Paul Krugman « TheCenterLane.com

The Second Stimulus

July 9th, 2009 Posted in Uncategorized

Jul, 09 2009

Comments Off

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.

787 billion, American capitalism, American University, banking crisis, Barack Obama, being flexible, blog, Bloomberg news, Bloomberg survey, Bloomberg TV, Business Week, centrist, centrist blog, Commentary, comprehensive bank bailout plan, compromise for the sake of compromise itself, Congress, conservative, crony capitalism, current events opinion, David Lightman, Democrat, Democratic Party, Democrats, derivatives crisis, Dow Jones industrial average, economic crisis, economic meltdown, Economic Recovery Advisory Board, economic stimulus, economics, economists, Elise Craig, equities markets, Face The Nation, FDIC, Federal Reserve, federal spending, financial crisis, financial meltdown, George Guess, George Soros, GOP, health care reform, House of Representatives, insolvent banks, investment banks, James Galbarith, John Burke, John T Burke Jr, Joseph Stiglitz, Kevin Hall, Laura Tyson, liberal, McLatchy Newspapers, moral hazard, more job losses than expected, NASDAQ 100 index, New York Stock Exchange, News, Nobel laureate, Nomura Equity Forum, Obama, Obama Administration, Obama Presidency, Opinion, Paul Krugman, Political, political blog, political commentary blog, Politico, Presidency, President, President Barack Obama, President of the United States, public option, Republican, Republican Party, S&P 500 index, SEC, second economic stimulus package, Securities and Exchange Commission, Senate, Shamim Adam, socialized loss and privatized gain, Standard and Poors 500, Steny Hoyer, stock markets, taxpayer subsidies to investment banks, the center lane, the economy, The Second Stimulus, The White House, thecenterlane, Theo Francis, Treasury Department, unbiased news, United States Senate, United States Treasury, Victoria McGrane, voter perception of weak leadership, Wall Street, Wall Street lobbyists, Wall Street meltdown, wealth transfer, welfare for the rich, zombie banks

Defending Reagan

June 4th, 2009 Posted in Uncategorized

Jun, 04 2009

Comments Off

June 4, 2009

In case you’ve wondered whether Nobel laureates ever emit brain farts, Paul Krugman answered that question in the May 31 edition of The New York Times. His column of that date targeted former President Ronald Reagan for causing our current economic crisis:

There’s plenty of blame to go around these days. But the prime villains behind the mess we’re in were Reagan and his circle of advisers — men who forgot the lessons of America’s last great financial crisis, and condemned the rest of us to repeat it.

I was never a big fan of Ronald Reagan. My reaction to his nomination as the Republican Presidential candidate in 1980, conjured up James Coburn’s sarcastic line from the movie In Like Flint: “An actor for President!” Reagan’s legacy was exaggerated — which is why the book, Tear Down This Myth by Will Bunch, is available on this site, under the “Featured Books” section on the left side of this page. I never believed that Reagan deserved all the credit he was given for the collapse of the former Soviet Union. In my opinion, that distinction belongs to Lech Walesa, leader of Solidarity (the former Soviet bloc’s first independent trade union) and his old buddy, Karol Wojtyla, who later became Pope John Paul II. In fact, former Soviet leader Mikhail Gorbachev admitted that the demise of the Iron Curtain would have been impossible without John Paul II.

Another literary deflation of that aspect of the Reagan legend can be found in The Rebellion of Ronald Reagan: A History of the End of the Cold War by James Mann. In his review of that book for The Washington Post, Ronald Steel noted how James Mann addressed the claim that Reagan broke up the Soviet Union:

And in 1991 the Soviet Communist Party disintegrated and with it ultimately the Soviet Union itself. Did Reagan make it happen? This would be too strong, Mann insists. The Cold War ended largely because Gorbachev “had abandoned the field.”

Despite my own feelings about the Reagan legacy, upon reading Paul Krugman’s attempt to blame Ronald Reagan for the economic meltdown, I immediately rejected that idea. What became interesting was that in the aftermath of that article, commentators from “left-leaning” news sources voiced objections to the piece. For example, William Greider is the national affairs correspondent for The Nation. On his own blog, Greider wrote an essay entitled: “Krugman Gets His History Wrong”. While upbraiding Krugman, Mr. Greider took care to note the complicity of the Democrats in causing the current economic crisis:

What Krugman leaves out is that financial deregulation actually started two years earlier — before the Gipper got to Washington. A Democratic Congress and Democratic president (Jimmy Carter) enacted the Monetary Control Act of 1980 which removed all remaining controls on interest rates and repealed the federal law prohibiting usury (note that sky-high interest rates and ruinous predatory lending have been with us ever since). It was the 1980 legislation that took the lid off banking and doomed the savings and loan industry, the mainstay that used to provide housing loans and home mortgages. The thrifts were able to raise capital because they were allowed to pay a half percent more in interest to depositors. Bankers wanted them out of the way. The Democratic party obliged.

Robert Scheer is the editor of Truthdig. The columns he writes for Truthdig regularly appear in The Nation. (He is famous for getting Jimmy Carter to admit for Playboy magazine, that Carter often “lusts in his heart for other women”.) Mr. Scheer’s reaction to Krugman’s vilification of Reagan as the saboteur of the economy includes such words as “disingenuous” and “perverse”. Beyond that, Sheer lays blame for this crisis where it properly belongs:

Reagan didn’t do it, but Clinton-era Treasury Secretaries Robert Rubin and Lawrence Summers, now a top economic adviser in the Obama White House, did. They, along with then-Fed Chairman Alan Greenspan and Republican congressional leaders James Leach and Phil Gramm, blocked any effective regulation of the over-the-counter derivatives that turned into the toxic assets now being paid for with tax dollars.

* * *

How can Krugman ignore the wreckage wrought during the Clinton years by the gang of five? Rubin, who convinced President Clinton to end the New Deal restrictions on the merger of financial entities, went on to help run the too-big-to-fail Citigroup into the ground. Gramm became a top officer at the nefarious UBS bank. Greenspan’s epitaph should be his statement to Congress in July 1998 that “regulation of derivatives transactions that are privately negotiated by professionals is unnecessary.” That same week Summers assured banking lobbyists that the Clinton administration was committed to preventing government regulation of swaps and other derivatives trading.

Thank goodness Eliot “Socks” Spitzer is still around, writing for Slate. His most recent article about the economy not only provides an accurate assessment of the cause of the problem — it also suggests some solutions:

We have had a fundamentally misguided industrial policy over the past decade. Yes, industrial policy is a dirty phrase to many, some of whom would argue that we haven’t had one, and indeed shouldn’t. But the truth is we did have one: to leverage up and guarantee the bets of a financial services sector that has now collapsed and left nothing of value in its wake.

What would be a better approach? A policy to support those sectors that actually create goods and value. Investment in transformational technology and infrastructure are core national needs. So why not start with a government order for 500,000 electric cars, subject to an RFP two years from now, by which time a true electric car prototype will have been developed? It should be open to any manufacturer, as long as 75 percent of the value of the car is domestically produced. I don’t care if the name on the plate is GM or Toyota, as long as the value added is here. (I prefer a “Toyota” produced in Tennessee to a “GM” produced in China. Why struggle to save the shell of a company –GM– that intends to ship jobs overseas anyway?) Guaranteeing an order of 500,000 will give manufacturers the needed scale to generate profits and reassure private customers that service and support will be around for the long haul. And the federal government could also issue an RFP for recharging stations, to be built by private companies, along the interstate highway system, wherever there is a traditional filling station, so that recharging will be possible.

(By the way: An “RFP” is a Request for Proposals, or bids, on a government project — just in case you were thinking it might mean “request for prostitutes”.)

I have always been a fan of Socks Spitzer. His personal story underscores the simple truth that all of us, regardless of our accomplishments, are only human and we all make mistakes — even Nobel Prize winners such as Paul Krugman.

Alan Greenspan, American capitalism, an actor for President, bank bailout, Bank of America, bank stocks, banking crisis, Barack Obama, blog, centrist, Citigroup, Clinton administration, Clinton-era Treasury Secretaries, Commentary, Commodity Futures Trading Commission, comprehensive bank bailout plan, conflict of interest, Congress, conservative, crony capitalism, Defending Reagan, demise of the Iron Curtain, demise of the Soviet Union, Democrat, Democratic Party, Democrats, derivatives crisis, economic crisis, economic meltdown, electric cars, Elliot Socks Spitzer, Elliot Spitzer, Fannie Mae, FDIC, Federal Reserve, financial crisis, financial meltdown, Financial Stability Plan, foreclosures, Freddie Mac, GM, Goldman Sachs, Government Sachs, hedge fund managers, hedge funds, huge financial institutions, In Like Flint, insolvent banks, investment banks, James Coburn, James Leach, James Mann, Jimmy Carter, John Burke, John T Burke Jr, Karol Wojtyla, Krugman Gets His History Wrong, Larry Summers, Lech Walesa, liberal, lobbyists, Merrill Lynch, Mikhail Gorbachev, Monetary Control Act of 1980, moral hazard, mortgage-backed securities, News, Obama Administration, Obama Presidency, Opinion, Paul Krugman, Phil Gramm, Playboy magazine, Political, Politics, Pope John Paul II, President of the United States, Reagan legacy, Reagan legend, Republican, Republican Party, revolving door, Robert Rubin, Robert Scheer, Ronald Reagan, Ronald Steel, Savings and Loan crisis, SEC, Securities and Exchange Commission, Slate, socialized loss and privatized gain, Socks Spitzer, Solidarity, TARP, TARP bailout, taxpayer subsidies to investment banks, Tear Down This Myth, temporary receivership, the center lane, the economy, The Nation, The New York Times, The Rebellion of Ronald Reagan A History of the End of the Cold War, The Washington Post, The White House, thecenterlane, Tim Geithner, toxic assets, Toyota, Treasury Department, Troubled Asset Relief Program, troubled assets, Truthdig, Turbo Tim, Turbo Tim Geithner, United States Senate, United States Treasury, unscrupulous lenders, usury, Wall Street, Wall Street lobbyists, Wall Street meltdown, wealth transfer, welfare for the rich, Will Bunch, zombie banks

Disappointer-In-Chief

April 9th, 2009 Posted in Uncategorized

Apr, 09 2009

Comments Off

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.

Afghanistan, American capitalism, bank bailout, bank stress tests, Barack Obama, Bill Clinton, blog, Bloomberg news, centrist, Columbia University, Commentary, comprehensive bank bailout plan, Congress, Congressional Oversight Panel, conservative, D E Shaw, debt restructuring, Democracy Now, Democrat, Democratic Party, Democrats, derivatives crisis, Disappointer-In-Chief, economic crisis, economics, economists, Elizabeth Warren, expansion of financial regulations, FDIC, Federal Reserve, financial crisis, financial meltdown, Financial Stability Plan, Fox News, Geithner – Summers plan, George Soros, Glass-Steagall Act, hedge fund, Huffington Post, illegal wiretapping by Bush Administration, insolvent banks, investment banks, James Quinn, Jeff Zeleny, Jeffrey Sachs, John Burke, John T Burke Jr, Joseph Stiglitz, Kathleen Hays, Keith Olbermann, Larry Summers, liberal, Michelle Bachmann, mortgage-backed securities, MSNBC, Naomi Klein, National Economic Council, nationalization of banks, New York Times, News, Obama Administration, Obama Presidency, Opinion, oversight of bank bailouts, Patriot Act, Paul Krugman, pee-pip, Political, Politics, PPIP, PPIP amounts to robbery of the American people, President of the United States, Public-Private Investment Program, Rachel Maddow, re-education camps, Republican, Republican Party, Saijel Kishan, Sam Stein, Sean Hannity, SEC, securities, Securities and Exchange Commission, Senate Finance Committee, sovereign immunity, Strasbourg France, stress testing of banks, subprime mortgage crisis, TALF, TARP bailout, taxpayer subsidies to investment banks, Telegraph, temporary receivership, ten-year recession, Term Asset-Backed Securities Loan Facility, the center lane, the economy, The Washington Post, The White House, thecenterlane, Tim Geithner, toxic assets, transparency, Treasury Department, Troubled Asset Relief Program, Turbo Tim, Turbo Tim Geithner, United States Senate, Wall Street, wealth transfer, Zachary Goldfarb, zombie banks

Geithner Goes Rogue

April 2nd, 2009 Posted in Uncategorized

Apr, 02 2009

Comments Off

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.

ABC News, AIG, AIG bonus controversy, AIG debacle, American capitalism, bank bailout, bank stress tests, Barack Obama, blog, centrist, Chris Adams, Commentary, comprehensive bank bailout plan, Congress, Congressional Oversight Panel, conservative, debt restructuring, Democrat, Democratic Party, Democrats, derivatives crisis, economic crisis, economics, economists, Elizabeth Warren, FDIC, Federal Reserve, financial crisis, financial meltdown, Financial Stability Plan, GAO, Geithner Goes Rogue, Gene Dodaro, General Accounting Office, Goldman Sachs, Hank Paulson, Hussman Investment Trust, insolvent banks, investment banks, John Burke, John P Hussman, John T Burke Jr, Joseph Stiglitz, liberal, Matthew Jaffe, McClatchy Newspapers, mortgage-backed securities, Mother Jones, nationalization of banks, Neil Barofsky, News, Obama Administration, Obama Presidency, Opinion, oversight of bank bailouts, Paul Krugman, pee-pip, Political, Politics, PPIP, President of the United States, Public-Private Investment Program, Republican, Republican Party, SEC, securities, Securities and Exchange Commission, Senate Finance Committee, Steve Aquino, stress testing of banks, TALF, TARP bailout, taxpayer subsidies to investment banks, temporary receivership, Term Asset-Backed Securities Loan Facility, the center lane, the economy, The White House, thecenterlane, Tim Geithner, toxic assets, Treasury Department, Troubled Asset Relief Program, Turbo Tim, Turbo Tim Geithner, United States Senate, Wall Street, wealth transfer, zombie banks

Understanding The Creepy Bailouts

March 26th, 2009 Posted in Uncategorized

Mar, 26 2009

Comments Off

March 26, 2009

The voting, taxpaying public had no trouble understanding the outrageousness of AIG’s use of government-supplied, bailout money to pay $165 million in bonuses to its employees. As we all saw, there was a non-stop chorus of outrage, running from letters to the editors of small-town newspapers to death threats against AIG employees and their next-of-kin. However, what most people don’t really understand is how this crisis came about and what the failed solutions have been. Some of us have tried to familiarize ourselves with the alphabet soup of acronyms for those government-created entities, entrusted with the task of solving the most complex financial problems of all time. Nevertheless, we are behind the curve with our own understanding and we will remain behind the curve regardless of how hard we try. It’s no accident. Opacity is the order of the day from the Federal Reserve, the Treasury, the Securities and Exchange Commission and the Commodity Futures Trading Commission. In other words: You (the “little people”) are not supposed to know what is going on. So just go back to work, pay your taxes and watch the television shows that are intended to tie-up your brain cells and dumb you down.

This week, Wall Street was excited to learn the details of Treasury Secretary “Turbo” Tim Geithner’s latest version of what, last week, was called the Financial Stability Plan. In order to make the unpopular plan sound different, it was given a new name: the PPIP (Public-Private Investment Partnership or “pee-pip”). Those economists who had voiced skepticism about the plan’s earlier incarnations were not impressed with the emperor’s new clothes. As Nobel laureate and Princeton University Professor Paul Krugman explained in The New York Times:

But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

The plan’s supporters now claim that Professor Nouriel Roubini, an advocate for “nationalization” (or more accurately: temporary receivership) of insolvent banks now supports the “new” plan. As one can discern from the New York Daily News op-ed piece by Dr. Roubini and fellow New York University Professor Matthew Richardson, they simply described this plan a “a step in the right direction”. More important were the caveats they included in their article:

But let’s not have any illusions. The government bears the risk if and when the investors take a bath on the taxpayer-provided loans. If the economy gets worse, it could get very ugly, very quickly. The administration should be transparent in making clear that there is still a wealth transfer taking place here – from taxpayers to investors and banks.

* * *

Moreover, there’s the issue of transparency – or lack thereof. No one knows what the loans or securities are worth. Competing investors will help solve this by promoting price discovery. But be careful what you wish for. We might not like the answers.

James K. Galbraith (the son of famed economist John Kenneth Galbraith) has a PhD in Economics from Yale and is a professor at the University of Texas at Austin. His reaction to the PPIP appears on The Daily Beast website in an article entitled: “The Geithner Plan Won’t Work”:

The ultimate objective, and in President Obama’s own words, the test of this plan, is whether it will “get credit flowing again.” (I have dealt with that elsewhere.) Short answer: It won’t. Once rescued, banks will sit quietly on the sidelines, biding their time, until borrowers start to reappear. From 1989 to 1994, that took five years. From 1929 to 1935 — you get the picture.

* * *

And the reality is, if the subprime securities are truly trash, most of the big banks are troubled and some are insolvent. The FDIC should put them through receivership, get clean audits, install new management, and begin the necessary shrinkage of the banking system with the big guys, not the small ones. It should not encumber the banking system we need with failed institutions. And it should not be giving CPR to a market for toxic mortgages that never should have been issued, and certainly never securitized, in the first place.

Back in May of 2006, Dr. Galbraith wrote an article for Mother Jones that is particularly relevant to the current economic crisis. Many commentators are now quoting Galbraith’s observations about how “the predator class” is in the process of crushing the rest of us:

Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia. Instead, predation has become the dominant feature — a system wherein the rich have come to feast on decaying systems built for the middle class. The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth. But it is the defining feature, the leading force. And its agents are in full control of the government under which we live.

The validity of Galbraith’s argument becomes apparent after reading Matt Taibbi’s recent article for Rolling Stone, called “The Big Takeover”. Taibbi’s article is a “must read” for anyone attempting to get an understanding of how this mess came about as well as the sinister maneuvers that were made after la mierda hit the fan. It’s not a pretty picture and Matt deserves more than congratulations for his hard work on this project, putting the arcane financial concepts and terminology into plain, easy-to-understand English. Beyond that, he provides the Big Picture, which, for those who read Galbraith’s discourse on predation, is all too familiar:

People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’etat. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grace: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — “our partners in the government,” as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

Let’s hope I haven’t scared you out of reading Matt’s article. Besides: If you don’t — you are going to feel really stupid when you have to admit that you don’t know what the ABCPMMMFLF is.

ABCPMMMFLF, AIG, AIG bonus controversy, AIG debacle, American capitalism, bank bailout, bank stress tests, Barack Obama, blog, centrist, Commentary, Commodity Futures Trading Commission, comprehensive bank bailout plan, Congress, conservative, Democrat, Democratic Party, Democrats, derivatives crisis, economic crisis, economic meltdown, economics, economists, Enron, FDIC, Federal Reserve, financial crisis, financial meltdown, Financial Stability Plan, insiders, insolvent banks, investment banks, James K Galbraith, John Burke, John Kenneth Galbraith, John T Burke Jr, liberal, Matt Taibbi, mortgage-backed securities, Mother Jones, nationalization of banks, New York Daily News, New York University, News, Nobel laureate, Nouriel Roubini, Obama Administration, Obama Presidency, one trillion dollars, opacity, Opinion, Paul Krugman, pee-pip, Political, Politics, PPIP, predation, President of the United States, Princeton University, Professor Matthew Richardson, public outrage, Public-Private Investment Partnership, Republican, Republican Party, Rolling Stone, SEC, securities, Securities and Exchange Commission, stress testing of banks, TARP bailout, taxpayer anger, taxpayer subsidies to investment banks, temporary receivership, the banks, The Big Takeover, the center lane, The Daily Beast, the economy, The Geithner Plan Won’t Work, The New York Times, the predator class, the predatory class, the Treasury, The White House, thecenterlane, Tim Geithner, toxic assets, transparency, Troubled Asset Relief Program, Turbo Tim, Turbo Tim Geithner, Understanding The Creepy Bailouts, United States Senate, University of Texas at Austin, Wall Street, wealth transfer, Yale, zombie banks

The Betrayal

March 23rd, 2009 Posted in Uncategorized

Mar, 23 2009

Comments Off

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.

AIG, AIG bonus controversy, AIG debacle, Amy Klobuchar, bad bankers, bank bailout, bank restructuring, bank stock prices, bank stress tests, Barack Obama, Ben Smith, Bernie Madoff Ponzi scheme, blog, caucus of conservative and centrist Democrats, caucus of moderate Democrats, centrist, Commentary, comprehensive bank bailout plan, Congress, Conservadems, conservative, Democrat, Democratic Party, Democrats, derivatives crisis, economic crisis, economic meltdown, Evan Bayh, Federal Reserve, financial crisis, financial meltdown, Financial Stability Plan, Frank Rich, George W Bush, Hank Paulson, Henry Paulson, Hope dealer, insolvent banks, investment banks, John Burke, John T Burke Jr, Joseph Stiglitz, Larry Summers, liberal, Manu Raju, mortgage-backed securities, MSNBC, nationalization of banks, News, Obama Administration, Obama Presidency, Obamas Katrina Moment, Obamas Yellow Cake moment, one trillion dollars, Opinion, Oval Office, Paul Krugman, Political, Politico, Politics, President of the United States, public outrage, putting lipstick on a pig, Rachel Maddow, Republican, Republican Party, Saddam Hussein, snake oil, stress testing of banks, TARP bailout, taxpayer anger, taxpayer subsidies to investment banks, temporary receivership, ten-year recession, the banks, The Betrayal, the center lane, the economy, The New York Times, The White House, thecenterlane, theres an ill wind a-blowin, Tim Geithner, toxic assets, Troubled Asset Relief Program, Turbo Tim, Turbo Tim Geithner, United States Senate, voter willingness to trust Obama, Wall Street, Yves Smith, zombie banks

The Pushback From Europe

March 16th, 2009 Posted in Uncategorized

Mar, 16 2009

Comments Off

March 16, 2009

There was plenty of action and plenty of inaction in Europe last week, toward addressing the world financial crisis. Our new Treasury Secretary, “Turbo” Tim Geithner, has been in Horsham, (West Sussex County) U.K., chatting it up with G-20 finance ministers in a run-up meeting to the big London Summit on April 2. (Meanwhile . . . Who was conducting the “stress tests” on the nineteen “stressed” banks while Turbo Tim was across the pond, eating the awful, British food? Worse yet: Treasury still has a few positions to fill.)

We got a taste of the European response to the financial crisis during Sunday’s broadcast of NBC’s Meet The Press. Near the end of the program, David Gregory asked the BBC’s Katty Kay about the “back story” to the G-20 finance ministers’ meeting in England:

MR. GREGORY: You’re just back from Europe, Katty, and one of the big debates this week with the administration and Europe is that Europe does not want to do larger stimulus. And we know that some of the problems in Europe and around the globe with this recession are quite acute.

MS. KAY: You know, it’s really interesting traveling through Europe this week, and two things really struck me. One is that there is less public concern about the nature of this crisis, and part of that is that Europeans have a broader social safety net. I was speaking to a journalist in Sweden who said to me, “You know, if I lose my job, I lose some of my income. But I still have very good health care and my children have very good state education.” So people aren’t as panicked by this recession as they are here. That means that there is less political pressure on European leaders to spend their way out of this and to act some kind of stimulus package, a global stimulus package, what the administration’s been calling for. There is also a feeling in Europe that they don’t want to have to submit to an American made solution to what is seen by many, by many Europeans as an American made problem. There is a real resistance here …

Europe’s portrayal of the world financial crisis as “an American problem” became painfully apparent during the recent G-20 finance ministers’ meeting. As Damien Paletta and Stephen Fidler reported for The Wall Street Journal, the G-20 members exploited the opportunity to pressure Secretary Geithner on solving the problems in America’s banking sector before asking the G-20 to make any efforts toward increased economic stimulus spending. The G-20 members are well-aware of the Obama administration’s unwillingness to place insolvent banks under government receivership, particularly since this is widely perceived in the United States as being too “un-American”, or worse yet — European. As The Wall Street Journal article pointed out:

The turnaround suggests the limits of U.S. power in the world emerging out of the rubble of the financial crisis. Many countries, including U.S. allies, are increasingly putting pressure on America to clean up a mess they believe it created.

Mr. Geithner’s actions during the next two weeks will be scrutinized by both Wall Street and world financial markets, which have remained unconvinced that the Obama administration can pull the world out of the downturn.

* * *

Participants said they were pleasantly surprised by the meeting’s unity of purpose, given comments beforehand from the Germans and the French rebuffing U.S. calls to make further commitments to fiscal expansion. But it was also clear U.S. officials had a long way to go before they could satisfy concerns about the banking sector, which emerged as a surprising point of contention during the negotiations.

“I and some others were expecting much quicker movement on the part of the administration” related to the treatment of banks, said one central banker.

From the Obama administration’s perspective, there can only be one culprit responsible for this attitude about our government’s failure to address the unresolved problem of “troubled assets” (i.e. mortgage-backed securities and the multitude of ill-begotten “derivatives”) responsible for the questionable health of so many American banks. This culprit is Nobel Prize-winning Economist, Paul Krugman. Professor Krugman has written again and again about the urgent need for the Obama administration to face the ugly reality that the “zombie banks” must be placed under government receivership (which is not really “nationalization”).

Fortunately, Professor Krugman stepped up and pointed out (in The New York Times) that if the EU really believes that it doesn’t have any skin in this game, it is in for an unpleasant surprise:

The clear and present danger to Europe right now comes from a different direction — the continent’s failure to respond effectively to the financial crisis.

Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.

* * *

Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent.

* * *

You might expect monetary policy to be more forceful. After all, while there isn’t a European government, there is a European Central Bank. But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness, and will surely cover the Fed’s losses if its efforts to unfreeze financial markets go bad. The E.C.B., which must answer to 16 often-quarreling governments, can’t count on the same level of support.

Europe, in other words, is turning out to be structurally weak in a time of crisis.

What transpired in this trans-continental dialogue was a lot like a volleyball game between politicians and commentators from the European Union against politicians and commentators from the United States. After the EU team “spiked” the ball over the net — it hit Tim Geithner on the head. The ball then bounced away. Just as the ball passed above Paul Krugman — “Boom Goes the Dynamite!” Nice play, Paul!

American banks, an American problem, bank bailout, Barack Obama, BBC, blog, Boom Goes the Dynamite, centrist, Commentary, Congress, conservative, Damien Paletta, David Gregory, Democrat, Democratic Party, Democrats, economic stimulus spending, England, European Central Bank, Federal Reserve, financial crisis, Financial Stability Plan, fiscal and monetary policy, G-20, G-20 finance ministers, G-20 finance ministers meeting, government receivership, Horsham, ill-begotten derivatives, insolvent banks, John Burke, John T Burke Jr, Katty Kay, liberal, London Summit, Meet The Press, mortgage-backed securities, nationalization, NBC, News, Nobel Prize-winning Economist, Obama Administration, Obama Presidency, Opinion, Paul Krugman, Political, Politics, President of the United States, problems in American banking sector, Republican, Republican Party, Stephen Fidler, stress testing, stress tests, TARP bailout, the center lane, the Fed, The New York Times, The Pushback From Europe, The Wall Street Journal, The White House, thecenterlane, Tim Geithner, Treasury Secretary Tim Geithner, Troubled Asset Relief Program, troubled assets, Turbo Tim, Turbo Tim Geithner, un-American, United States Senate, United States Treasury, West Sussex County, world financial crisis, zombie banks

The Big Bite

March 12th, 2009 Posted in Uncategorized

Mar, 12 2009

Comments Off

March 12, 2009

As President Obama’s “big bang” agenda gets underway (wherein the government is simultaneously tackling the problems of the economy, health care, education and energy) criticism of this strategy is beginning to mount. Commentators from the conservative end of the spectrum are, not surprisingly, the most vocal in their admonitions that these other issues are detracting attention from the most pressing issue facing America and the world: the economy. As William Galston pointed out in The New Republic, Obama’s “big bang” strategy runs the risk of repeating Jimmy Carter’s failed attempt to push a far-reaching agenda at the beginning of his term:

It is time for President Obama to focus his considerable leadership and communication skills on the financial crisis–to speak candidly with the people about the magnitude of pthe roblem, to embrace a solution commensurate with the problem, and to do whatever it takes to persuade Congress and the people to accept it. If he does not, he could end up where another highly intelligent, self-disciplined, and upright president did three decades ago.

Conservative pundit, Tony Blankley, expressed similar dismay that not enough thought and effort have been dedicated to this urgent problem. He added that this sentiment is not limited to those on the “far right”:

Obama not only is failing to focus more or less exclusively on protecting the financial system and the economy that depend on it but also is letting his ideological ardor drive him to expend both his own and his administration’s attention, along with the vast new tax dollars, on those programs rather than on the financial and economic crises.

Thus — and here is his political danger — if the financial system fails (and much of the economy along with it), it will be a fair, true and politically lethal charge against Obama that he didn’t do all he could as soon as he could to protect us from the catastrophe. It was this decision that shocked even some of his moderate supporters, such as David Gergen, David Brooks and others, who are muttering in private.

And this misjudgment is only compounded by the slow and inept start of Treasury Secretary Timothy Geithner, the man who has the line responsibility to fix it and who only this past weekend got around to nominating some of his vital sub-Cabinet officials. The failure of both Obama and Geithner, in the five months since the election, to come up with a plan to deal with the toxic assets and insolvency of major financial institutions may well look even more irresponsible than it already does if the derivatives crisis in fact hits the world.

Most of the anxiety over the Obama administration’s economic plan (or lack thereof) concerns its lack of disclosed details and the administration’s apparent decision to ignore the warnings of prominent economists about the urgency of taking the only logical action: put the “zombie” banks through receivership to purge them of their “toxic assets” (most notably mortgage-backed securities). The scant information disclosed about Treasury Secretary, “Turbo” Tim Geithner’s Financial Stability Plan is that it involves “stress testing” the banks to determine their true financial condition and creating some sort of investment fund by which private investors would be enticed to purchase the toxic assets with taxpayer money being used to guarantee the value of those assets.

Turbo Tim has repeatedly stated that he is opposed to “nationalization” of the functionally insolvent banks. This position is in direct opposition to the warnings of two Nobel laureates and countless other Economics professors, including Dr. Nouriel Roubini, who predicted the economic crisis back on September 7, 2006. As Steve Coll discussed on The New Yorker‘s Think Tank blog:

To compound all this, Geithner, Bernanke, and the President seem to have organized themselves as a determined minority in resistance to the gathering view among mainstream economists, even Alan Greenspan, that the best solution to the bank problem, at this point, is, in fact, temporary receivership — on the model of the Resolution Trust Corporation that cleaned up the savings-and-loans industry in the early nineteen-nineties, or the more routine receivership processes of the Federal Deposit Insurance Corporation. Is this resistance by Geithner, Bernanke, and the President genuine and fully determined, or is it part of the political and confidence equation above, and therefore susceptible to change? In the President’s case, it’s hard to be sure. In Geithner’s case, he seems to be saying what he means. Where is Larry Summers, the top White House economic adviser, on this critical question? Also hard to tell. Perhaps, like Alan Greenspan, he is privately leaning toward receivership; if so, his position would be complicated by the fact that his younger, former protege, Geithner, who now holds a more visible position than his own, thinks otherwise. Anyway, the facts about the health of the banks are not yet officially in hand — that is the purpose of the “stress tests” that are now being administered, to analyze which of the country’s largest nineteen banks are in the strongest positions, and which are in the weakest. Policy options are still being developed. The likelihood of various economic forecasts is still being debated. And so we endure more Kremlin-like opacity.

Is Turbo Tim simply “playing it close to the chest” by holding off on announcing any plans to put zombie banks into receivership, so as to prevent a “run” on more healthy institutions and the destruction of what is left of their stock value? Although I would like to believe that, those more knowledgeable than myself are quite skeptical. Columbia University Professor Joseph E. Stiglitz (2001 recipient of the Nobel Prize in Economics) pointed out in the March 29 issue of The Nation, that placing the insolvent banks into receivership must be done immediately. The process of endless bailouts for these banks is a waste of money that appears to be solely for the benefit of the banks’ shareholders:

It has been obvious for some time that a government takeover of our banking system–perhaps along the lines of what Norway and Sweden did in the ’90s–is the only solution. It should be done, and done quickly, before even more bailout money is wasted.
* * *
The politicians responsible for the bailout keep saying, “We had no choice. We had a gun pointed at our heads. Without the bailout, things would have been even worse.” This may or may not be true, but in any case the argument misses a critical distinction between saving the banks and saving the bankers and shareholders. We could have saved the banks but let the bankers and shareholders go. The more we leave in the pockets of the shareholders and the bankers, the more that has to come out of the taxpayers’ pockets.
* * *
By these standards, the TARP bailout has so far been a dismal failure. Unbelievably expensive, it has failed to rekindle lending. Former Treasury Secretary Henry Paulson gave the banks a big handout; what taxpayers got in return was worth less than two-thirds of what we gave the big banks–and the value of what we got has dropped precipitously since.

Since TARP facilitated the consolidation of banks, the problem of “too big to fail” has become worse, and therefore the excessive risk-taking that it engenders has grown worse. The banks carried on paying out dividends and bonuses and didn’t even pretend to resume lending.

The most recent recipient of the Nobel Prize in Economics, Paul Krugman, has become increasingly vocal in his criticism of the Obama administration’s approach to this problem:

A real fix for the troubles of the banking system might help make up for the inadequate size of the stimulus plan, so it was good to hear that Mr. Obama spends at least an hour each day with his economic advisors, “talking through how we are approaching the financial markets.” But he went on to dismiss calls for decisive action as coming from “blogs” (actually, they’re coming from many other places, including at least one president of a Federal Reserve bank), and suggested that critics want to “nationalize all the banks” (something nobody is proposing).

As I read it, this dismissal — together with the continuing failure to announce any broad plans for bank restructuring — means that the White House has decided to muddle through on the financial front, relying on economic recovery to rescue the banks rather than the other way around. And with the stimulus plan too small to deliver an economic recovery … well, you get the picture.

Is the administration’s approach to the financial crisis being handicapped by an over-extension of resources because of the overwhelming demands of the “big bang” strategy? Whether or not that is the case, the administration’s current solution to the bank problem is drawing criticism from both the left and the right. If President Obama stays with the course charted by “Turbo” Tim Geithner, odds are that our new President will be restricted to a single term in The White House.

Alan Greenspan, bank bailout, bank stress tests, Barack Obama, big bang strategy, blog, centrist, Columbia University, Commentary, Congress, conservative, David Brooks, David Gergen, Democrat, Democratic Party, Democrats, derivatives crisis, economic crisis, Federal Reserve, financial crisis, Financial Stability Plan, Henry Paulson, insolvent banks, Jimmy Carter, John Burke, John T Burke Jr, Larry Summers, liberal, nationalization of banks, News, Nobel Prize in Economics, Nouriel Roubini, Obama Administration, Obama Presidency, Opinion, Paul Krugman, Political, Politics, President of the United States, Professor Joseph Stiglitz, receivership, Republican, Republican Party, Steve Coll, stress testing of banks, TARP bailout, The Big Bite, the center lane, the economy, The Nation, The New Republic, The New York Times, The New Yorker, The White House, thecenterlane, Think Tank blog, Tim Geithner, Tony Blankley, toxic assets, Troubled Asset Relief Program, Turbo Tim, Turbo Tim Geithner, United States Senate, William Galston, zombie banks

The New Welfare Queens

February 26th, 2009 Posted in Uncategorized

Feb, 26 2009

Comments Off

February 26, 2009

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

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

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

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

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

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

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

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

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

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

* * *

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

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

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

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

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

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

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

* * *

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

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

Adam Posen, Ari Levy, Barack Obama, Ben Bernanke, Bill Gross, blog, Bloomberg news, Bradley Keoun, centrist, Citigroup, CNBC, Commentary, Congress, conservative, Countdown, Craig Torres, Democrat, Democratic Party, Democrats, Economics professor, Eric Falkenstein, failure of nerve, Falson 50, Franklin D. Gilliam, golf outing, Harvard University, insolvent banks, Japanese recession, Jim Cramer, John Burke, John T Burke Jr, junk science, liberal, lost decade, Matthew Richardson, Maureen Dowd, MSNBC, NAB Research LLC, Nancy Bush, nationalization of banks, News, Nieman Foundation for Journalism, Northwestern University, Obama Administration, Obama Presidency, Opinion, Pacific Investment Management Company, Paul Krugman, Political, Politics, President of the United States, Republican, Republican Party, RGE Monitor, Richard Bove, Rochdale Securities, Ronald Reagan, Seeking Alpha, Sheryl Crow, stress tests, TARP program, Temporary nationalization, the center lane, The New Welfare Queens, The New York Times, The White House, thecenterlane, Tim Geithner, toxic assets, Troubled Asset Relief Program, Turbo Tim, Turbo Tim Geithner, UCLA, United States Senate, welfare fraud, welfare queen, zombie banks

We’re All Headed Into The Hudson

February 9th, 2009 Posted in Uncategorized

Feb, 09 2009

Comments Off

February 9, 2009

It’s Monday, February 9 and Change Airlines flight 2008 is just taking off from Senate Airport. In the cockpit are: Captain “Barry” Barackburger, Co-pilot “Turbo” Geithner, and Flight Engineer Larry Summers. During its takeoff roll, the plane came dangerously close to an open container belonging to the Bad Paper Company. The Bad Paper was to be loaded onto a Xeng Airlines flight, bound for Beijing. As the Change airplane passed the open container, a large amount of the Bad Paper was sucked into the plane’s jet engines. Just after takeoff, the airliner’s Captain radioed the tower:

Captain Barry: Senate tower this is Change twenty-zero-eight. That paper container was too close to the runway and our engines sucked most of it in. We’re losing thrust and we need to come back around.

Senate tower: Change twenty-zero-eight you are clear to land on runway 18.

Captain Barry: We can’t make it back. That’s too far for us. Do you have anything closer?

Senate tower: Can you make it to Taxcut International?

Captain Barry: Are you kidding? Taxcut doesn’t have enough runway. C’mon! Help me out here! We’re running out of time!

Senate tower: I have our navigation technician here to come up with something. What do you have, Irene?

Nav Tech I. Newton: Your best option looks like runway 27-Left at States Field.

Larry Summers: What the hell do you know about math or physics, Missy? This plane has a much higher “sink rate” than your estimate. Save your science fair project for those broads on The View. I’m sure they’ll be impressed.

Captain Barry: Larry! Chill!

Captain Barry: Senate tower, we’re going to be making a hard landing and I don’t want to try it on a runway. There’s no time for that, anyway. We’re going to have to set down in the river.

Senate tower: That sounds awfully wasteful! Do you know how much that plane costs?

Captain Barry: At least we can get some salvage value out of the plane this way. Besides, I can’t gamble with the health and welfare of my passengers.

Senate tower: But first, you should at least try . . .

Captain Barry: Hey! I’m the Captain. Remember? Okay, Turbo! Throw the “ditch switch” and alert the passengers for a water landing!

Will Captain Barry be able to make a “soft landing” in the river? Will Senate tower delay this attempt long enough to make that impossible? Stay tuned.

In the mean time Steven Mufson and Lori Montgomery have reported in the Washington Post, that conservative-minded economists are in agreement with liberal economists that an economic stimulus bill should be enacted as quickly as possible:

While economists remain divided on the role of government generally, an overwhelming number from both parties are saying that a government stimulus package — even a flawed one — is urgently needed to help prevent a steeper slide in the economy.

Many economists say the precise size and shape of the package developing in Congress matter less than the timing, and that any delay is damaging.

There is no doubt that the fight over the stimulus bill has turned into a partisan political battle. This was best exemplified by the fact that no Republican in the House of Representatives voted in favor of the House version of that legislation. Battle lines have also been drawn by many commentators. In his February 5 op-ed column for the New York Times, Paul Krugman (recipient of the Nobel Prize in Economics) complained about Republican efforts to downsize the spending provisions in the bill and to add more tax cuts. He was particularly upset about President Obama’s willingness to make compromises in those areas:

So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.

It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.

The very characteristics of President Obama’s behavior that are causing so much anxiety for Mr. Krugman would seem to make it unlikely that Obama will follow Krugman’s advice. The President has done plenty of talking about his bringing us into an era of “post-partisanship”. As David Brooks pointed out on February 5, there are many in Congress headed in that same direction. For Obama to abandon them would not only be unlikely, it would be political suicide:

The big news here is that there are many Democrats who don’t want to move in a conventional liberal direction and there some Republicans willing to work with them to create a functioning center. These moderates — who are not a party, but a gang — seemed willing to seize control of legislation from the party leaders. They separated themselves from both the left and right.

* * *

The liberals already are mobilizing against the Moderate Gangs. On Thursday, the liberal interest groups were intensively lobbying against the stimulus cuts. But there’s no way that Obama, who spent two years campaigning on postpartisan politics, can reject the single biggest manifestation of postpartisanship in the country today. If he does that, his credibility will be shot.

One reason why Barack Obama is the President is because many voters are impressed by his willingness to sit down and work out solutions with his opponents. Now is his chance to show them that he can deliver results by using that strategy.

Barack Obama, Barry Barackburger, blog, centrist, Commentary, Congress, conservative, David Brooks, Democrat, Democratic Party, Democrats, economic stimulus bill, economists, John Burke, John T Burke Jr, Larry Summers, liberal, Lori Montgomery, moderate gangs, moderates, New York Times, News, Obama Administration, Obama Presidency, Opinion, Paul Krugman, Political, Politics, post-partisan, post-partisanship, President of the United States, Republican, Republican Party, Rush Limbaugh, Steven Mufson, tax cuts, the center lane, The View, The White House, thecenterlane, Turbo Geithner, United States Senate, Washington Post, We’re All Headed Into The Hudson

TheCenterLane.com

© 2008 – 2024 John T. Burke, Jr.

The Second Stimulus

Defending Reagan

Disappointer-In-Chief

Geithner Goes Rogue

Understanding The Creepy Bailouts

The Betrayal

The Pushback From Europe

The Big Bite

The New Welfare Queens

We’re All Headed Into The Hudson

Tip Jar

Recent Posts

Stock Market

Blogroll

Archives

About TheCenterLane.com