pressure on commodities is being driven by China.  This brings us to his latest prediction and dire warning:

The significance here is that given China’s overwhelming influence on so many commodities, especially in terms of the percentage China represents of new growth in global demand, any general economic stutter in China can mean very big declines in some of their prices.

You can assess on your own the probabilities of a stumble in the next year or so.  At the least, I would put it at 1 in 4, while some of my colleagues think the odds are much higher.  If China stumbles or if the weather is better than expected, a probability I would put at, say, 80%, then commodity prices will decline a lot.  But if both events occur together, it will very probably break the commodity markets en masse.  Not unlike the financial collapse.  That was a once in a lifetime opportunity as most markets crashed by over 50%, some much more, and then roared back.

Modesty should prevent me from quoting from my own July 2008 Quarterly Letter, which covered the first crash.

*   *   *

In the next decade, the prices of all raw materials will be priced as just what they are, irreplaceable.  If the weather and China syndromes strike together, it will surely produce the second “once in a lifetime” event in three years.

For the near-term, we appear to be in an awful double-bind:  either we get crushed by increasing commodity prices – or – commodities will become plentiful and cheap, causing the world economy to crash once again.  It won’t bother Wall Street at all, because The Ben Bernank and “Turbo” Tim will be ready and willing to provide abundant bailouts – again, at taxpayer expense.


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How States Can Save Billions

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We’ve been reading a lot about fallout lately.  The Fukushima power plant disaster is now providing a lasting legacy all over the world.  This animation from the French national meteorological service, Météo-France, illustrates how the spread of the Fukushima fallout is migrating.

For the past three years, we have been living with the fallout from a financial “meltdown”, which resulted from deregulation, greed and the culture of “pervasive permissiveness” at the Federal Reserve, as discussed in the Financial Crisis Inquiry Report.  The fallout from the financial meltdown has also spread across the entire world.  Different countries have employed different approaches for coping with the situation.  In Ireland, the banks were bailed out at taxpayer expense, crippling that nation’s economy for generations to come.  As a result, the Irish citizens fought back, went to the polls and ousted the perfidious politicians who helped the banks avoid responsibility for their transgressions.   On the other hand, in Portugal, the government refused to impose austerity measures on the citizens, who should not be expected to pay the price for the financial mischief that gave rise to the current economic predicament.  Given the additional fact that Portugal, as a nation, was not a “player” in the risky games that nearly brought down the world economy, the recent decision by the Portuguese parliament is easy to understand.

In our own country, the various states have found it quite difficult to balance their budgets.  High unemployment, which refuses to abate, and depressed real estate valuation have devastated each state’s revenue base.  Because the states cannot print money, as the Federal Reserve does in order to pay the federal government’s bills, it has become necessary for the states to rely on creative gimmicks to reverse their misfortunes.  Most states had previously deployed numerous “economic development projects” over the years.  Such projects are taxpayer-funded subsidies to attract corporations and entice them to establish local operations.  Rex Nutting of MarketWatch recently took a critical look at those programs:

And yet, study after study show that these subsidies create few, if any, net jobs.  For instance, California’s Enterprise Zone program – which is supposed to boost business in 42 economically distressed communities – has cost the taxpayers $3.6 billion over 27 years, but to no avail.  A legislative analyst report in 2005 found that “EZs have little if any impact on the creation of new economic activity or employment.” Read more from the legislative analyst report.

California Gov. Jerry Brown has proposed to kill the EZ program and the even-more expensive redevelopment agency program, but he faces an uphill fight in the Legislature.  Such subsidies are popular with the legislators who receive boatloads of campaign contributions from businesses lucky enough to find a government teat to latch on to.

Nationwide, such giveaways from state and municipal governments amounted to more than $70 billion in 2010, according to Kenneth Thomas, a political scientist at the University of Missouri at St. Louis, who has specialized in studying these subsidies.  That’s more than the states collect in corporate income taxes in a good year.  Read about Thomas’s book: “Investment Incentives and the Global Competition for Capital”

And that $70 billion is twice as much money as would be required to fully fund the pensions owed to state and local government workers, the very same pensions that budget-cutting politicians across the country claim are responsible for the fiscal hole we’re in.

What Rex Nutting has suggested amounts to the elimination of a significant number of corporate welfare programs.  He has also dared to challenge the corporatist mantra that corporate welfare “creates jobs”.  We are supposed to believe that the only way states can balance their budgets is through the imposition of draconian austerity programs, designed to force the “little people” to – once again – pay the tab for Wall Street’s binge.  Because the voters have no lobbyists to protect their own interests, venal state and local politicians have set about slashing public safety expenditures (through mass layoffs of police and firefighters), closing parks and libraries, as well as under-funding public school systems.

Never mind that state and local governments could save $70 billion by cutting just one form of corporate welfare.  They would rather let you watch your house burn down.  You can’t afford that house anyway.


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Some Good News For Once

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Since the Great Recession began three years ago, Americans have been receiving a daily dose of the most miserable news imaginable.  Our prevalent nightmare concerns the possibility that gasoline prices could find their way up to $10 per gallon as Muammar Gawdawful takes Libya into a full-scale civil war.

Some people tried to find a thread of hope in the latest non-farm payrolls report from the Bureau of Labor Statistics.  The report was spun in several opposing directions by various commentators.  The single statement from the BLS report which seemed most important to me was the remark in the first sentence that    “. . .  the unemployment rate was little changed at 8.9 percent . . .”.  Nevertheless, David Leonhardt of The New York Times noted his suspicion that “the government is understating actual job growth” while providing his own upbeat read of the report.  On the other hand, at the Zero Hedge website, Tyler Durden made this observation:

Wonder why the unemployment rate is at an artificially low 8.9%?  Three simple words:  Labor Force Participation.  At 64.2%, it was unchanged from last month, and continues to be at a 25 year low.  Should the LFP return to its 25 trendline average of 66.1%, the unemployment rate would be 11.6%.

Indeed, the ugly truth is that as you spend more time pondering the current unemployment situation, you find an increasingly dismal picture.  Economist Mark Thoma came up with a “back of the envelope calculation” of the benchmarks he foresees as the unemployment situation abates:

7% unemployment in July of 2012

6% unemployment in March of 2013

5% unemployment in December of 2013

4% unemployment in September of 2014

If anything, relative to the last two recoveries, this forecast is optimistic.  Even so, it will still take two years to get to 6% unemployment (and if the natural rate is closer to 5.5% at that time, as I expect it will be, it will take another five months to fully close the gap). Things may be looking up, but we have a long way to go and it’s too soon to turn our backs on the unemployed.

Only three more years until we return to pre-crisis levels!  Whoopie!

For those in search of genuinely good news, I went on a quest to come up with some for this piece.  Here’s what I found:

For the truly desperate, the Salon website has introduced a new weekly feature entitled, “The Week In Uppers”.  It is a collection of stories, often including video clips, which will (hopefully) make you smile.  The items are heavy on good deeds – sometimes by celebrities.

I was quite surprised by this next “good news” item:  A report by Rex Nutting of MarketWatch, revealing this welcome fact:

.   .   .  the United States remains the biggest manufacturing economy in the world, producing about 20% of the value of global output in 2010  . . .  (Although fast-growing China will pass the United States soon enough.)

Even though we may soon drop to second place, at least our unemployment rate should be in decline by that point.  Here are some more encouraging factoids from Rex Nutting’s essay:

In 2010, U.S. factories shipped $5.03 trillion worth of goods out the door, up 9% from 2009’s horribly depressed output, according to the Census Bureau.

*   *   *

In 2010 alone, productivity in the manufacturing sector surged 6.7%. Fortunately for workers, it looks as if companies have squeezed as much extra output out of labor as they can right now.  For the first time since 1997, factories actually added jobs during the calendar year in 2010, as they hired 112,000 additional workers.

There will be further job gains as factories ramp up their production to meet rising demand, economists say.

According to the Institute for Supply Management’s monthly survey of corporate purchasing managers, business is booming.  The ISM index rose for a seventh straight month in February to 61.4%, matching the highest reading since 1983.

*   *   *

What is the ISM telling us?  “The manufacturing sector is on fire,” says Stephen Stanley, chief economist for Pierpont Securities.  The new orders index rose to 68%, the highest since 2004, and the employment index rose to 64.5%, the highest since 1973.

Factories are hiring because orders are stacking up faster than they can produce goods.

What’s behind the boom?  In part, it’s domestic demand for capital goods and consumer goods.  Businesses are finally beginning to believe in the recovery, so they’re starting to expand, which means new equipment must be purchased.

Be sure to read the full report if you want to re-ignite those long, lost feelings of optimism.

It’s nice to know that if you look hard enough you can still find some good news (at least for now).


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