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Ignoring The Root Cause

June 17th, 2010 Posted in Uncategorized
Jun, 17 2010
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June 17, 2010

The predominant criticism of the so-called “financial reform” bill is its failure to address the problems caused by the existence of financial institutions considered “too big to fail”.  In an essay entitled, “Creating the Next Crisis” economist Simon Johnson discussed the consequences of this legislative let-down:

On the critical dimension of excessive bank size and what it implies for systemic risk, there was a concerted effort by Senators Ted Kaufman and Sherrod Brown to impose a size cap on the largest banks – very much in accordance with the spirit of the original “Volcker Rule” proposed in January 2010 by Obama himself.  In an almost unbelievable volte face, for reasons that remain somewhat mysterious, Obama’s administration itself shot down this approach.  “If enacted, Brown-Kaufman would have broken up the six biggest banks in America,” a senior Treasury official said.  “If we’d been for it, it probably would have happened.  But we weren’t, so it didn’t.”

*   *   *

The US financial sector received an unconditional bailout – and is not now facing any kind of meaningful re-regulation.  We are setting ourselves up, without question, for another boom based on excessive and reckless risk-taking at the heart of the world’s financial system.  This can end only one way:  badly.

One would assume that an important lesson learned from the 2008 financial crisis was the idea that a corporation shouldn’t be permitted to blackmail the country with threats that its own financial collapse would have such a dire impact on society-at-large that the corporation should be bailed out by the taxpayers.  The resulting problem is called “moral hazard” because such businesses are encouraged to act irresponsibly by virtue of the certainty that they will be bailed out if their activities prove self-destructive.

Gonzalo Lira wrote a piece for the Naked Capitalism blog, explaining how the moral hazard resulting from the “too big to fail” doctrine is facilitating a state of corporate anarchy:

In a nutshell, in this era of corporate anarchy, corporations do not have to abide by any rules — none at all.  Legal, moral, ethical, even financial rules are irrelevant.  They have all been rescinded in the pursuit of profit — literally nothing else matters.

As a result, corporations currently exist in a state of almost pure anarchy — but an anarchy directly related to their size:  The larger the corporation, the greater its absolute freedom to do and act as it pleases.  That’s why so many medium-sized corporations are hell-bent on growth over profits:  The biggest of them all, like BP and Goldman Sachs, live in a positively Hobbesian State of Nature, free to do as they please, with nary a consequence.

Good-old British Petroleum – the latest beneficiary of the “too big to fail doctrine”  — can rely on its size to avoid any sanctions it considers unacceptable because too many “small people” might lose their jobs if BP can’t stay fat and happy.  Gonzalo Lira’s analysis went a step further:

Worst of all, BP realizes that, if it finally cannot get a handle on the oil spill disaster, they can simply fob it off on the U.S. Government — in other words, the people of the United States will wind up cleaning BP’s mess.  BP knows that no one will hold it accountable — BP knows that it will get away with it.

*   *   *

This era of corporate anarchy is reaching a crisis point — we can all sense it.  Yet the leadership in the United States and Europe is making no effort to solve the root problem.  Perhaps they don’t see the problem.  Perhaps they are beholden to corporate masters.  Whatever the case, in his speech, President Obama made ridiculous references to “clean energy” while ignoring the cause of the BP oil spill disaster, the cause of the financial crisis, the cause of the spiralling health-care costs — the corporate anarchy that underlines them all.

This era of corporate anarchy is wrecking the world — literally, if you’ve been tuning in to images of the oil billowing out a mile down in the Gulf of Mexico.

Mr. Lira discussed how a leadership void has been helping corporate anarchy overtake democratic capitalism:

Obama is a corporatist — he’s one of Them.  So there’ll be more bullshit talk about “clean energy” and “energy independence”, while the root cause — corporate anarchy — is left undisturbed.

The failure of President Obama to take advantage of the opportunity to address this “root cause” in his Oval Office address concerning the Deepwater Horizon disaster, inspired Robert Reich to make this comment:

Whether it’s Wall Street or health insurers or oil companies, we are approaching a turning point.  The top executives of powerful corporations are pursuing profits in ways that menace the nation.  We have not seen the likes not since the late nineteenth century when the “robber barons” of finance, oil, and the giant trusts ran roughshod over America.  Now, as then, they are using their wealth and influence to buy off legislators and intimidate the regions that depend on them for jobs.  Now, as then, they are threatening the safety and security of our people.

One of my favorite commentators, Paul Farrell of MarketWatch, recently warned us about the consequences of allowing corporate anarchy to destroy democratic capitalism:

The rise of uncontrolled corporate greed killed the “Invisible Hand,” the “soul” of capitalism that Adam Smith saw in 1776 as a divine force serving “the common good.”  Today the system has no moral compass.  Wall Street’s insatiable greed has destroyed capitalism from within, turning America’s economy into a soulless zombie.

The “Invisible Hand” Adam Smith saw as essential to capitalism in “The Theory of Moral Sentiments” died in endless battles fought by 261,000 lobbyists each wanting a bigger piece of the $1.7 trillion federal budget pie plus favorable laws protecting, vesting and increasing the power and wealth of their special interest clients.  Future historians will call this ideological battle replacing democracy the new “American Capitalists Anarchy.”

*   *   *

As a New York Times reviewer put it:  Nations like “China and Russia are using what he calls ‘state capitalism’ to advance the interests of their companies at the expense of their American rivals.”  Global pandemic?

Unfortunately while America wastes trillions to bail out inefficient too-stupid-to-fail banks, our competition is bankrolling healthy state-controlled corporations to destroy us  . . .

If we ever reach the point when the watered-down “financial reform” bill finally becomes law, the taxpayers should insist that their government move on to address the “root cause” of corporate anarchy by taking up campaign finance reform.  That should be one hell of a fight!



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Getting It Reich

April 8th, 2010 Posted in Uncategorized
Apr, 08 2010
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April 8, 2010

Robert Reich, former Secretary of Labor under President Clinton, has been hitting more than a few home runs lately.   At a time when too many commentators remain in lock-step with their favorite political party, Reich pulls no punches when pointing out the flaws in the Obama administration’s agenda.  I particularly enjoyed his reaction to the performance of Larry Summers on ABC television’s This Week on April 4:

I’m in the “green room” at ABC News, waiting to join a roundtable panel discussion on ABC’s weekly Sunday news program, This Week.

*   *   *

Larry Summers was interviewed just before Greenspan. He said the economy is expanding, that the Administration is doing everything it can to bring jobs back, and that the regulatory reform bills moving on the Hill will prevent another financial crisis.

What?

*   *   *

If any three people are most responsible for the failure of financial regulation, they are Greenspan, Larry Summers, and my former colleague, Bob Rubin.

*   *   *

I dislike singling out individuals for blame or praise in a political system as complex as that of the United States but I worry the nation is not on the right economic road, and that these individuals — one of whom advises the President directly and the others who continue to exert substantial influence among policy makers — still don’t get it.

The direction financial reform is taking is not encouraging.  Both the bill that emerged from the House and the one emerging from the Senate are filled with loopholes that continue to allow reckless trading of derivatives.  Neither bill adequately prevents banks from becoming insolvent because of their reckless trades.  Neither limits the size of banks or busts up the big ones.  Neither resurrects the Glass-Steagall Act. Neither adequately regulates hedge funds.

More fundamentally, neither bill begins to rectify the basic distortion in the national economy whose rewards and incentives are grotesquely tipped toward Wall Street and financial entrepreneurialism, and away from Main Street and real entrepreneurialism.

Is it because our elected officials just don’t understand what needs to be done to prevent another repeat of the financial crisis – or is the unwillingness to take preventative action the result of pressure from lobbyists?  I think they’re just playing dumb while they line their pockets with all of that legalized graft. Meanwhile, Professor Reich continued to function as the only adult in the room, with this follow-up piece:

Needless to say, the danger of an even bigger cost in coming years continues to grow because we still don’t have a new law to prevent what happened from happening again.  In fact, now that they know for sure they’ll be bailed out, Wall Street banks – and those who lend to them or invest in them – have every incentive to take even bigger risks.  In effect, taxpayers are implicitly subsidizing them to do so.

*   *   *

But the only way to make sure no bank it too big to fail is to make sure no bank is too big.  If Congress and the White House fail to do this, you have every reason to believe it’s because Wall Street has paid them not to.

Reich’s recent criticism of the Federal Reserve was another sorely-needed antidote to Ben Bernanke’s recent rise to media-designated sainthood.  In an essay quoting Republican Senator Jim DeMint of South Carolina, Reich transcended the polarized political climate to focus on the fact that the mysterious Fed enjoys inappropriate authority:

The Fed has finally came clean.  It now admits it bailed out Bear Stearns – taking on tens of billions of dollars of the bank’s bad loans – in order to smooth Bear Stearns’ takeover by JP Morgan Chase.  The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed.  The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout.

The losses from those deals still total tens of billions, and taxpayers are ultimately on the hook.  But the public never knew.  There was no congressional oversight.  It was all done behind closed doors. And the New York Fed – then run by Tim Geithner – was very much in the center of the action.

*   *   *

The Fed has a big problem.  It acts in secret.  That makes it an odd duck in a democracy.  As long as it’s merely setting interest rates, its secrecy and political independence can be justified. But once it departs from that role and begins putting billions of dollars of taxpayer money at risk — choosing winners and losers in the capitalist system — its legitimacy is questionable.

You probably thought that Ron Paul was the only one who spoke that way about the Federal Reserve.  Fortunately, when people such as Robert Reich speak out concerning the huge economic and financial dysfunction afflicting America, there is a greater likelihood that those with the authority to implement the necessary reforms will do the right thing.  We can only hope.



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More Damned Lies Than You Can Count

March 15th, 2010 Posted in Uncategorized
Mar, 15 2010
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March 15, 2010

Thanks to the great work of Anton Valukas, as court-appointed bankruptcy examiner investigating the collapse of Lehman Brothers, people are finally beginning to realize how significant a role fraud plays on Wall Street.  It turned out that the Enron scandal wasn’t the once-in-a-lifetime event people thought it was.  Accounting fraud occurs on a regular basis, as does fraudulent stock price manipulation.  The 2200-page report prepared by Valukas and his team at Jenner & Block has everyone talking.  It’s about time.

Other lies are getting more exposure as well.  President Obama justified the bank bailouts with the rationale that giving the money to the banks creates a “money multiplier” effect because banks can loan out 8-10 dollars for every bailout dollar they get, giving the economy more bang for the bailout buck.  As I pointed out on September 21, Australian economist Steve Keen published a fantastic report from his website, explaining how the “money multiplier” myth, fed to Obama by the very people who helped cause the crisis, was the wrong paradigm to be starting from in attempting to save the economy.  Here’s some of what Professor Keen had to say:

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.  (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook.  Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt:  “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

*  *  *

If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375% — more than twice the level that ushered in the Great Depression.

This is a rescue?  It’s a “hair of the dog” cure:  having booze for breakfast to overcome the feelings of a hangover from last night’s binge.  It is the road to debt alcoholism, not the road to teetotalism and recovery.

Fortunately, it’s a “cure” that is also highly unlikely to work, because the model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

Now that Australia’s economy is beginning to recover, they have already found it necessary to begin raising interest rates.  As I pointed out last September:

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.

Michael Shedlock (“Mish”) recently referred to Professor Keen’s debunking of the money multiplier myth in a fantastic essay:

However, conventional wisdom regarding the money multiplier is wrong.  Australian economist Steve Keen notes that in a debt based society, expansion of credit comes first and reserves come later.

Indeed, this is easy to conceptualize:  Banks lent more than they should have, and those loans are going bad at a phenomenal rate.  In response, the Fed has engaged in a huge swap-o-rama party with various banks (swapping treasuries for collateral of dubious value) in addition to turning on the printing presses.

This was done so that banks would remain “well capitalized”. The reality is those excess reserves are a mirage.  Banks need those reserves for credit losses coming down the pike, as unemployment rises, foreclosures mount, and credit card defaults soar.

Banks are not well capitalized, they are insolvent, unwilling and unable to lend.

Blogger George Washington recently wrote an extensive, thought-provoking piece about public banking and other potential alternatives to resolve the economic crisis, which appeared at the Naked Capitalism website.  The essay began with a discussion of Steve Keen’s work in exposing the “money multiplier” as a sham.

Speaking of shams, former Labor Secretary Robert Reich recently wrote a great essay entitled, “The Sham Recovery”.  Reich has exposed the propagandists touting the imaginary economic recovery in his unique, clear style:

Business cheerleaders naturally want to emphasize the positive.  They assume the economy runs on optimism and that if average consumers think the economy is getting better, they’ll empty their wallets more readily and — presto! — the economy will get better.  The cheerleaders fail to understand that regardless of how people feel, they won’t spend if they don’t have the money.

It’s always nice when a big lie gets exposed.   It’s even better that we are now learning that the true cause of the financial crisis was plain, old sleaze.



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Three New Books For March

February 24th, 2010 Posted in Uncategorized
Feb, 24 2010
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February 24, 2010

The month of March brings us three new books about the financial crisis.  The authors are not out to make apologies for anyone.  To the contrary, they point directly at the villains and expose the systemic flaws that were exploited by those who still may yet destroy the world economy.  All three of these books are available at the Amazon widget on the sidebar at the left side of this page.

Regular fans of the Naked Capitalism blog have been following the progress of Yves Smith on her new book, ECONned:  How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.  It will be released on March 2.  Here is some information about the book from the product description at the Amazon website:

ECONned is the first book to examine the unquestioned role of economists as policy-makers, and how they helped create an unmitigated economic disaster.

Here, Yves Smith looks at how economists in key policy positions put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that eventually led them, and us, off the cliff and into financial meltdown.  Intelligently written for the layman, Smith takes us on a terrifying investigation of the financial realm over the last twenty-five years of misrepresentations, naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability.

In eConned (sic), author Yves Smith reveals:

–why the measures taken by the Obama Administration are mere palliatives and are unlikely to pave the way for a solid recovery

–how economists have come to play a profoundly anti-democratic role in policy

–how financial models and concepts that were discredited more than thirty years ago are still widely used by banks, regulators, and investors

–how management and employees of major financial firms looted them, enriching themselves and leaving the mess to taxpayers

–how financial regulation enabled predatory behavior by Wall Street towards investors

–how economics has no theory of financial systems, yet economists fearlessly prescribe how to manage them

Michael Lewis is the author of the wildly-popular book, Liar’s Poker, based on his experience as a bond trader for Solomon Brothers in the mid-80s.  His new book, The BigShort: Inside the Doomsday Machine, will be released on March 15.  Here is some of what Amazon’s product description says about it:

A brilliant account — character-rich and darkly humorous — of how the U.S. economy was driven over the cliff.

*   *   *

Michael Lewis’s splendid cast of characters includes villains, a few heroes, and a lot of people who look very, very foolish:  high government officials, including the watchdogs; heads of major investment banks (some overlap here with previous category); perhaps even the face in your mirror.  In this trenchant, raucous, irresistible narrative, Lewis writes of the goats and of the few who saw what the emperor was wearing, and gives them, most memorably, what they deserve.  He proves yet again that he is the finest and funniest chronicler of our times.

Our third author, Simon Johnson, recently co-authored an article for CenterPiece with Peter Boone entitled, “The Doomsday Cycle” which explains how “we have let a ‘doomsday cycle’ infiltrate our economic system”.  The essay contains a number of proposals for correcting this problem.  Here is one of them:

We believe that the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise.  If we triple core capital at major banks to15-25% of assets, and err on the side of requiring too much capital for derivatives and other complicated financial structures, we will create a much safer system with less scope for “gaming” the rules.

Simon Johnson is a professor of Entrepreneurship at MIT’s Sloan School of Management.  From 2007-2008, he was chief economist at the International Monetary Fund.  With James Kwak, he is the co-publisher of The Baseline Scenario website.  Johnson and Kwak have written a new book entitled, 13 Bankers:  The Wall Street Takeover and the Next Financial Meltdown.  Although this book won’t be released until March 30, the Amazon website has already quoted from reviews by the following people:  Bill Bradley, Robert Reich, Arianna Huffington, Bill Moyers, Alan Grayson, Brad Miller, Elizabeth Warren and others.  Professor Warren must be a Democrat, based on the affiliation of nearly everyone else who reviewed the book.

Here is some of what can be found in Amazon’s product description:

.  .  .  a wide-ranging, meticulous, and bracing account of recent U.S. financial history within the context of previous showdowns between American democracy and Big Finance: from Thomas Jefferson to Andrew Jackson, from Theodore Roosevelt to Franklin Delano Roosevelt.  They convincingly show why our future is imperiled by the ideology of finance (finance is good, unregulated finance is better, unfettered finance run amok is best) and by Wall Street’s political control of government policy pertaining to it.

As these authors make the talk show circuit to promote their books during the coming weeks, the American public will hearing repeated pleas to demand that our elected officials take action to stop the mercenary financial behemoths from destroying the world.  Perhaps the message will finally hit home.

If you are interested in any of these three books, they’re available on the right side of this page.



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That Sinking Feeling

December 10th, 2009 Posted in Uncategorized
Dec, 10 2009
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December 10, 2009

President Obama must have thought that a regimen of constant speechifying on television would maintain his popularity.  While enduring criticism from his fellow Democrats after his most recent speech on December 8, Obama must be aware that the poll numbers show how his continuous oration strategy is not working.  During these desperate economic times, the voters — even Obama’s own supporters — want more than speeches.  On December 1, poll results released by Rasmussen Reports not only revealed that the President’s approval rating sank to 48 percent — his disapproval rating actually reached 52 percent!  On December 9, Quinnipiac University published the results of a poll conducted during December 1 – 6.  The results gave the Preisdent a job approval rating of only 46 percent, and those disapproving Obama’s performance amounted to 44 percent.  Peter Brown, assistant director of the Quinnipiac University Polling Institute, discussed the results:

“President Barack Obama’s job approval rating continues to slide and it’s evident the deterioration stems from voter unhappiness over domestic policy matters,” Brown added.

American voters disapprove 54 – 41 percent of Obama’s handling of the economy, down from a 52 – 43 percent disapproval November 18 and his worst score ever on this issue.  The biggest shift is among Democrats who approve 71 – 24 percent, down from 77 – 18 percent three weeks ago.

The biggest drop in Obama’s overall approval is among independent voters, who disapprove 51 – 37 percent, down from 46 – 43 percent disapproval.

Although the health care issue had an impact on the poll’s results, the Quinnipiac team found that the deterioration in support for Obama resulted from those favoring the public option, despite the spin effort in many quarters to suggest that the poll revealed dissatisfaction with the public option itself:

Voters disapprove 52 – 38 percent of the health care reform proposal under consideration in Congress, and they disapprove 56 – 38 percent of President Obama’s handling of health care, down from 53 – 41 percent in a November 19 survey by the independent Quinnipiac (KWIN-uh- pe-ack) University.

But voters support 56 – 38 percent giving people the option of being covered by a government health insurance plan, compared to 57 -35 percent November 19.

The Ipsos/McClatchy Poll, taken during December 3 – 6, gave the President an even 49 – 49 percent split on his approval rating.  The interesting segment of these results was the breakdown on voter satisfaction concerning particular issues.  That section of the poll revealed that Obama received his highest “unsatisfactory” rating on the issue of  “jobs and the economy” with 45 percent giving the President an unsatisfactory grade (D or F) while only 36 percent gave him a satisfactory grade (A or B) and 19 percent gave him a C.

The disappointment expressed by Obama’s supporters concerning his handling of the economy was not limited to polling results.  Robert Reich, former Secretary of Labor during the Clinton administration, wrote a piece for his blog on December 8 entitled:  “The Preisdent’s Job Initiative Doesn’t Measure Up”.  Reich was not alone in his assessment of Obama’s performance to date:

No president in modern times walks a tightrope as exquisitely as this one.  His balance is a thing of beauty.  But when it comes to this economy right now — an economy fundamentally out of balance — we need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large.

Reich implied that the time for the “balancing act” is over.  It is now time to solve problems:

The word in Washington is we’re out of the woods.  The rate of unemployment dipped from 10.2 percent in September to 10 percent in October.  In our nation’s capital, a one-month trend marks a turnaround.  Don’t believe it for a moment.  The real story of October was the increasing number of Americans who dropped out of the labor force, too discouraged even to look for work.

Whether or not one agrees with Reich’s proposal of spending $400 billion over a two-year period to put people back to work, even Reich’s opponents would likely agree with his assessment of Obama’s initiative:

We don’t know exactly how much the President is proposing to spend, but sources tell me it’s in the range of $70 billion, redirected from the $200 billion in TARP savings.  The President’s small, calibrated attempt to balance a stimulus with deficit reduction will in fact make the deficit worse over the long haul.  It postpones the day when we’re back to near full employment, when almost all Americans who need a job get paychecks on which they pay taxes.  This isn’t really balance at all.   It prolongs the economic imbalance.

At The New Republic, William Galston wrote a piece entitled “Obama Has a Problem Prioritizing his Agenda” which he began by discussing the importance of timing:

Timing is to politics what location is to real estate.  Good policy ideas are useless if the time is not right.

*   *   *

But the larger point is that the president is beginning to realign his agenda.

But he’s just beginning.  To complete the pivot and make 2010 the year of jobs, two other things must happen.  First, the White House must fully integrate the jobs focus into the president’s schedule.

*   *   *

Second, the legislative agenda for 2010 must reflect and reinforce the renewed focus on job creation.  That means postponing items that the American people are bound to regard as diversionary as long as unemployment remains high.

*   *   *

Great presidents from Lincoln to FDR have understood that “now or never” is the ultimate false choice in politics.  All too often, now means never.  The “fierce urgency of now” should be reserved for what is truly urgent.  As for the rest, patience is more than a virtue; it is a necessity.

On of my favorite centrist commentators, Dan Gerstein of Forbes.com, wrote a piece on Wednesday entitled:  “Obama Not Cutting It On The Economy”.  Although Gerstein began by complimenting Obama on his “balancing act”, he moved on to focus on the absence of “hope and change” promised during the election campaign.  As we have seen, Gerstein was not alone in emphasizing the need to immediately address this problem:

Indeed, we’re confronting an unprecedented combination of grave economic challenges that, while not as immediate as the financial collapse we avoided last fall, may be more consequential.

Gerstein explained how Obama’s initiative is a step in the right direction, but just a step, nonetheless:

The modest job-creation proposals the administration unveiled Tuesday individually have their merits, and they seem much more mission-focused than the mish-mashed stimulus bill that Congressional Democrats constructed.

*   *   *

That’s because the new jobs plan was not designed to be a policy game-changer but a political stopgap, to tide the public over and buy the White House time for the second half of the stimulus plan to kick in.  They are betting the national farm — soy beans to servers — that the old stimulus combined with the new “stimulus lite” will provide enough demand to spur enough new hiring to calm the country.

Gerstein provided a good explanation of the core difficulty the President faces in tackling the multitude of problems arising from the economic crisis:

This unwillingness to make tough decisions strikes me as arguably the worst leadership failure of the Obama presidency.  That’s in large part because cutting outlays and shifting resources would be such a relatively easy lift in this environment.  For starters the federal government is filled with programs and set-asides that are either outdated, wasteful, largely symbolic or designed to serve narrow interest groups.  And the administration (not to mention many think tanks) has already identified dozens of suitable targets in budget hit lists.  No one would be better positioned than Obama, given his baseline support on the left, to call for the elimination and reduction of programs that we can’t defend as national priorities at this moment.

*   *   *

This was the great missed opportunity of the president’s speech — the watchdog that didn’t bark.  He could have done more than repackage his economic policy; he could have helped restore public confidence in his leadership and our shared future.  Instead, the juggler-in-chief did the opposite of his Afghanistan speech — he settled for the safe play and in doing so dropped the most important ball.

That’s great advice!  If only the President would listen to it.



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More Bad Press For Goldman Sachs

July 16th, 2009 Posted in Uncategorized
Jul, 16 2009
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July 16, 2009

They can’t seem to get away from it, no matter how hard they try.  Goldman Sachs is finding itself confronted with bad publicity on a daily basis.

It all started with Matt Taibbi’s article in Rolling Stone.  As I pointed out on June 25, I liked the article as well as Matt’s other work.  His blog can be found here.  His article on Goldman Sachs employed a good deal of hyperbolic rhetoric which I enjoyed  —  especially the metaphor of Goldman Sachs as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.  Nevertheless, many commentators took issue with the article, especially focusing on the subtitle’s claim that “Goldman Sachs has engineered every major market manipulation since the Great Depression”.  I took that remark as hyperbole, since it would obviously require over 120 megabytes of space to document “every major market manipulation since the Great Depression” — so I wasn’t disappointed about being unable to read all that.  Some of Taibbi’s critics include Megan McArdle from The Atlantic and Joe Weisenthal at Clusterstock.

On the other hand, Taibbi did get a show of support from Eliot “Socks” Spitzer during a July 14 interview on Bloomberg TV.  Mr. Spitzer made some important points about Goldman’s conduct that we are now hearing from a number of other sources.  Spitzer began by emphasizing that because of the bank bailouts “Goldman’s capital was driven to virtually nothing — because we as taxpayers gave them access to capital — they made a bloody fortune” (another vampire squid reference).  Spitzer voiced the concern that Goldman is simply going back to proprietary trading and taking advantage of spreads, following its old business model.  He argued that, a result of the bailouts:

. . . their job should be, from a macroeconomic perspective, to raise capital and put it into sectors that create jobs.  If they’re not getting that done, then why are we supporting them the way we have been?

This sentiment seems to be coming from all directions, in light of the fact that on July 14, Goldman reported second-quarter profits of 3.44 billion dollars — while on the following day, another TARP recipient, CIT Group disclosed that it would likely file for bankruptcy on July 17.  On July 16, The Wall Street Journal ran an editorial entitled:  “A Tale of Two Bailouts” comparing Goldman’s fate with that of CIT.  The article pointed out that since Goldman’s risk is subsidized by the taxpayers, the company might be more appropriately re-branded as “Goldie Mac”:

We like profits as much as the next capitalist.  But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business.  Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail.  But that is all but impossible now and for the foreseeable future.  Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it.

If there is a lesson in this week’s tale of two banks, it’s that it won’t be enough to give the Federal Reserve a mandate to “monitor” systemic risk.  Last fall’s bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share.  Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer’s dime.

Robert Reich voiced similar concern over the fact that “Goldman’s high-risk business model hasn’t changed one bit from what it was before the implosion of Wall Street.”  He went on to explain:

Value-at-risk — a statistical measure of how much the firm’s trading operations could lose in a day — rose to an average of  $245 million in the second quarter from $240 million in the first quarter. In the second quarter of 2008, VaR averaged $184 million.

Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation.  Which means you and I are still indirectly funding Goldman’s high-risk operations.

*   *   *

So the fact that Goldman has reverted to its old ways in the market suggests it has every reason to believe it can revert to its old ways in politics, should its market strategies backfire once again — leaving the rest of us once again to pick up the pieces.

At The Huffington Post, Mike Lux reminded Goldman that despite its repayment of $10 billion in TARP funds, we haven’t overlooked the fact that Goldman has not repaid the $13 billion it received for being a counterparty to AIG’s bad paper or the “unrevealed billions” it received from the Federal Reserve.  This raises a serious question as to whether Goldman should be allowed to pay record bonuses to its employees, as planned.  Didn’t we go through this once before?  Paul Abrams is mindful of this, having issued a wake-up call to “Turbo” Tim Geithner and Congress.

As long as we keep reading the news, each passing day provides us with yet another reminder to feel outrage over the hubris of the people at Goldman Sachs.

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Black And Reich

April 16th, 2009 Posted in Uncategorized
Apr, 16 2009
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April 16, 2009

I guess it’s because I was using TurboTax to work on my income tax return for the past few days, that I was constantly reminded of Treasury Secretary “Turbo” Tim Geithner.  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”).  I recently read an article by a couple of Economics professors named Laurence J. Kotlikoff (Boston University) and Jeffrey Sachs (Columbia University) wherein they referred to this plan as the GASP (Geithner And Summers Plan).  Their bottom line:

The Geithner-and-Summers Plan should be scrapped.  President Obama should ask his advisors to canvas the economics and legal community to hear the much better ideas that are in wide circulation.

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).  During that time, the FSLIC helped block an attempted sale of Charles Keating’s Lincoln Savings and Loan, which was subsequently seized by the Federal Home Loan Bank Board, despite opposition from five United States Senators, who became known as the Keating Five.  A recent interview with Professor Black by Jack Willoughby of Barrons revealed that Black’s aversion to the PPIP starts with the fact that it is being implemented by Geithner and Summers:

We have failed bankers giving advice to failed regulators on how to deal with failed assets.  How can it result in anything but failure?  If they are going to get any truthful investigation, the Democrats picked the wrong financial team.  Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems.  Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.

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.

For the past month or so, I’ve been hearing many stock market commentators bemoan the fact that there is so much money “on the sidelines”.  In other words, people with trading accounts are letting their money sit in brokerage money market accounts, rather than risking it in the stock markets.  I believe that many of these people are so discouraged by the sleazy environment on Wall Street, they are waiting for things to get cleaned up before they take any more chances in a casino where so many games are rigged.  In the Barrons interview, Black made a point that reinforced my opinion:

His (Geithner’s) use of language like “legacy assets” — and channeling the worst aspects of Milton Friedman — is positively Orwellian.  Extreme conservatives wrongly assume that the government can’t do anything right.  And they wrongly assume that the market will ultimately lead to correct actions.  If cheaters prosper, cheaters will dominate.  It is like Gresham’s law:  Bad money drives out the good.  Well, bad behavior drives out good behavior, without good enforcement.

By asking Professor Black a few simple, straightforward questions (in layperson’s language) Jack Willoughby got some fantastic and refreshing information in return (also in layperson’s language) making this article a “must read”.  As Black and many others have pointed out, these huge financial institutions must be broken down into smaller businesses.  Why isn’t this being undertaken?  Professor Black looks to where the buck stops:

Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.

These Democrats want to maintain America’s pre-eminence in global financial capitalism at any cost.  They remain wedded to the bad idea of bigness, the so-called financial supermarket — one-stop shopping for all customers — that has allowed the American financial system to paper the world with subprime debt.  Even the managers of these worldwide financial conglomerates testify that they have become so sprawling as to be unmanageable.

Another critic of the Geithner-Summers PPIP is former Secretary of Labor, Robert Reich.  Reich is now a professor at the University of California at Berkeley.  His April 6 blog entry discussed the fact that the top 25 hedge fund managers earned a total of $11.6 billion last year:

But what causes me severe heartburn is that these are exactly the sort of investors Tim Geithner is trying to lure in to buy troubled assets from banks, with an extraordinary offer financed by you and me and other taxpayers:  If it turns out the troubled assets are worth more than these guys pay for them, they could make a fortune.  If it turns out the assets are worth less, these guys won’t lose a thing because we taxpayers will bail them out.  Plus, they get to pick only the highest-rated of the big banks’ bad assets and can review them carefully before buying.

What a deal.  Why can’t you and I get in on this bonanza? Because we’re too small.  The government will designate only about five big investor funds — run or owned by the richest of the rich — as potential buyers.  Hedge funds fit the bill perfectly.

It’s nice to know that more and more prominent individuals in the world of economics and public policy are taking the ethical stand against a program based on the principle of “socialized loss and privatized gain”.  I just hope President Obama doesn’t take too long to realize that these people are right and that the Geithner – Summers team is wrong.

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The “Bad Bank” Debate

January 29th, 2009 Posted in Uncategorized
Jan, 29 2009
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January 29, 2009

The $700 billion Troubled Assets Relief Program (TARP) doesn’t seem to have accomplished much in the way of relieving banks from the ownership of “troubled assets”.  In fact, nobody seems to know exactly what was done with the first $350 billion in TARP funds, and those who do know are not talking.  Meanwhile, the nation’s banks have continued to flounder.  As David Cho reported in The Washington Post on Wednesday, January 28:

The health of many banks is getting worse, not better, as the downturn makes it difficult for all kinds of consumers and businesses to pay back money they borrowed from these financial firms.  Conservative estimates put bank losses yet to be declared at $1 trillion.

The continuing need for banks to unload their toxic assets has brought attention to the idea of creating a “bad bank” to buy mortgage-backed securities and other toxic assets, thus freeing-up banks to get back into the lending business.  Bloomberg News and other sources reported on Wednesday that FDIC chair, Sheila Bair, is pushing for her agency to run such a “bad bank”.  Our new Treasury Secretary, Tim Geithner, has also discussed the idea of such a bank (often referred to as an “aggregator bank”) as reported on Wednesday by Reuters:

Geithner said last week the administration was reviewing the option of setting up a bad bank, but that it is “enormously complicated to get right.”

The idea of creating such a bank has drawn quite a bit of criticism.  Back on January 18, Paul Krugman (recipient of the Nobel Prize in Economics) characterized this approach, without first “nationalizing” the banks on a temporary basis, as “Wall Street Voodoo”:

A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s:  it seized the defunct banks, cleaning out the shareholders.  Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.

The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches.  Instead, they’re reportedly gravitating toward a compromise approach:  moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.

Krugman scrutinized Sheila Bair’s earlier explanation that the aggregator bank would buy the toxic assets at “fair value”, by questioning how we define what “fair value” really means.  He concluded that this entire endeavor (as it is currently being discussed) is a bad idea for all concerned:

Unfortunately, the price of this retreat into superstition may be high.  I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.

Krugman is not alone in his skepticism concerning this plan.  As Annelena Lobb and Rob Curran  reported in Wednesday’s Wall Street Journal, this idea is facing some criticism from those in the financial planning business:

“I don’t see how this increases liquidity,” says Paul Sutherland, chief investment officer at FIM Group in Traverse City, Mich.  “This idea that we should burn million-dollar bills from taxpayers to take bad assets isn’t the best path.”

Billionaire financier Geroge Soros told CNBC that he disagrees with the “bad bank” strategy, explaining that the proposal “will help relieve the situation, but it will not be sufficient to turn it around”.  He then took advantage of the opportunity to criticize the execution of the first stage of the TARP bailout:

As to Paulson’s handling of the first half of the $700 billion Wall Street bailout fund known as TARP, Soros said the money was used “capriciously and haphazardly.”  He said half of it has now been wasted, and the rest will need to be used to plug holes.

Former Secretary of Labor, Robert Reich, anticipates that a “big chunk” of the remaining TARP funds will be used to create this aggregator bank.  Accordingly, he has suggested application of the type of standards that were absent during the first TARP phase:

Until the taxpayer-financed Bad Bank has recouped the costs of these purchases through selling the toxic assets in the open market, private-sector banks that benefit from this form of taxpayer relief must (1) refrain from issuing dividends, purchasing other companies, or paying off creditors; (2) compensate their executives, traders, or directors no more than 10 percent of what they received in 2007; (3) be reimbursed by their executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008 — compensation which was, after all, based on false premises and fraudulent assertions, and on balance sheets that hid the true extent of these banks’ risks and liabilities; and (4) commit at least 90 percent of their remaining capital to new bank loans.

However, Reich’s precondition:  “Until the taxpayer-financed Bad Bank has recouped the costs of these purchases through selling the toxic assets in the open market” is exactly what makes his approach unworkable.  The cost of purchasing the toxic assets from banks will never be recouped by selling them in the open market.  This point was emphasized by none other than “Doctor Doom” himself (Dr. Nouriel Roubini) during an interview with CNBC at the World Economic Forum in Davos, Switzerland.  Dr. Roubini pointed out:

At which price do you buy the assets?  If you buy them at a high price, you are having a huge fiscal cost.  If you buy them at the right market price, the banks are insolvent and you have to take them over.  So I think it’s a bad idea.  It’s another form of moral hazard and putting on the taxpayers, the cost of the bailout of the financial system.

What is Dr. Roubini’s solution?  Face up to the reality that the banks are insolvent and “do what Sweden did”:  take over the banks, clean them up by selling off the bad assets and sell them back to the private sector.

Nevertheless, you can’t always count on the federal government to do the right thing.  In this case, I doubt that they will.  As David Cho pointed out at the end of his Washington Post article:

The bailout program “is a public relations nightmare,” one government official said.  He added that Obama officials are sure to face criticism for whatever course they take.

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