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Obama And The TARP

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I always enjoy it when a commentator appearing on a talk show reminds us that President Obama has become a “tool” for the Wall Street bankers.  This theme is usually rebutted with the claim that the TARP bailout happened before Obama took office and that he can’t be blamed for rewarding the miscreants who destroyed our economy.  Nevertheless, this claim is not entirely true.  President Bush withheld distribution of one-half of the $700 billion in TARP bailout funds, deferring to his successor’s assessment of the extent to which the government should intervene in the banking crisis.  As it turned out, during the final weeks of the Bush Presidency, Hank Paulson’s Treasury Department declared that there was no longer an “urgent need” for the TARP bailouts to continue.  Despite that development, Obama made it clear that anyone on Capitol Hill intending to get between the banksters and that $350 billion was going to have a fight on their hands.  Let’s jump into the time machine and take a look at my posting from January 19, 2009 – the day before Obama assumed office:

On January 18, Salon.com featured an article by David Sirota entitled:  “Obama Sells Out to Wall Street”.  Mr. Sirota expressed his concern over Obama’s accelerated push to have immediate authority to dispense the remaining $350 billion available under the TARP (Troubled Asset Relief Program) bailout:

Somehow, immediately releasing more bailout funds is being portrayed as a self-evident necessity, even though the New York Times reported this week that “the Treasury says there is no urgent need” for additional money.  Somehow, forcing average $40,000-aires to keep giving their tax dollars to Manhattan millionaires is depicted as the only “serious” course of action.  Somehow, few ask whether that money could better help the economy by being spent on healthcare or public infrastructure.  Somehow, the burden of proof is on bailout opponents who make these points, not on those who want to cut another blank check.

Discomfort about another hasty dispersal of the remaining TARP funds was shared by a few prominent Democratic Senators who, on Thursday, voted against authorizing the immediate release of the remaining $350 billion.  They included Senators Russ Feingold (Wisconsin), Jeanne Shaheen (New Hampshire), Evan Bayh (Indiana) and Maria Cantwell (Washington).  The vote actually concerned a “resolution of disapproval” to block distribution of the TARP money, so that those voting in favor of the resolution were actually voting against releasing the funds.  Earlier last week, Obama had threatened to veto this resolution if it passed.  The resolution was defeated with 52 votes (contrasted with 42 votes in favor of it).  At this juncture, Obama is engaged in a game of “trust me”, assuring those in doubt that the next $350 billion will not be squandered in the same undocumented manner as the first $350 billion.  As Jeremy Pelofsky reported for Reuters on January 15:

To win approval, Obama and his team made extensive promises to Democrats and Republicans that the funds would be used to better address the deepening mortgage foreclosure crisis and that tighter accounting standards would be enforced.

“My pledge is to change the way this plan is implemented and keep faith with the American taxpayer by placing strict conditions on CEO pay and providing more loans to small businesses,” Obama said in a statement, adding there would be more transparency and “more sensible regulations.”

Of course, we all know how that worked out  .   .   .  another Obama promise bit the dust.

The new President’s efforts to enrich the Wall Street banks at taxpayer expense didn’t end with TARP.  By mid-April of 2009, the administration’s “special treatment” of those “too big to fail” banks was getting plenty of criticism.  As I wrote on April 16 of that year:

Criticism continues to abound concerning the plan by Turbo Tim and Larry Summers for getting the infamous “toxic assets” off the balance sheets of our nation’s banks.  It’s known as the Public-Private Investment Program (a/k/a:  PPIP or “pee-pip”).

*   *   *

One of the harshest critics of the PPIP is William Black, an Economics professor at the University of Missouri.  Professor Black gained recognition during the 1980s while he was deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC).

*   *   *

I particularly enjoyed Black’s characterization of the PPIP’s use of government (i.e. taxpayer) money to back private purchases of the toxic assets:

It is worse than a lie.  Geithner has appropriated the language of his critics and of the forthright to support dishonesty.  That is what’s so appalling — numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy resolution of insolvencies.  He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent.  He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything.  He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.

Although President Obama’s hunt for Osama bin Laden was a success, his decision to “punt” on the economic stimulus program – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – became Obama’s own “Tora Bora moment”, at which point he allowed economic recovery to continue on its elusive path away from us.  Economist Steve Keen recently posted this video, explaining how Obama’s failure to promote an effective stimulus program has guaranteed us something worse than a “double-dip” recession:  a quadruple-dip recession.

Many commentators are currently discussing efforts by Republicans to make sure that the economy is in dismal shape for the 2012 elections so that voters will blame Obama and elect the GOP alternative.  If Professor Keen is correct about where our economy is headed, I can only hope there is a decent Independent candidate in the race.  Otherwise, our own “lost decade” could last much longer than ten years.


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Time For Another Victory Lap

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I’m no cheerleader for President Obama.  Since he first became our Disappointer-In-Chief, I have vigorously voiced my complaints about his decisions.  At the end of President Obama’s first month in office, I expressed concern that his following the advice of “Turbo” Tim Geithner and Larry Summers was putting the welfare (pun intended) of the Wall Street banks ahead of the livelihoods of those who voted for him.  I lamented that this path would lead us to a ten-year, Japanese-style recession.  By September of 2010, it was obvious that those early decisions by the new President would prove disastrous for the Democrats at the mid-term elections.  At that point, I repeated my belief that Obama had been listening to the wrong people when he decided to limit spending on the economic stimulus package to approximately half of what was necessary to end the economic crisis:

Even before the stimulus bill was signed into law, the administration had been warned, by way of an article in Bloomberg News, that a survey of fifty economists revealed that the proposed $787 billion stimulus package would be inadequate.

Last week, I was about to write a piece, describing that decision as “Obama’s Tora Bora moment”.  When I sat down at my computer just after 11 p.m. on Sunday, I realized that the timing wouldn’t have been appropriate for such a metaphor.  The President was about to make his historic speech, announcing that Osama Bin Laden had been killed.  Just as many have criticized the Obama administration’s handling of the disaster in the Gulf of Corexit as “Obama’s Katrina Moment”, I believe that the President’s decision to “punt” on the stimulus – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  The consequences have been enormously expensive (simply adding the $600 billion cost of QE 2 alone to a better-planned stimulus program would have reduced our current unemployment level to approximately 5%).  Beyond that, the advocates of “Austerian” economics have scared everyone in Washington into the belief that the British approach is somehow the right idea – despite the fact that their economy is tanking.  Never mind the fact Australia’s stimulus program was successful and ended the recession in that country.

The Fox Ministry of Truth has brainwashed a good number of people into believing that Obama’s stimulus program (a/k/a the American Recovery and Reinvestment Act of 2009) was a complete failure.  You will never hear the Fox Ministry of Truth admit that prominent Republican economist Keith Hennessey, the former director of the National Economic Council under President George W. Bush, pointed out that the 2009 stimulus “increased economic growth above what it otherwise would have been”.  The Truth Ministry is not likely to concede that John Makin of the conservative think-tank, the American Enterprise Institute, published this statement at the AEI website:

Absent temporary fiscal stimulus and inventory rebuilding, which taken together added about 4 percentage points to U.S. growth, the economy would have contracted at about a 1 percent annual rate during the second half of 2009.

On the other hand, count me among those who are skeptical that the Federal Reserve’s monetary policy can have any impact on our current unemployment crisis (it hasn’t yet).

Many of Obama’s critics have complained that the Presidential appearance at Ground Zero was an inappropriate “victory lap” – despite the fact that George W. Bush was invited to the event (although he declined).  Not only was that victory lap appropriate – Obama is actually entitled to run another.   As E.J. Dionne pointed out, the controversial “nationalization” of the American auto industry (what should have been done to the Wall Street banks) has become a huge success:

The actual headlines make the point. “Demand for fuel-efficient cars helps GM to $3.2 billion profit,” declared The Washington Post.  “GM Reports Earnings Tripled in First Quarter, as Revenue Jumped 15 Percent,” reported The New York Times.

*   *   *

“Having the federal government involved in every aspect of the private sector is very dangerous,” Rep. Dan Burton, R-Ind., told Fox News in December 2008.  “In the long term it could cause us to become a quasi-socialist country.”  I don’t see any evidence that we have become a “quasi-socialist country,” just big profits.

Rep. Lamar Smith, R-Texas, called the bailout “the leading edge of the Obama administration’s war on capitalism,” while other members of Congress derided the president’s auto industry task force.  “Of course we know that nobody on the task force has any experience in the auto business, and we heard at the hearing many of them don’t even own cars,” declared Rep. Louie Gohmert, R-Texas, after a hearing on the bailout in May 2009. “And they’re dictating the auto industry for our future? What’s wrong with this picture?”

*   *   *

In the case of the car industry, allowing the market to operate without any intervention by government would have wiped out a large part of the business that is based in Midwestern states.  This irreversible decision would have damaged the economy, many communities and tens of thousands of families.

And contrary to the predictions of the critics, government officials were quite capable of working with the market in restructuring the industry. Government didn’t overturn capitalism.  It tempered the market at a moment when its “natural” forces were pushing toward catastrophe. Government had the resources to buy the industry time.

In fairness, President Obama has finally earned some bragging rights, after punting on health care, the stimulus and financial “reform”.  He knows his Republican opponents will never criticize him for his own “Tora Bora moment” – because to do so would require an admission that a more expensive economic stimulus was necessary in 2009.  As a result, it will be up to an Independent candidate or a Democratic challenger to Obama (less likely these days) to explain that the persistent economic crisis – our own “lost decade” – lingers on as a result of Obama’s “Tora Bora moment”.


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Troublesome Creatures

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A recent piece by Glynnis MacNicol of The Business Insider website led me to the conclusion that Shepard Smith deserves an award.  You might recognize Shep Smith as The Normal Guy at Fox News.  In case you haven’t heard about it yet, a controversy has erupted over a 20-minute crank telephone call made to Wisconsin Governor Scott Walker by a man who identified himself as David Koch, one of two billionaire brothers, famous for bankrolling Republican politicians.  The caller was actually blogger Ian Murphy, who goes by the name, Buffalo Beast.  In a televised discussion with Juan Williams concerning the controversy surrounding Wisconsin Governor Walker, Shep Smith focused on the ugly truth that the Koch brothers are out to “bust labor”.  Here are Smith’s remarks as they appeared at The Wire blog:

It’s all political isn’t it?  Isn’t it just 100% politics? … Have you looked at the list of the top 10 donors to political campaigns?  Seven of those 10 donate to Republicans.  The other three that remain of those top 10, they all donate to Democrats and they are all unions.  Bust the unions, it’s over … . And this started when?  It started with the Koch brothers.  The Koch brothers were organizing…

*   *   *

I’m not taking a side on this, I’m telling you what’s going on … The facts!  But people don’t want to hear the facts … let them get angry, facts are troublesome creatures from time to time.  The Koch brothers, and others, were organized to bust labor, it’s what big business wants to do … this isn’t a new concept.  So they gave a bunch of money to the governor’s campaign.  The governor’s campaign is over.  Now, away we go!  We’re going to try to bust this union up, and that’s what they’re doing … this is political and everyone in the middle is a pawn.

Those “troublesome creatures” called facts have been finding their way into the news to a refreshing degree lately.  Emotional rhetoric has replaced news reporting to such an extreme level that most people seem to have accepted the premise that facts are relative to one’s perception of reality.  The lyrics to “Crosseyed and Painless” by the Talking Heads (written more than 30 years ago) seem to have been a prescient commentary about this situation:

Facts all come with points of view
Facts don’t do what I want them to
Facts just twist the truth around
Facts are living turned inside out

Budgetary disputes are now resolved on an emotional battlefield where facts usually take a back seat to ideology.  Despite this trend, there are occasional commentaries focused on fact-based themes.  One recent example came from David Leonhardt of The New York Times, entitled “Why Budget Cuts Don’t Bring Prosperity”.  The article began with the observation that because so many in Congress believe that budget cuts are the path to national prosperity, the only remaining question concerns how deeply spending should be cut this year.  Mr. Leonhardt provided those misled “leaders” with the facts:

The fundamental problem after a financial crisis is that businesses and households stop spending money, and they remain skittish for years afterward.  Consider that new-vehicle sales, which peaked at 17 million in 2005, recovered to only 12 million last year.  Single-family home sales, which peaked at 7.5 million in 2005, continued falling last year, to 4.6 million.  No wonder so many businesses are uncertain about the future.

Without the government spending of the last two years — including tax cuts — the economy would be in vastly worse shape.  Likewise, if the federal government begins laying off tens of thousands of workers now, the economy will clearly suffer.

That’s the historical lesson of postcrisis austerity movements.  The history is a rich one, too, because people understandably react to a bubble’s excesses by calling for the reverse.  When Franklin Roosevelt was running for president in 1932, he repeatedly called for a balanced budget.

But no matter how morally satisfying austerity may be, it’s the wrong answer.

Leonhardt’s  objective analysis drew this response from Yves Smith of Naked Capitalism:

Did a memo go out?   Leonhardt almost always hews to neoclassical orthodoxy.  This is a big change for him.

Those “troublesome creatures” called facts became the subject of an opinion piece about the budget, written by Bill Schneider for Politico.  While dissecting the emotional motivation responsible for “a dangerous political arms race where the stakes keep escalating”, Schneider set about isolating the fact-based signal from the emotional noise clouding the budget debate:

Many of the programs targeted for big cuts by the House Republicans have a suspiciously ideological tinge:  Planned Parenthood, the Environmental Protection Agency, funds to implement the new health care reform law, National Public Radio, the Corporation for Public Broadcasting, President Bill Clinton’s AmeriCorps program, money for a White House climate change czar.  The Washington Post calls the House budget “an assault on bedrock Democratic priorities.’’

The public is certainly worried about the deficit.  But do people believe the deficit is a crisis demanding immediate and radical action?  That’s not so clear.

In a Pew Research Center poll taken this month, the public was split over whether the federal government’s priority should be reducing the deficit (49 percent) or spending to help the economic recovery (46 percent).  What economic issue worries people the most? Jobs tops the list (44 percent). Fewer than half that say the deficit (19 percent).

Yes, there is an economic crisis in the country.  The crisis is jobs.  So Republicans have to argue that spending cuts will create jobs — an argument that mystifies many economists.

Let’s hope that those “troublesome creatures” keep turning up at debates, “town hall” meetings and in commentaries.  If they cause widespread allergic reactions, let nature run its course.


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Balance Provokes Outrage

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December 13 marked the launch date for an organization named No Labels.  The group describes itself this way:

No Labels is a 501(c)(4) social welfare advocacy organization created to provide a voice for America’s vital center, where ideas are judged on their merits, a position which is underrepresented in our current politics.  No Labels provides a forum and community for Americans of all political backgrounds interested in seeing the nation move not left, not right, but forward.  No Labels encourages all public officials to prioritize the national interest over party interest, and to cease acting on behalf of narrow, if vocal, special interests on the far right or left.

Although No Labels has both a Declaration and a Statement of Purpose, you will find the most useful information about the group on its Frequently Asked Questions page.

As a political centrist, I found most of what I read at the No Labels website appealing enough, although I disagreed with a bit of it.  First of all, the group would have been more aptly-named, “No Polarization” since they aren’t really opposed to labels, as they explained:

We are never asking people to give up their labels, only put them aside to do what’s best for America.

Besides – I enjoy using labels to describe people.  Some of my favorite labels include:  corporatist, plutocrat, oligarch and tool.  Another statement on the No Labels website with which I disagreed was the following remark, from their Statement of Purpose:

We can’t seem to break our addiction to foreign oil.

I would suggest:  “We can’t seem to break our addiction to carbon-based energy sources.”  There is no such thing as “foreign oil”.  The so-called, “American” oil companies are all incorporated in the Cayman Islands and none of them pay income taxes to our government.  All of our oil comes from multinational corporations and it is commingled with “Muslim oil” and “Venezuelan Communist oil” at storage depots.  If the people from No Labels insist on treating us as idiots in the same manner as the two major political parties, they will deservedly fail in their mission.

I was particularly amused by the fact that so many people expressed outrage about the founding of No Labels.  The new organization managed to draw plenty of ire from an assortment of commentators during the past week and it made for some fun reading.  One of the “Founding Leaders” of No Labels is John Avlon of the Huffington Post.  He recently wrote this essay in response to spleen-venting by Rush Limbaugh on the right and Keith Olbermann on the left – both of whom expressed displeasure with the inception of the new association:

“If we do this right, we can discredit this whole mind-set of the ‘moderate center’ being the defining group in American politics,” said Rush.  “Because this No Labels group is going to end up illustrating what a fraudulent idea that whole concept of, ‘There are people who decide issue by issue.  On the left they like certain things, on the right they like certain things.’ ”

So Rush believes that there are no principled Americans who decide what they believe on different policies issue-by-issue.  For someone who talks about freedom a lot, he doesn’t have much faith in free will or free-thinking.  He doesn’t believe that Americans — especially independent voters — can consider themselves fiscally conservative but socially liberal.  You either walk in lockstep as a social conservative and fiscal conservative or you are a ‘hard-core liberal’ — libertarians, apparently, need not apply.

*   *   *

Keith Olbermann named No Labels one of the “worst persons in the world” last night (a badge of honor he gave to me earlier this year).  He called us “wolves in sheep’s clothing,” and “a bunch of fraudulent conservative Democrats pretending to be moderates and a bunch of fraudulent Republicans pretending to be independents.”  Again, there’s the impulse to divide and deny the legitimacy of anyone who doesn’t conform to a hyper-partisan view of politics.

Conservative columnist George Will provided this amusing bit of speculation that the entire effort might simply be a pretext for Michael Bloomberg’s Presidential ambitions:

Often in the year before the year before the year divisible by four, a few political people theatrically recoil from partisanship.  Recently, this ritual has involved speculation about whether New York Mayor Michael Bloomberg might squander a few of his billions to improve America by failing to be elected president.

Oh, snap!  Good one, George!

The strangest reaction to the kick-off of No Labels came from Frank Rich of The New York Times.  The relevant portions of Mr. Rich’s rant seemed to be based on the theme that the Republican-dominated 112th Congress will be intransigent and therefore, President Obama along with his fellow Democrats, must fight intransigence with intransigence.  This formula for gridlock would ultimately prove more harmful to Democrats than Republicans.

The Frank Rich diatribe was particularly bizarre because it rambled all over the place, with rants about people and subjects having nothing to do with No Labels.  Peter Orszag has no connection to No Labels.  So, why did Frank Rich go off on the wild tangent about Orszag, Citigroup and Scott Brown’s contributions from the financial sector as though any of them might have had something to do with No Labels?  Forget about what John Avlon told you concerning Keith Olberman’s putting No Labels on his “worst persons in the world” list.  According to Frank Rich, the entire No Labels effort is actually a “a promotional hobby horse for MSNBC”.  It gets weirder:  Rich believes that because a political consultant (Mark McKinnon) and a fund-raiser (Nancy Jacobson) are “prime movers” for No Labels . . .  therefore “No Labels itself is another manifestation” of the syndrome wherein “both parties are bought off by special interests who game the system and stack it against the rest of us.”  At this point, the only factoid I can find to support that allegation is the inclusion of the term “foreign oil” in the group’s Statement of Purpose.  So, I’ll keep an open mind.  Besides, I enjoy a good conspiracy theory as well as Jesse Ventura’s television program with the same name.  Nevertheless, it becomes difficult to stick with Frank Rich’s theory that by failing to seek re-election as Senator of Indiana, Evan Bayh deliberately “facilitated the election of a high-powered corporate lobbyist, Dan Coats, as his Republican successor”.  The fact that Bayh’s father, former Senator Birch Bayh, is a lobbyist is interposed to emphasize the likelihood that Evan will also become a lobbyist.  Is this discussion being offered to explain that Evan Bayh “stepped aside” to allow Dan Coats to become Senator because Bayh has a genetic pre-disposition to the “Lobbyist Code of Dishonor”?  If so, in what manner does this impact No Labels?  Guilt by association?

The animosity generated by this group’s stand against what it calls “hyper-partisanship” demonstrates that the opponents of No Labels are advocates of hyper-partisanship.  In the days ahead, it will be interesting to see who else speaks out to “give acrimony a chance”.


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Libertarian Accuses Socialist Of Selling Out

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Quite a bit has been written about the Federal Reserve’s December 1 release of documents revealing the details of its bailouts to those business entities benefiting from the Fed’s eleven emergency lending programs initiated as a result of the 2008 financial crisis.  When you consider the fact that those documents concern over 21,000 transactions, all the attention should come as no surprise.

The two individuals who seem to have benefited the most from this event are Congressman Ron Paul and Senator Bernie Sanders.  The two became unlikely allies in their battle to include an “Audit the Fed” provision in the financial reform bill.  Ron Paul, the Libertarian Republican from Texas (considered the “Godfather of the Tea Party movement”) authored the book, End The Fed.  Congressman Paul sponsored the original “Audit the Fed” proposal in the House of Representatives – H.R. 1207.  Bernie Sanders, who describes himself as a democratic socialist, sponsored the watered-down “Audit the Fed” bill — S. 3217 — which replaced Congressman Paul’s version in what finally became known as the Restoring Financial Stability Act of 2010.

A recent article in The Wall Street Journal by Maya Jackson Randall recalled the backstory of how the Sanders proposal was incorporated into the financial reform bill:

Under pressure from the Obama administration, Mr. Sanders, who has described himself as a democratic socialist, made last-minute changes to his proposal; it doesn’t require audits of monetary policy, and it doesn’t require disclosure of the names of banks that use the discount window.

An unhappy Paul, a long-time Fed critic, said Mr. Sanders had “sold out.”

Who would have ever thought that a Libertarian Republican would, one day, accuse a democratic socialist of “selling out” on a bill to regulate the financial industry?

With the Republicans’ becoming the majority party in the House, the numerous committee chairmanships will now pass from the Democrats to the GOP for the 112th Congress.  Although quite a bit of concern has been expressed by liberal pundits that the banking lobby will now have unfettered control over Congress, many banking industry lobbyists are sweating over the fact that Ron Paul will be the likely Chairman of the House Financial Services Committee.  That fear and the efforts by ranking Republicans to assuage that dread were discussed in a recent article by Phil Mattingly and Robert Schmidt for Bloomberg BusinessWeek:

Five GOP leadership aides, speaking anonymously because a decision isn’t final, say incoming House Speaker John Boehner has discussed ways to prevent Paul from becoming chairman or to keep him on a tight leash if he does.  If Boehner, who will help determine who gets to chair subcommittees as early as Dec. 8, rejects Paul, he may have to contend with thousands of grassroots supporters and dozens of younger lawmakers who see Paul as a hero.  Boehner, through a spokesman, declined to comment.  “A lot of the older members probably think Ron is a little bit out of step,” says Representative Bill Posey, a Florida Republican and unabashed Paul fan.  “The depth of his knowledge on monetary policy, his understanding of it all, is second to none.”

Nevertheless, Ron Paul accused a socialist of  “selling out” by capitulating to the pressure exerted by the banking lobby through its puppet – the Obama administration.  His use of such a reproach demonstrates that Congressman Paul cannot be trusted to make certain that the House Financial Services Committee serves as a tool of the banking lobby.  Beyond that, the extreme, partisan elements of the Republican Party cannot depend on Congressman Paul to “follow the script” written to portray Obama as the socialist.

As the Bloomberg BusinessWeek article pointed out, any efforts to deprive Congressman Paul of this chairmanship will guarantee some serious blowback from the Tea Party ranks as well as the other supporters of Ron Paul.  John Boehner is in a serious double-bind here.  If he allows Paul to assume the chairmanship, Boehner’s anticipated efforts to keep Paul “on a tight leash” should provide some good entertainment.


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Fedbashing Is On The Rise

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It seems as though everyone is bashing the Federal Reserve these days.  In my last posting, I criticized the Fed’s most recent decision to create $600 billion out of thin air in order to purchase even more treasury securities and mortgage-backed securities by way of the recently-announced, second round of quantitative easing (referred to as QE2).  Since that time, I’ve seen an onslaught of outrage directed against the Fed from across the political spectrum.  Bethany McLean of Slate made a similar observation on November 9.  As the subtitle to her piece suggested, people who criticized the Fed were usually considered “oddballs”.  Ms. McLean observed that the recent Quarterly Letter by Jeremy Grantham (which I discussed here) is just another example of anti-Fed sentiment from a highly-respected authority.  Ms. McLean stratified the degrees of anti-Fed-ism this way:

If Dante had nine circles of hell, then the Fed has three circles of doubters.  The first circle is critical of the Fed’s current policies. The second circle thinks that the Fed has been a menace for a long time.  The third circle wants to seriously curtail or even get rid of the Fed.

From the conservative end of the political spectrum, the Republican-oriented Investor’s Business Daily provided an editorial on November 9 entitled, “Fighting The Fed”.  More famously, in prepared remarks to be delivered during a trade association meeting in Phoenix, Sarah Palin ordered Federal Reserve chairman Ben Bernanke to “cease and desist” his plan to proceed with QE2.  As a result of the criticism of her statement by Sudeep Reddy of The Wall Street Journal’s Real Time Economics blog, it may be a while before we hear Ms. Palin chirping about this subject again.

The disparagement directed against the Fed from the political right has been receiving widespread publicity.  I was particularly impressed by the pummeling Senator Jim Bunning gave Ben Bernanke during the Federal Reserve Chairman’s appearance before the Senate Banking Committee for Bernanke’s confirmation hearing on December 3, 2009.  Here is the most-frequently quoted portion of Bunning’s diatribe:

.   .   .   you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail.  Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.

Michael Grunwald, author of Time magazine’s “Person of the Year 2009” cover story on Ben Bernanke, saw fit to write a sycophantic “puff piece” in support of Bernanke’s re-confirmation as Fed chairman.  In that essay, Grunwald attempted to marginalize Bernanke’s critics with this statement:

The mostly right-leaning (deficit) hawks rail about Helicopter Ben, Zimbabwe Ben and the Villain of the Year,   . . .

The “Helicopter Ben” piece was written by Larry Kudlow.  The “Zimbabwe Ben” and “Villain of the Year” essays were both written by Adrienne Gonzalez of the Jr. Deputy Accountant website, who saw her fanbase grow exponentially as a result of Grunwald’s remark.  The most amusing aspect of Grunwald’s essay in support of Bernanke’s confirmation was the argument that the chairman could be trusted to restrain his moneyprinting when confronted with demands for more monetary stimulus:

Still, doves want to know why he isn’t providing even more gas. Part of the answer is that he doesn’t seem to think that pouring more cash into the banking system would generate many jobs, because liquidity is not the current problem.  Banks already have reserves; they just aren’t using them to make loans and spur economic activity.  Bernanke thinks injecting even more money would be like pushing on a string.
*   *   *

To Bernanke, the benefits of additional monetary stimulus would be modest at best, while the costs could be disastrous. Reasonable economists can and do disagree.

Compare and contrast that Bernanke with the Bernanke who explained his rationale for more monetary stimulus in the November 4, 2010 edition of The Washington Post:

The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed.

*   *   *

But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.

Bernanke should have said:  “Pushing on a string should help us fulfill that obligation.”

Meanwhile, the Fed is getting thoroughly bashed from the political left, as well.  The AlterNet website ran the text of this roundtable discussion from the team at Democracy Now (Michael Hudson, Amy Goodman and Juan Gonzalez – with a cameo appearance by Joseph Stiglitz) focused on the question of whether QE2 will launch an “economic war on the rest of the world”.  I enjoyed this opening remark by Michael Hudson:

The head of the Fed is known as “Helicopter Ben” because he talks about dropping money into the economy.  But if you see helicopters, they’re probably not your friends.  Don’t go out and wait for them to drop the money, because the money is all going electronically into the banks.

At the progressive-leaning TruthDig website, author Nomi Prins discussed the latest achievement by that unholy alliance of Wall Street and the Federal Reserve:

The Republicans may have stormed the House, but it was Wall Street and the Fed that won the election.

*   *   *

That $600 billion figure was about twice what the proverbial “analysts” on Wall Street had predicted.  This means that, adding to the current stash, the Fed will have shifted onto its books about $1 trillion of the debt that the Treasury Department has manufactured.  That’s in addition to $1.25 trillion more in various assets backed by mortgages that the Fed is keeping in its till (not including AIG and other backing) from the 2008 crisis days.  This ongoing bailout of the financial system received not a mention in pre- or postelection talk.

*   *   *

No winning Republican mentioned repealing the financial reform bill, since it doesn’t really actually reform finance, bring back Glass-Steagall, make the big banks smaller or keep them from creating complex assets for big fees.  Score one for Wall Street.  No winning Democrat thought out loud that maybe since the Republican tea partyers were so anti-bailouts they should suggest a strategy that dials back ongoing support for the banking sector as it continues to foreclose on homes, deny consumer and small business lending restructuring despite their federal windfall, and rake in trading profits.  The Democrats couldn’t suggest that, because they were complicit.  Score two for Wall Street.

In other words, nothing will change.  And that, more than the disillusionment of his supporters who had thought he would actually stand by his campaign rhetoric, is why Obama will lose the White House in 2012.

The only thing I found objectionable in Ms. Prins’ essay was her reference to “the pro-bank center”.  Since when is the political center “pro-bank”?  Don’t blame us!

As taxpayer hostility against the Fed continues to build, expect to see this book climb up the bestseller lists:  The Creature from Jekyll Island.   It’s considered the “Fedbashers’ bible”.


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Two Years Too Late

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October 11, 2010

Greg Gordon recently wrote a fantastic article for the McClatchy Newspapers, in which he discussed how former Treasury Secretary Hank Paulson failed to take any action to curb risky mortgage lending.  It should come as no surprise that Paulson’s nonfeasance in this area worked to the benefit of Goldman Sachs, where Paulson had presided as CEO for the eight years prior to his taking office as Treasury Secretary on July 10, 2006.  Greg Gordon’s article provided an interesting timeline to illustrate Paulson’s role in facilitating the subprime mortgage crisis:

In his eight years as Goldman’s chief executive, Paulson had presided over the firm’s plunge into the business of buying up subprime mortgages to marginal borrowers and then repackaging them into securities, overseeing the firm’s huge positions in what became a fraud-infested market.

During Paulson’s first 15 months as the treasury secretary and chief presidential economic adviser, Goldman unloaded more than $30 billion in dicey residential mortgage securities to pension funds, foreign banks and other investors and became the only major Wall Street firm to dramatically cut its losses and exit the housing market safely.  Goldman also racked up billions of dollars in profits by secretly betting on a downturn in home mortgage securities.

By now, the rest of that painful story has become a burden for everyone in America and beyond.  Paulson tried to undo the damage to Goldman and the other insolvent, “too big to fail” banks at taxpayer expense with the TARP bailouts.  When President Obama assumed office in January of 2009, his first order of business was to ignore the advice of Adam Posen (“Temporary Nationalization Is Needed to Save the U.S. Banking System”) and Professor Matthew Richardson.  The consequences of Obama’s failure to put those “zombie banks” through temporary receivership were explained by Karen Maley of the Business Spectator website:

Ireland has at least faced up to the consequences of the reckless lending, unlike the United States.  The Obama administration has adopted a muddle-through approach, hoping that a recovery in housing prices might mean that the big US banks can avoid recognising crippling property losses.

*   *   *

Leading US bank analyst, Chris Whalen, co-founder of Institutional Risk Analytics, has warned that the banks are struggling to cope with the mountain of problem home loans and delinquent commercial property loans.  Whalen estimates that the big US banks have restructured less than a quarter of their delinquent commercial and residential real estate loans, and the backlog of problem loans is growing.

This is eroding bank profitability, because they are no longer collecting interest on a huge chunk of their loan book.  At the same time, they also face higher administration and legal costs as they deal with the problem property loans.

Banks nursing huge portfolios of problem loans become reluctant to make new loans, which chokes off economic activity.

Ultimately, Whalen warns, the US government will have to bow to the inevitable and restructure some of the major US banks.  At that point the US banking system will have to recognise hundreds of billions of dollars in losses from the deflation of the US mortgage bubble.

If Whalen is right, Ireland is a template of what lies ahead for the US.

Chris Whalen’s recent presentation, “Pictures of Deflation” is downright scary and I’m amazed that it has not been receiving the attention it deserves.  Surprisingly — and ironically – one of the only news sources discussing Whalen’s outlook has been that peerless font of stock market bullishness:  CNBC.   Whalen was interviewed on CNBC’s Fast Money program on October 8.  You can see the video here.  The Whalen interview begins at 7 minutes into the clip.  John Carney (formerly of The Business Insider website) now runs the NetNet blog for CNBC, which featured this interview by Lori Ann LoRocco with Chris Whalen and Jim Rickards, Senior Managing Director of Market Intelligence at Omnis, Inc.  Here are some tidbits from this must-read interview:

LL:  Chris, when are you expecting the storm to hit?

CW:  When the too big to fail banks can no longer fudge the cost of restructuring their real estate exposures, on and off balance sheet. Q3 earnings may be the catalyst

LL:  What banks are most exposed to this tsunami?

CW:  Bank of America, Wells Fargo, JPMorgan, Citigroup among the top four.  GMAC.  Why do we still refer to the ugly girls — Bank of America, JPMorgan and Wells Fargo in particular — as zombies?  Because the avalanche of foreclosures and claims against the too-big-too-fail banks has not even crested.

*   *   *

LL:  How many banks to expect to fail next year because of this?

CW:  The better question is how we will deal with the process of restructuring.  My view is that the government/FDIC can act as receiver in a government led restructuring of top-four banks.  It is time for PIMCO, BlackRock and their bond holder clients to contribute to the restructuring process.

Of course, this restructuring could have and should have been done two years earlier — in February of 2009.  Once the dust settles, you can be sure that someone will calculate the cost of kicking this can down the road — especially if it involves another round of bank bailouts.  As the saying goes:  “He who hesitates is lost.”  In this case, President Obama hesitated and we lost.  We lost big.



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We Took The Wrong Turn

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October 7, 2010

The ugly truth has raised its head once again.  We did it wrong and Australia did it right.  It was just over a year ago – on September 21, 2009 – when I wrote a piece entitled, “The Broken Promise”.  I concluded that posting with this statement:

If only Mr. Obama had stuck with his campaign promise of “no more trickle-down economics”, we wouldn’t have so many people wishing they lived in Australia.

I focused that piece on a fantastic report by Australian economist Steve Keen, who explained how the “money multiplier” myth, fed to Obama by the very people who caused the financial crisis, was the wrong paradigm to be starting from in attempting to save the economy.

The trouble began immediately after President Obama assumed office.  I wasn’t the only one pulling out my hair in February of 2009, when our new President decided to follow the advice of Larry Summers and “Turbo” Tim Geithner.  That decision resulted in a breach of Obama’s now-infamous campaign promise of “no more trickle-down economics”.  Obama decided to do more for the zombie banks of Wall Street and less for Main Street – by sparing the banks from temporary receivership (also referred to as “temporary nationalization”) while spending less on financial stimulus.  Obama ignored the 50 economists surveyed by Bloomberg News, who warned that an $800 billion stimulus package would be inadequate.  At the Calculated Risk website, Bill McBride lamented Obama’s strident posturing in an interview conducted by Terry Moran of ABC News, when the President actually laughed off the idea of implementing the so-called “Swedish solution” of putting those insolvent banks through temporary receivership.

With the passing of time, it has become painfully obvious that President Obama took the country down the wrong path.  The Australian professor (Steve Keen) was right and Team Obama was wrong.  Economist Joseph Stiglitz made this observation on August 5, 2010:

Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world.  He realized that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon.  So the first part of the stimulus was cash grants, followed by investments, which would take longer to put into place.

Rudd’s stimulus worked:  Australia had the shortest and shallowest of recessions of the advanced industrial countries.

Fast-forward to October 6, 2010.  Michael Heath of Bloomberg BusinessWeek provided the latest chapter in the story of how America did it wrong while Australia did it right:

Australian Employers Added 49,500 Jobs in September

Australian employers in September added the most workers in eight months, driving the country’s currency toward a record and bolstering the case for the central bank to resume raising interest rates.

The number of people employed rose 49,500 from August, the seventh straight gain, the statistics bureau said in Sydney today.  The figure was more than double the median estimate of a 20,000 increase in a Bloomberg News survey of 25 economists.  The jobless rate held at 5.1 percent.

Meanwhile — back in the States — on October 6, ADP released its National Employment Report for September, 2010.  It should come as no surprise that our fate is 180 degrees away from that of Australia:  Private sector employment in the U.S. decreased by 39,000 from August to September on a seasonally adjusted basis, according to the ADP report.   Beyond that, October 6 brought us a gloomy forecast from Jan Hatzius, chief U.S. economist for the ever-popular Goldman Sachs Group.  Wes Goodman of Bloomberg News quoted Hatzius as predicting that the United States’ economy will be “fairly bad” or “very bad” over the next six to nine months:

“We see two main scenarios,” analysts led by Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients.  “A fairly bad one in which the economy grows at a 1 1/2 percent to 2 percent rate through the middle of next year and the unemployment rate rises moderately to 10 percent, and a very bad one in which the economy returns to an outright recession.”

Aren’t we lucky!  How wise of President Obama to rely on Larry Summers to the exclusion of most other economists!

Charles Ferguson, director of the new documentary film, Inside Job, recently offered this analysis of the milieu that facilitated the opportunity for Larry Summers to inflict his painful legacy upon us:

Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge of coordinating U.S. economic policy, deftly marginalizing others who challenged him.  Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations — quite a feat.  Never once has Summers publicly apologized or admitted any responsibility for causing the crisis.  And now Harvard is welcoming him back.

Summers is unique but not alone.  By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government.  What few Americans realize is that the revolving door is now a three-way intersection.  Summers’ career is the result of an extraordinary and underappreciated scandal in American society:  the convergence of academic economics, Wall Street, and political power.

*     *     *

Now, however, as the national recovery is faltering, Summers is being eased out while Harvard is welcoming him back.  How will the academic world receive him?  The simple answer:  Better than he deserves.

Australia is looking better than ever  —  especially when you consider that their spring season is just beginning right now     .   .   .




Party Out Of Bounds

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October 4, 2010

It’s refreshing to witness the expansion in the number of people looking forward to the demise of our two-party political system.  Tom Friedman of The New York Times recently gushed with enthusiasm about the idea of  “a serious third party”, capable of rising to the challenge of enacting important, urgently-needed legislation without offending the far left, the far right or “coal state Democrats”.  Friedman is only half-right.  We need a third, a fourth, a fifth and a sixth party, as well.  Placing all of one’s hope in THE Third Party is a formula for more disappointment.

I frequently complain that we no longer have two distinct political parties running America.  We are currently stuck under the regime of the Republi-cratic Corporatist Party.  The widely-expressed disappointment resulting from President Obama’s failure to keep his campaign promises was discussed in my previous four postings.

Salena Zito of the Pittsburgh Tribune-Review wrote a great article about her year of traveling 6,609 miles to interview 432 people identifying themselves as Democrats.  Here’s what she learned:

In coffee shops, on streetcorners and farms, at factories, the narrative was always the same:  How could such great promise have let the country down so much, so quickly?

Ms. Zito reached the conclusion that the man elected President by these voters was really no improvement from the 2004 candidate, John Kerry:

Obama is no less out of touch than the Kerry whom America watched windsurf  before the 2004 election — the same man who said last week that one reason Democrats will lose this year is that “we have an electorate that doesn’t always pay that much attention to what’s going on, so people are influenced by a simple slogan rather than the facts or the truth or what’s happening.”

Here’s where Kerry and Obama are both wrong:  The electorate that was influenced by a simple slogan – “Yes, we can” — in 2008 actually is very well-informed.

This time, that electorate isn’t voting for a dream, but for its pocketbook.

Throughout the current election cycle, the Democratic establishment has avoided the sort of challenge experienced by the Republican establishment in the form of the Tea Party movement.  That will change after November 2, at which point disgruntled Democrats will feel more comfortable jumping ship.  It took consecutive humiliations at the polls in 2006 and 2008 before the Tea Partiers were motivated to break ranks with the Republican powers that be and undertake campaigns to challenge Republican incumbents.  Their efforts paid off so well, many Tea Partiers have become enthused about having a distinct party from the Republican organization.  After the 2010 elections are concluded, we can expect to see splinter groups breaking away from the Democratic Party.

Back on April 22, Mark Willen, Senior Political Editor of The Kiplinger Letter, wrote an interesting piece, lamenting the disadvantage experienced by moderate candidates because the political primary process facilitates victory for the choices of extremist voters as a result of the enthusiasm gap.  (Extremists are more motivated to vote in primaries than moderate voters, who don’t consider themselves crusaders for a particular agenda.)  Willen sees the two parties being pushed to ideological extremes, despite the fact that most Americans consider themselves to be in the center of the political spectrum.  Another important point from that piece concerns the fact that info-tainment programs presenting extremist views get better ratings than programs featuring commentary that really is “fair and balanced”.  As a result, cable television audiences are regularly exposed to a bombardment of caustic rhetoric.

The 2012 elections could bring us a significant increase in the number of  “independent” candidates, as well as nominees from new political parties.  A change of that nature could close future mid-term enthusiasm gaps, occurring in the November elections (such as the one expected for this year).  The prospects for a larger, more diverse group of political parties are looking better with each passing day.



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Fighting The Old War

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September 30, 2010

The New York Times recently ran a story about Mayor Michael Bloomberg’s efforts to support the campaigns of centrist Republicans out of concern that the election of “Tea Party” –  backed candidates was pushing the Republican Party to the extreme right.  The article by Michael Barbaro began this way:

In an election year when anger and mistrust have upended races across the country, toppling moderates and elevating white-hot partisans, Mayor Michael R. Bloomberg is trying to pull politics back to the middle, injecting himself into marquee contests and helping candidates fend off the Tea Party.

Although it’s nice to see Mayor Bloomberg take a stand in support of centrism, I believe he is going about it the wrong way.  There are almost as many different motives driving people to the Tea Party movement as there are attendees at any given Tea Party event.  Although the movement is usually described as a far-right-wing fringe phenomenon, reporters who have attended the rallies and talked to the people found a more diverse group.  Consider the observations made by True Slant’s David Masciotra, who attended a Tea Party rally in Valparaiso, Indiana back on April 14:

The populist anger of the Northwest Indiana tea partiers could be moved to a left-wing protest rally without much discernible difference.

As much as the NWI Patriots seemed to hate Obama and health care reform, they also hate large corporations and the favorable treatment they are given by Washington.

*   *   *

They have largely legitimate concerns and grievances about the quality of their lives and future of their children’s lives that are not being addressed in Washington by either party.  Their wages have stagnated, while the cost of raising a family has crushingly increased.

My pet theory is that the rise of the Tea Party movement is just the first signal indicating the demise of the so-called “two-party system”.  I expect this to happen as voters begin to face up to the fact that the differences between Democratic and Republican policies are subtle when compared to the parties’ united front with lobbyists and corporations in trampling the interests of individual citizens.  On July 26, I wrote a piece entitled, “The War On YOU”, discussing the battle waged by “our one-party system, controlled by the Republi-cratic Corporatist Party”.   On August 30, I made note of a recent essay at the Zero Hedge website, written by Michael Krieger of KAM LP.  One of Krieger’s points, which resonated with me, was the idea that whether you have a Democratic administration or a Republican administration, both parties are beholden to the financial elites, so there’s not much room for any “change you can believe in”:

.   .  .   the election of Obama has proven to everyone watching with an unbiased eye that no matter who the President is they continue to prop up an elite at the top that has been running things into the ground for years.  The appointment of Larry Summers and Tiny Turbo-Tax Timmy Geithner provided the most obvious sign that something was seriously not kosher.  Then there was the reappointment of Ben Bernanke.  While the Republicans like to simplify him as merely a socialist he represents something far worse.

Barry Ritholtz, publisher of The Big Picture website, recently wrote a piece focused on how the old Left vs. Right paradigm has become obsolete.  He explained that the current power struggle taking place in Washington (and everywhere else) is the battle of corporations against individuals:

We now live in an era defined by increasing Corporate influence and authority over the individual.  These two “interest groups” – I can barely suppress snorting derisively over that phrase – have been on a headlong collision course for decades, which came to a head with the financial collapse and bailouts.  Where there are massive concentrations of wealth and influence, there will be abuse of power.  The Individual has been supplanted in the political process nearly entirely by corporate money, legislative influence, campaign contributions, even free speech rights.

*   *   *

For those of you who are stuck in the old Left/Right debate, you are missing the bigger picture.  Consider this about the Bailouts:  It was a right-winger who bailed out all of the big banks, Fannie Mae, and AIG in the first place; then his left winger successor continued to pour more money into the fire pit.

What difference did the Left/Right dynamic make?   Almost none whatsoever.

*   *   *

There is some pushback already taking place against the concentration of corporate power:  Mainstream corporate media has been increasingly replaced with user created content – YouTube and Blogs are increasingly important to news consumers (especially younger users).  Independent voters are an increasingly larger share of the US electorate. And I suspect that much of the pushback against the Elizabeth Warren’s concept of a Financial Consumer Protection Agency plays directly into this Corporate vs. Individual fight.

But the battle lines between the two groups have barely been drawn.  I expect this fight will define American politics over the next decade.

Keynes vs Hayek?  Friedman vs Krugman?  Those are the wrong intellectual debates.  It’s you vs. Tony Hayward, BP CEO,  You vs. Lloyd Blankfein, Goldman Sachs CEO.   And you are losing    . . .

Barry Ritholtz concluded with the statement:

If you see the world in terms of Left & Right, you really aren’t seeing the world at all  . . .

I couldn’t agree more.  Beyond that, I believe that politicians who continue to champion the old Left vs. Right war will find themselves in the dust as those leaders representing the interests of human citizens  rather than corporate interests win the support and enthusiasm of the electorate.   Similarly, those news and commentary outlets failing to adapt to this changing milieu will no longer have a significant following.  It will be interesting to see who adjusts.