September 23, 2010
Nobody seems too surprised about the resignation of Larry Summers from his position as Director of the National Economic Council. Although each commentator seems to have a unique theory for Summers’ departure, the event is unanimously described as “expected”.
When Peter Orszag resigned from his post as Director of the Office of Management and Budget, the gossip mill focused on his rather complicated love life. According to The New York Post, the nerdy-looking number cruncher announced his engagement to Bianna Golodryga of ABC News just six weeks after his ex-girlfriend, shipping heiress Claire Milonas, gave birth to their love child, Tatiana. That news was so surprising, few publications could resist having some fun with it. Politics Daily ran a story entitled, “Peter Orszag: Good with Budgets, Good with Babes”. Mark Leibovich of The New York Times pointed out that the event “gave birth” to a fan blog called Orszagasm.com. Mr. Leibovich posed a rhetorical question at the end of the piece that was apparently answered with Orszag’s resignation:
This goes to another obvious — and recurring — question: whether someone whose personal life has become so complicated is really fit to tackle one of the most demanding, important and stressful jobs in the universe. “Frankly I don’t see how Orszag can balance three families and the national budget,” wrote Joel Achenbach of The Washington Post.
The shocking nature of the Orszag love triangle was dwarfed by President Obama’s nomination of Orszag’s replacement: Jacob “Jack” Lew. Lew is a retread from the Clinton administration, at which point (May 1998 – January 2001) he held that same position: OMB Director. That crucial time frame brought us two important laws that deregulated the financial industry: the Financial Services Modernization Act of 1999 (which legalized proprietary trading by the Wall Street banks) and the Commodity Futures Modernization Act of 2000, which completely deregulated derivatives trading, eventually giving rise to such “financial weapons of mass destruction” as naked credit default swaps. Accordingly, it should come as no surprise that Lew does not believe that deregulation of the financial industry was a proximate cause of the 2008 financial crisis. Lew’s testimony at his September 16 confirmation hearing before the Senate Budget Committee was discussed by Shahien Nasiripour of The Huffington Post:
Lew, a former OMB chief for President Bill Clinton, told the panel that “the problems in the financial industry preceded deregulation,” and after discussing those issues, added that he didn’t “personally know the extent to which deregulation drove it, but I don’t believe that deregulation was the proximate cause.”
Experts and policymakers, including U.S. Senators, commissioners at the Securities and Exchange Commission, top leaders in Congress, former financial regulators and even Obama himself have pointed to the deregulatory zeal of the Clinton and George W. Bush administrations as a major cause of the worst financial crisis since the Great Depression.
During 2009, Lew was working for Citigroup, a TARP beneficiary. Between the TARP bailout and the Federal Reserve’s purchase of mortgage-backed securities from that zombie bank, Citi was able to give Mr. Lew a fat bonus of $950,000 – in addition to the other millions he made there from 2006 until January of 2009 (at which point Hillary Clinton found a place for him in her State Department).
The sabotage capabilities Lew will enjoy as OMB Director become apparent when revisiting my June 28 piece, “Financial Reform Bill Exposed As Hoax”:
Another victory for the lobbyists came in their sabotage of the prohibition on proprietary trading (when banks trade with their own money, for their own benefit). The bill provides that federal financial regulators shall study the measure, then issue rules implementing it, based on the results of that study. The rules might ultimately ban proprietary trading or they may allow for what Jim Jubak of MSN calls the “de minimus” (trading with minimal amounts) exemption to the ban. Jubak considers the use of the de minimus exemption to the so-called ban as the likely outcome. Many commentators failed to realize how the lobbyists worked their magic here, reporting that the prop trading ban (referred to as the “Volcker rule”) survived reconciliation intact. Jim Jubak exposed the strategy employed by the lobbyists:
But lobbying Congress is only part of the game. Congress writes the laws, but it leaves it up to regulators to write the rules. In a mid-June review of the text of the financial-reform legislation, the Chamber of Commerce counted 399 rule-makings and 47 studies required by lawmakers.
Each one of these, like the proposed de minimus exemption of the Volcker rule, would be settled by regulators operating by and large out of the public eye and with minimal public input. But the financial-industry lobbyists who once worked at the Federal Reserve, the Treasury, the Securities and Exchange Commission, the Commodities Futures Trading Commission or the Federal Deposit Insurance Corp. know how to put in a word with those writing the rules. Need help understanding a complex issue? A regulator has the name of a former colleague now working as a lobbyist in an e-mail address book. Want to share an industry point of view with a rule-maker? Odds are a lobbyist knows whom to call to get a few minutes of face time.
You have one guess as to what agency will be authorized to make sure those new rules comport with the intent of the financial “reform” bill . . . Yep: the OMB (see OIRA).
President Obama’s nomination of Jacob Lew is just the latest example of a decision-making process that seems incomprehensible to his former supporters as well as his critics. Yves Smith of Naked Capitalism refuses to let Obama’s antics go unnoticed:
The Obama Administration, again and again, has taken the side of the financial services industry, with the occasional sops to unhappy taxpayers and some infrequent scolding of the industry to improve the optics.
Ms. Smith has developed some keen insight about the leadership style of our President:
The last thing Obama, who has been astonishingly accommodating to corporate interests, needs to do is signal weakness. But he has made the cardinal mistake of trying to please everyone and has succeeded in having no one happy with his policies. Past Presidents whose policies rankled special interests, such as Roosevelt, Johnson, and Reagan, were tenacious and not ruffled by noise. Obama, by contrast, announces bold-sounding initiatives, and any real change will break eggs and alienate some parties, then retreats. So he creates opponents, yet fails to deliver for his allies.
Yes, the Disappointer-In-Chief has failed to deliver for his allies once again – reinforcing my belief that he has no intention of running for a second term.
A Preemptive Strike By Tools Of The Plutocracy
The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009. The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry. As I pointed out on April 15, more than a few commentators had been expressing their disappointment with the FCIC. Section (5)(h)(1) of the FERA established a deadline for the FCIC to submit its report:
In light of the fact that it took the FCIC eight months to conduct its first hearing, one shouldn’t be too surprised to learn that their report had not been completed by December 15. The FCIC expects to have the report finalized in approximately one month. This article by Phil Mattingly and Robert Schmidt of Bloomberg News provides a good history of the partisan struggle within the FCIC. On December 14, Sewell Chan of The New York Times disclosed that the four Republican members of the FCIC would issue their own report on December 15:
Beyond that, Shahien Nasiripour of the Huffington Post revealed more details concerning the dissent voiced by Republican panel members:
I gave those four Republican members more credit than that. I was wrong. Commission Vice-Chairman Bill Thomas, along with Douglas Holtz-Eakin, Peter Wallison, and Keith Hennessey issued their own propaganda piece as a preemptive strike against whatever less-than-complimentary things the FCIC might ultimately say about the Wall Street Plutocrats. The spin strategy employed by these men in explaining the cause of the financial crisis is to blame Fannie Mae and Freddie Mac for the entire episode. (That specious claim has been debunked by Mark Thoma and others many times.) This remark from the “Introduction” section of the Republicans’ piece set the tone:
Many economists and other commentators will have plenty of fun ripping this thing to shreds. One of the biggest lies that jumped right out at me was this statement from page 5 of the so-called Financial Crisis Primer:
That lie can and will be easily refuted — many times over — by the simple fact that a large number of essays had been published by economists, commentators and even dilettantes who predicted the housing collapse.
Yves Smith provided a refreshing retort to the Plutocracy’s Primer at her Naked Capitalism website:
The fact that a pre-emptive strike by the Plutocratic “Gang of Four” has been initiated with the release of their Primer could indeed suggest that that their patrons are worried about the ultimate conclusions to be published by the FCIC next month. The release of this Primer will surely draw plenty of criticism and attract more attention to the FCIC’s final report. Nevertheless, will the resulting firestorm motivate the public to finally demand some serious action beyond the lame “financial reform” fiasco? Adam Garfinkle’s recent essay in The American Interest suggests that such hope could be misplaced:
Will this situation ever change?
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